HQAM ESG

From sustainable business to ESG: Quality as connector

At a time when environmental awareness and social responsibility are becoming increasingly important, the way people invest has changed fundamentally. Sustainability is no longer just a buzzword, but a key driver of investment decisions. More and more investors are recognizing the need not only to generate returns, but also to make a positive contribution to society and the environment, and thus to have a better handle on risk management. In this context, quality investments with a focus on ESG (environmental, social and governance) criteria are becoming increasingly important.

We take a look at the growing importance of sustainability as a component of Quality Investments. We also show how ESG aspects are integrated into the investment approach to promote a sustainable future while achieving long-term growth and stability. From considering ethical business practices to promoting environmentally friendly initiatives, sustainable Quality Investments show that responsible investing is not only possible, but extremely promising. Take a look at the transformative power of sustainability and its role in shaping a better future through QualityInvestments.

SUSTAINABILITY

The path to a sustainable portfolio

We make sure portfolio companies and investment candidates meet our ESG standards through systematic integration of ESG analysis into our investment process. Instead of blindly relying on third-party assessments, where the process can sometimes be non-transparent, and the outcome – arguable, our analysis is performed in-house by our analysts, and research outcomes are documented.

While our analysis is guided by widely adopted materiality frameworks, we at Hérens Quality understand that each business is different and faces unique sustainability-related challenges and opportunities. Therefore, rather than adopting a one-size-fits-all approach, our ESG analysis focuses on things that really matter for a particular business, and our analysts assess each Company on a case-by-case basis, considering not only specifics of its industry, home country and business model.

Within our ESG integration approach, we not only aim to understand how sustainability-related risks may affect Company’s operations, but our analysis also considers negative externalities – Company’s impact on the environment and the society.

The systematic and objective analysis of a company’s management has been an important part of our quality investment approach from the very beginning. Also, our experience with ESG quality portfolios since 2010 shows that business sustainability is a necessary basis for many ESG criteria.

While some aspects may not have an immediate negative impact on a company’s financial performance, we believe that quality companies should always strive to conduct their business in an ethical and responsible manner, as sustainable governance has a positive long-term impact on the company’s financial performance, as illustrated below. It is important for companies to take a long-term view when it comes to ESG, as not all sustainability-focused decisions will have an immediate positive impact on the company’s financial results and may even affect short-term profitability. However, we believe that sooner or later, unsustainable business practices will backfire and eventually undermine the company’s operations. For example, a company may achieve higher profit margins by underpaying its employees, but in the long run, it will not only struggle to attract new talent, but also lose valuable colleagues, which can disrupt internal operations and affect development plans or customer relationships.

In addition, we focus not only on the company’s current sustainability performance, but also on how it got there – we do not have a rule that a company must already be best-in-class to qualify for our portfolios – but we do require that sustainability is integrated throughout the company’s operations and is a part of its business plan and overall strategy.

Sustainability as part of the investment process

Our goal is to identify quality companies: those with a strong financial base, solid balance sheets and conservative financing. We look for companies that deploy their capital profitably in segments and markets, where they have a competitive advantage. In addition, we consider a consistent and competent management team as well as a responsible corporate strategy as decisive characteristics for quality companies. To this end, our research department evaluates various ESG factors as part of our analysis process.

MODELS

UNSUSTAINABLE BUSINESS MODELS

The exclusion of such unsustainable business models from investments and portfolios is often done to minimize financial risks. Companies operating in these industries could face legal, social, and ethical challenges that could lead to reputational damage and financial losses. As a result, more investors are paying attention to supporting companies that positively impact ESG factors and strive for long-term sustainability. Overall, the exclusion of unsustainable business models helps to promote a shift in business thinking. Companies are encouraged to rethink their business practices, adopt more sustainable approaches, and focus on long-term financial stability and positive environmental and social impacts.

EXCLUSIONS

In our investment process, we strictly exclude companies that violate international labor organizations and conventions of the United Nations Global Compact. These include, in particular, disregard for human rights, labor, the environment and corruption. In addition, we exclude certain industries where we believe there are humanitarian, social, ethical, or environmental concerns. We exclude companies that are active in industries such as tobacco, armaments, or weapons manufacturing.

ENGAGEMENT

Our Engagement

To ensure that portfolios are not exposed to significant ESG risks, we always communicate with portfolio companies about any sustainability-related issues that we find concerning. Through dialogue with the company, we strive to understand the root causes of the problem and company’s action plan to remedy the issue, so that we can make a decision on whether the company still qualifies for quality portfolios.

Thanks to systematic approach to ESG, quality portfolios show above-benchmark results on ESG performance indicators and have above-benchmark ESG ratings, even though we do not base our investment decisions solely on third-party assessments. Hence, we believe this is a testament of our view that quality and sustainability go hand in hand.

REPORTING

Client Reporting

Our ESG integration process is fully transparent and we are ready to provide our clients with the necessary information to understand the sustainability profile of quality portfolios. Upon request, our clients receive a detailed overview of the ESG performance of portfolio companies, which includes a variety of useful environmental, social and governance indicators in addition to overall ESG ratings. We pay particular attention to the carbon intensity of our portfolios. Detailed information on the carbon intensity of portfolios and individual companies is available to our clients upon request. We are proud that our portfolios have a significantly lower CO ₂ footprint compared to their respective benchmarks, which is due not only to sector allocation but also to advantageous stock selection.

Portfolio MSCI ESG Rating

Our analysts are always up to date on ESG developments in portfolio holdings and are ready to answer any questions or concerns clients may have. We respond to our clients individually and can make portfolio adjustments according to clients’ views and beliefs. We are able to provide clients with additional exclusion filters and implement customized negative lists or selection criteria.