Our approach of investing in quality and value for the long-term has allowed us to navigate this year from a position of strength. The pandemic affected all of the companies we invest in. Some have benefitted and others have been impacted. We have sought to make the most of opportunities where we could and have learned important lessons throughout the year.
Our investment team has highlighted some of those lessons, how they have impacted our thinking and our portfolios and what opportunities they hold for the future.
ESG – Sustainability, Corporate Resilience and Investment Returns
One of the most powerful developments of the last few years has been the increasing focus on the integration of environmental, social and governance (ESG) factors in traditional financial analysis. Rightly, much of the focus in developing and implementing standards at the political and economic level has focused on the unfolding climate crisis. Corporates have faced increased calls to properly account for and mitigate the polluting environmental externalities they generate, and the impact on industries and individual companies has provided evidence of the value of incorporating the ‘E’ into long-term financial analysis.
But more than any other previous crisis, the Covid-19 pandemic has demonstrated that sustainability and corporate resilience are interrelated and that best-in-class ESG practices can allow companies to create value beyond just the E. As we discussed in our January insight “Our Roadmap to Sustainable Investing,” for us ESG integration involves incorporating a broad range of factors into our analysis of our investee companies. This starts of course with environmental factors, but extends to social capital (including a company’s relationship with its customers, local communities and the government); human capital (including the management of a company’s human resources as a key asset); the inherent business model (including business model resilience, supply chain management and materials sourcing); as well as leadership and governance (including systemic risk management and critical incident risk management). As we look back at how Covid-19 has swept through the globe, what has distinguished companies in their ability to respond to this crisis was how embedded and mature their competencies and practices in exactly these areas were.
We have identified the factors in our holdings across sectors. Food producer Nestlé and flavour & fragrances ingredient provider Givaudan were both called upon to keep critical food and beverage supply chains open. As consumers rushed to supermarkets in panic to stock up their pantries at home, Nestlé had to ensure that its ability to source inputs from over 550,000 farmers globally and keep food production lines open remained unaffected. Similarly, Givaudan had to keep supplying over 110,000 flavour and fragrance ingredients to over 10,000 global food, beverages and personal care product producers.