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ESG at Mondrian

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At Mondrian, we would consider any security within a given universe if we feel it offers compelling long-term risk-adjusted returns. Mondrian’s long-term, fundamental research process has always demanded that analysts strive to consider all material risks that could influence a security or market’s valuation, including those factors rooted in environmental, social, and governance concerns.

“Implemented in a systematic and consistent manner, ESG incorporation can be effectively integrated into a value investment philosophy.”

The willingness of value investors to take a position in a broad range of companies and industries – including those that typically score very poorly with regards to certain ESG characteristics – has been taken by some to mean that a value investment philosophy is incompatible with the incorporation of ESG factors. This needn’t be the case as demonstrated by Mondrian’s integrated approach to incorporation in our equity and fixed income strategies. In particular, Mondrian recognizes that climate change must be considered as a risk to the long-term future of economies and individual business, and addresses these concerns through its bottom-up analysis.

Analysts adopting a holistic approach, rather than ESG specialists operating in silos, create greater efficiency and context, focusing on the most material issues for a company.
 
Mondrian has always believed it is the responsibility of all investment professionals to understand and incorporate the impact of environmental, social and governance factors on our present and potential investments, and their sustainable profitability. 
 
Mondrian’s ESG Steering Committee, which is comprised of senior representatives from each of the investment and client service teams, sets and reviews firm-wide objectives and initiatives to ensure that our resources and investment staff are capable of meeting ongoing developments associated with ESG-related issues. 

Strategy Integration

In advocating for an integrated approach, we argue that all material factors that could influence a company’s valuation – as determined by its future cash generation and shareholder returns – should be rigorously analyzed and incorporated as part of an in-depth research process. Considerations stemming from environmental, social, and governance concerns must, where material, be included in this process. Taken not in aggregate but as individual concerns, they can be understood in the context of the company’s specific financial and operational situation.
 
The result of this risk-based approach is that, much like any other strategic, financial or regulatory risk incorporated into an equity valuation, the presence of material ESG-based risks need not preclude investment, provided that they are adequately discounted in the market price.
 
Across all of Mondrian’s equity investment products, the research process is driven by extensive, bottom-up fundamental company analysis which includes a comprehensive program of meeting with representatives from current and prospective holdings. We believe that the value of any equity security is equal to the present value of its future cash flows to the investor, which are primarily dividends. The principal focus of our investment professionals is constructing long-term forecasts for these cash flows utilizing our dividend discount methodology.
 

Clear ESG Integration Process

To make the integration of these factors in the equity valuation process more transparent, Mondrian utilizes a proprietary ESG Summary Report to document the research and analysis carried out on ESG factors, including the quantitative impacts in our valuation models.
 
The ESG Summary Report explicitly documents the influence of ESG risks and opportunities on our valuation assessments and is completed for all current and prospective equity holdings. By systematically considering both a set of core values as well as company-specific concerns, we aim to capture and quantify material factors that could impact the base, best and worst -case scenario risk analysis over the short, medium and long term. Documenting these factors helps Mondrian quantify the impact of ESG risks on a company’s valuation and sustainability.

Climate Change

Mondrian uses long-term investment models to evaluate the operating environment of each investment over an extended time horizon. To the extent that issues such as climate change, carbon emissions, water usage and energy usage have been identified as potential risk factors to consider in evaluating the investment case of a particular company, our analysts will conduct further investigation into the extent of these risks as well as risk mitigation.

The findings from this questioning and disclosure will be incorporated into our overall investment evaluation of the company and highlighted in the ESG Summary Report.

Stewardship

Stewardship considerations are part of the initial purchase decision, subsequent monitoring of an investment and any ongoing dialogue with an investee company, including active participation through our proxy voting process. A key element of our process is actively meeting with and engaging with management and the board of current and prospective investments to discuss the:

  • Current and long-term outlook for the business
  • Risks to that outlook and the company’s business
  • Company’s future business strategy
  • Governance policies and structures that support or hinder our confidence in the future outlook

Governance discussions will include governance policies, corporate structure, management and board experience and composition, remuneration policies, board oversight policies and procedures, climate change impacts, human capital concerns, and policies on shareholder returns.

Dedicated ESG Strategies

Mondrian’s firm-wide approach to integrating ESG factors is first and foremost a risk-based approach, but we also provide solutions for clients that would like to pursue principles-based capital allocation through our dedicated ESG products. Mondrian’s long-term, scenario-based approach to value investing is particularly well-suited to the integration of ESG factors, which are essential in understanding risk-adjusted returns. Our International Equity and Global Equity ESG products build on this value approach by combining risk-adjusted returns with principles-based capital allocation decisions:

  • Holdings should normally meet or exceed a minimum threshold as assessed using Mondrian’s proprietary ESG Summary Reports
  • Exposure to business involvements deemed unacceptable for the ESG mandate- presently fossil fuel extraction, weapons and tobacco- should be minimized
  • Positive consideration would typically be given to stocks with more favorable ESG characteristics where two or more companies exhibit comparable valuations
Our dedicated ESG products demonstrate Mondrian’s defensive, value-oriented characteristics while placing greater emphasis on ESG concerns in portfolio construction. For more information about our dedicated ESG strategies – see here:
 

International Equity ESG

Global Equity ESG

Global Green Bond

News and Insights

Mondrian’s Purchasing Power Parity (PPP) Approach

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November 2, 2023

Reading Time: 2 minutes Purchasing Power Parity method (PPP) provides a consistent measure of value across all currencies – a process we have employed since the founding of our firm in 1990.

Navigating the Decarbonization Transition within Small Cap Equities

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December 13, 2021

Reading Time: 11 minutes The decarbonization journey poses both investment opportunities and challenges with implications to risk appetite, access to capital and asset valuations.

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