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 analysed 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 utilising 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.
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 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.