In our investment approach we have always included the ‘ESG’ (environment, social, governance) aspects when selecting securities.
Our stance has always been that fundamental long-term investors cannot ignore ESG considerations in their research of a company and we certainly support the much-needed attention this brand of investing is placing on important issues that go beyond a company’s short-term financial performance.
That said, our guard is always raised when we observe trends characterised by indiscriminate investor inflows into a limited investable universe. This inevitably leads to unsustainable overvaluation and consequent disappointment over realized investor returns. We can already observe a substantial valuation rerating among ESG darlings that cannot be attributed just to changes in the longer-term company prospects.
Once again we note that ‘value’ part of our sustainable value investing approach is so important. Those investors simply investing in the broad ETF’s (see inflows in the graph below) may well be disappointed with future returns as the space gets more and more crowded.
Now more than ever it is important to select individual equities within the universe that offer not only the long term ESG benefits, but just as importantly are not overpriced. Valuation discipline is likely to become the key driver of returns in this area.
ESG investing, as with any segment of investing, requires a solid valuation framework if it is to prove a sustainable investment movement and not merely another fleeting investment fad.
