The Mackenzie Bluewater Team: Our approach towards responsible investing

Philosophy: stakeholder management as a key value driver

The Team’s investment focus is on identifying companies that can grow free cash flow sustainably at above average rates across a cycle.  We have a long-time investment horizon when we assess businesses, focusing on expected business and industry evolution over ten plus years. The types of businesses we gravitate towards, include higher quality businesses that are capital light and carry higher margins. 

We think of companies and industries as existing in an ecosystem and that a company’s treatment of its stakeholders, including employees, suppliers, customers, and the communities they operate in, will define how successful they are in the long run.

In our view, Environmental, Social and Governance (ESG) factors can materially impact both a company’s financial performance and its valuation in the market.  As a result, we incorporate ESG factors in our research and portfolio management process to target attractive risk-adjusted returns. 

Process: integrating ESG risks and opportunities in the top-down and bottom-up analysis

We identify and evaluate financially material ESG factors in our investment process, which is a combination of a top-down and bottom-up approach. 

From a top-down perspective, we aim to identify structural changes in the economy and avoid those businesses and sectors most at risk, while also considering new opportunities that may arise. For example, we believe that the energy transition to a low carbon economy exposes traditional energy companies to material financial risks while it also creates key investment opportunities for those businesses that enable the transition. 

From a bottom-up perspective, we first study each company to identify ESG strengths and weaknesses, through primary research. This involves studying a wide variety of sources, such as regulatory filings, corporate sustainability reports, news and social media searches, conference calls, and discussions with management. Secondly, we assess the financial materiality of the ESG factors we identified to understand how these factors impact a company’s ability to generate free cash flow, or the prospects of growing that free cash flow over time.  We aim to integrate this assessment in our valuation model assumptions such as growth rates, capital requirements, operating expenses to determine the impact on fair value. When the Team identifies ESG issues that can alter the investment thesis, the Team may also consider engagement as an effective tool to manage the risk.

Every member of the Bluewater team integrates financially material ESG factors in their due diligence processes for all current and prospective investments.  As a longstanding core component of the investment philosophy, investment team members have extensive experience in assessing ESG-related issues that we believe are material to long-term business and stock performance.

Case study: the energy transition to a low carbon economy and its impact on our investment decisions

Decarbonization and the global energy transition has been a research focus for the Team for over a decade. It has impacted the attractiveness of many companies including the two examples below: 

  1. With the proliferation of Electric Vehicles (EVs), we expect a flattening and ultimately declining fuel demand environment.  This would be a structural headwind for Alimentation Couche-Tard as an operator of fuel stations globally.  We adjusted fuel volume growth in our valuation models and concluded the stock was not adequately reflecting this structural change and we exited our position. 
  2. Schneider Electric is a business that will be a key enabler of the energy transition. They are a global leader in providing software and low and medium voltage electrical equipment that will enable the electrical grid to transform itself to be able to support the transition towards renewable power sources. As a result, we have added to this position. 

Learn more about the Bluewater team’s funds here


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