The Cundill approach towards responsible investing

Philosophy: ESG risk management to protect the value of our investments

As value equity investors, the Cundill Team manages money by purchasing what it believes are undervalued, out-of-favour, or misunderstood businesses that they believe have the potential to re-price and generate competitive long-term returns. Key to the team’s investment strategy is identifying companies that are priced below their estimate of fair value. Cundill acknowledges that environmental, social and governance (ESG) risks can negatively impact the value of a company. Therefore, the team integrates ESG risks into their bottom-up security selection process. Companies with significant ESG risks are often seen as lower quality and require a larger discount to fair value to be included in the portfolio. Cundill believes that engaging with investee companies to seek improvement in the management of their ESG risks can improve the overall quality rating of the company and reduce the risk of investment. 

 

"ESG risks can have negative impacts on the value of companies we invest in; we manage for this risk through our rigorous security selection and valuation process.”

Richard Wong, SVP, Portfolio Manager, Head of Team

How ESG factors are integrated in the investment process


A disciplined ESG risk management process aims to protect the portfolio from value deterioration. The process consists of 4 steps:
 

1.   All potential investments are assigned a quality score which incorporates ESG factors such as product governance, business ethics, human capital, carbon management, board structure and remuneration. Companies that rank lower (poorer) will face higher expected return hurdles, requiring a bigger discount from Cundill’s estimate of fair value, before the team would consider investing. The team sources ESG research from external providers such as Sustainalytics and S&P Global Trucost.

2.   Any company with a poor ESG rating or controversy score from 3rd party ESG data providers is examined further by the team. The examination requires an internal write-up of the ESG issues that the company faces. This allows the team to verify if the ESG risks are indeed financially material to the investment.

3.   Once potential ESG risks are identified, the team monitors the risks and could seek to engage with the respective company to clarify the potential issues further. The team focuses on the plans companies have to manage and overcome their ESG risks. Successful ESG risk management could be a trigger for share price appreciation and generate value for clients.

4.   On a quarterly basis, the investment team reviews each company’s ESG risks and controversies. The goal is not only to monitor for changes but to also consider if these changes have an impact (positive or negative) on Cundill’s investment thesis.

Learn more about the Mackenzie Cundill Team