Why Opt for a Transitional Approach to Sustainable Investing?

The number of sustainability funds and their close relatives — climate, ESG and impact funds — have multiplied in recent years, leaving investors with no shortage of options.

Many of the problems these funds are trying to address continue to proliferate. Greenhouse gas emissions reached record highs last year. So did coal demand. Child labor and deforestation are on the rise.

We believe sustainability funds can be more effective by deploying a different approach. We launched the Global Value Transition strategy to demonstrate ours: One that helps, not excludes, companies that are improving their sustainability characteristics while providing investors an opportunity to realize returns and balance style tilts in their portfolios.

In a crowded market of sustainability funds, we think it’s essential to differentiate our Global Value Transition strategy by explaining its purpose and constraints.

What’s Our Transitional Approach to Sustainable Investing?

Sustainability funds tend to place their investments in companies recognized for achieving sustainability in their business practices. These sustainability darlings are often growth companies, the best-in-class for their products or services.

We’re value managers. We seek companies that trade below their fair values or have experienced transitory valuation declines. This guiding principle directs us toward firms with the potential to enhance their sustainability practices or operate in industries such as mining, oil and natural gas, where resource depletion is more common than regeneration.

In these companies and industries, we see opportunities to generate alpha for institutional asset owners by exposing their portfolios to overlooked styles and stocks and driving real-world outcomes.

Investors May Benefit from the Value That Green Transitions Create

The Global Sustainability Value strategy invests in companies making the transition to sustainability. Historically, sustainable investors excluded these businesses from their funds and portfolios. We don’t think that approach works. Instead, we believe companies become more valuable as they progress toward more sustainable business practices. And investors share in the value created during this process.

Companies making the sustainability transition can help create tangible improvements for the world around us. For example, encouraging a business to embrace cleaner fuel sources can reduce greenhouse gas emissions. Pushing a company to source its raw materials from responsible parties can result in less labor exploitation or deforestation.

As Active Owners, We Engage Company Management to Ensure Business Model Progression

Our robust approach to identifying and investing in companies is designed to generate excess returns, not replicate a benchmark.

When Global Value Transition invests in a company, the firm’s management team should expect to hear how we think the business could improve its sustainability practices. This process would begin with an engagement plan supported by key performance indicators charting the company’s path to sustainability.

If the company doesn’t initiate its sustainability journey or make meaningful progress within a year, we will revisit discussions with management and the board of directors. We could also use our proxy votes to shape and influence the transition. If we don’t see progress toward sustainability, we might file a shareholder proposal, vote against the board or consider exiting our position in the company.

Ask us how our engagement helped achieve sustainable outcomes for companies like MSM Industrial and Emerson Electric.

Global Value Transition Encompasses More Than Environmental and Climate Issues

Sustainability funds are often associated with the environment. And environmental outcomes are often discussed in the context of greenhouse gas emissions, usually carbon.

We believe that’s a far too narrow view of sustainability. Even within the environment, focusing on carbon emissions looks past other pressing ecological problems caused by unsustainable business practices like biodiversity loss and water contamination.

Global Value Transition also sees sustainability encompassing more than environmental and climate-related issues. We include social sustainability in our analysis and company engagement. Are employees paid fairly? Do workers have safe working conditions?

Do companies partner with other enterprises that follow the law or common social norms? Does a company’s push toward sustainability in one area compromise its sustainability in another? For example, would a company’s transition to a cleaner type of fuel cause excessive job losses to the point where its move to environmental betterment degraded social outcomes?

We also contemplate governance issues in our decision-making. Do companies have competent and ethical management teams? Do company executive compensation plans incentivize acceptable goals and outcomes? Do they tolerate corruption or bribery?

External ESG Ratings Don’t Drive Our Transitional Approach

Where can investors turn to learn more about the sustainability factors of the companies they’re evaluating? Third-party data aggregators compile and publish rankings and scorecards. We don’t rely on them because they’re often based on unaudited information from the companies themselves.

Global Value Transition adopted its proprietary framework to analyze companies and their sustainability factors and follow their paths toward improvement. Our industry-specific key performance indicators (KPIs) hold companies accountable and track the progression of their business models.

For example, we evaluate the percentage of revenues that information technology companies devote to cybersecurity. A lack of spending and attention to protecting data broadly poses clear risks to the company’s bottom line and society.

We also monitor product safety oversight by health care companies. Companies plagued by product recalls aren’t healthy enterprises, and their customers could face harm if products fail to function as intended.

Our analytical approach provides us with information that external ESG ratings generally lack. It supplements our value-oriented investment philosophy that guides our engagement with companies as they transition to sustainability. In our view, using KPIs enables us to draw more accurate conclusions about a company’s sustainability journey rather than relying solely on the potentially misleading information that a company provides.