Deep Research Insights

Country-based exclusions

At our sustainability workshops we discussed that it is important for us that our investments are not involved in corruption scandals or pay taxes to dictators who then use that source of income to oppress their people.

Additionally, if a company is listed in a country with a high rate of corruption, it is possible that its accounting may not be as reliable as we expect. In “finance speak” one could say that companies listed or operating in countries with high levels of corruption are more likely to experience fat tail events. And we prefer reliability. To maintain a systematic and replicable approach to country exclusions, we rate countries using the Corruption Perception Index published every two years by Transparency International. This data helps us ensure our investment universe reflects our values.

Rules for exclusion of certain countries

• Eliminate stocks trading in countries that scored less than 50 on the most recent Corruption Perception Index from the list of permitted stock listing venues.
• Eliminate stocks of companies whose largest revenue contributing country scores less than 30 on the most recent Corruption Perception Index.

Results

• Current count of excluded countries with a score below 50: 121 (out of 180 countries)

Industry-based exclusions

We want to avoid investing in companies active in industries in which negative impact on environment or society is inextricably part of the business.

We acknowledge that some of these industries may be important components of the current economic system or crucial sources for local employment. However, we want to encourage transition into a greener and stronger world. With this goal, we have detailed the below rules for excluding such industries.

Rules for exclusion of industries with poor ESG performance

• Exploration, production, processing, transport & storage of oil (0 % tolerance)
• Exploration, mining and processing of coal and fossile fuels (0 % tolerance)
• Thermal coal energy generation (0 % tolerance; or if clear transition plan present then max. 20 % revenue tolerance)
• Production of chemical fertilizers (0% tolerance)
• Tobacco producers (0 % tolerance)
• Tobacco retailers, suppliers & distributers (max rev 20 %)
• Casinos & gambling (0 % tolerance)
• Airlines, Air Freight & Aviation Logistics (0 % tolerance)
• Aerospace and Defence (0 % tolerance)

Results

• Current count of excluded industries* due to inherently poor ESG: 14

*Based on the GICS industry classification standard.

Weapons

We identified weapons as one of our key sustainability issues very early on. Our concerns centered on the destruction of lives and health of immediately affected people as well as future generations, and the material destruction that is inevitable.

No arms-manufacturer has ever been selected for inclusion into our portfolio, even before we introduced our exclusion standards. At our sustainability workshops, we also discussed that we were concerned about accidentally profiting from weapons manufacturing and supply to the military. As a result of our workshops, we came up with the below rules:

Rules for exclusion of companies that manufacture, distribute, or sell:

• Nuclear weapons (0 % tolerance)
• Biological weapons (0 % tolerance)
• Chemical weapons (0 % tolerance)
• Landmines (0 % tolerance)
• Cluster munitions (0 % tolerance)
• Depleted uranium (0 % tolerance)
• White phosphorus (0 % tolerance)
• Conventional weapons and firearms producers for the military (0 % tolerance)
• Conventional civilian firearms (0 % tolerance)
• Civilian suppliers to the defence sector (tolerance of 25 % of revenue from contracts with military or private security)
• Companies listed under GICS code of the “Aerospace & Defense”

Results

• Current count of excluded companies due to weapons/military involvement: 107

Conduct-based exclusions

Companies in any line of business can create positive impact or destroy their social license to operate.

Since we maintain an “owner’s perspective”, we very strongly prefer to invest in companies that have a positive impact on the environment and society. In order to do so, we first firmly avoid those that violate our rules of conduct, as outlined below:

Rules for conduct-based exclusions

• Companies in violation of UN Global Compact
• Companies complicit in severe human rights abuses, including labor rights.
• Companies with business emitting significantly more emissions than their peers
• Companies exhibiting poor governance
• Companies lacking ESG information
• Companies involved in adult entertainment

Results

• Current count of excluded companies due to poor conduct: 42

Other exclusions

Sustainability concerns are just one of many reasons for our exclusions. We also exclude certain industries where we do not think we have the expertise for in-depth research. Additionally, we also exclude certain cyclical industries if we consider that the cycle would move against us. We also have a long list of companies that we exclude from our investment universe because our previous research told us that their business model is not compatible with our investment preferences.

Rules

• Exclude industries beyond the team’s circle of competence
• Exclude companies where the positioning in the economic cycle is not appropriate
• Exclude companies not fulfilling our investment criteria

Results

• Current count of GICS codes excluded beyond sustainability concerns: 28
• Current count of companies excluded beyond sustainability concerns: 399

How exclusions shape our investment universe

Exclusions are a quick way to shape our investment universe. Since the exclusions are based on our values or past experience, they do not make us worry that we are missing out on something. Rather, these exclusions help us efficiently find our investment gems.

Twice a year, we engage in a quantitative process we call Screening to narrow down our investment universe. This table is from the Fall 2021 Screening and it shows that our exclusion approach helped us narrow down our investment universe from 98’000 possible tickers (one ticker represents one company) to 43’381 based on our exclusion criteria alone.

Following the sustainability based exclusions, we further narrow down the investment universe with our financial risk management exclusions. Risk based exclusions are for instance limiting the companies’ debt allowance or ensuring sufficient liquidity in the underlying stock. We then rank the remaining stocks utilizing our proprietary financial and sustainability metrics to narrow down the universe to the most promising 50 companies. At this point, we shift the focus from what we exclude to what we prefer to see in a company. Next to an attractive valuation as an example on the financial side, we also screen for values we foster and standards we support on the sustainability side.

The final outcome of our screening is a list of 50 stocks exhibiting our preferred characteristics as far as they are quantitatively measurable. We then proceed to rigorously research them to find new investments.

First release: 08.04.2022
Recent version: 08.04.2022