Our approach
to Sus­tain­abil­ity

At this early stage, we focus on til­ting our uni­v­erse of pot­e­n­tial inv­e­s­tments tow­ards more sus­t­a­inable com­p­a­nies. This takes place in two steps. First, we apply exc­l­u­sions – we have always exc­l­uded com­p­a­nies that are active in the mining and pro­c­e­ssing of coal and oil and wea­pons pro­d­u­cers. In the second step, we use sus­t­a­inability scores along fin­a­n­cial ind­i­c­ators to rank the com­p­a­nies. Exa­m­ples of scores we use in gov­e­r­nance are the ind­e­p­endence of audit and com­p­e­nsation com­m­i­ttee chairs, CEO dua­lity, etc. For env­i­r­onmental scores, we focus on pro­xies of cli­mate change impact min­i­m­ization. In the social domain, human and labor rights man­a­g­ement are key. These scores are then used tog­e­ther with the fin­a­n­cial eva­l­u­ation des­c­r­ibed in the sec­tion on our inv­e­s­tment pro­cess to pro­duce a ran­king of pot­e­n­tial inv­e­s­tments in our uni­v­erse. The best-per­f­o­rming com­p­a­nies con­t­inue to the next stage, pre-check.

Morningstar Sustainability Rating

We use our pro­p­r­ietary equity scr­e­e­ning model to select and rank tho­u­s­ands of stocks wor­l­d­wide in a very short amount of time. Based on cri­t­eria we dev­e­l­oped and def­ined int­e­r­nally, this model sea­r­ches thr­ough the global stock mar­kets for target com­p­a­nies. These cri­t­eria inc­lude fin­a­n­cial risk mea­s­ures, val­u­a­tion met­rics, sus­t­a­inability cri­t­eria and gov­e­r­nance scores. The result of the equity scr­e­e­ning is an up-to-date short list of stocks to be ana­l­yzed by our equity res­e­arch team.

Morningstar Performance Rating

Morningstar Medalist Rating

During pre-check, we focus on the com­p­a­nies per­f­o­rming best on fin­a­n­cial and sus­t­a­inability met­rics. At this stage, we learn more about the com­pany’s bus­i­ness model, fin­a­n­cial per­f­o­rmance during crises and their app­r­oach to sus­t­a­inability. Since all the com­p­a­nies at this stage alr­eady sat­isfy our min­imum sta­n­d­ards, we move beyond “che­c­king the boxes” and pay att­e­n­tion to more qua­l­i­tative cri­t­eria: Does the com­p­e­nsation scheme align the int­e­r­ests of the man­a­g­ement with those of sha­r­e­holders? Is the man­a­g­ement suf­f­i­ciently div­erse? Our inv­e­s­tment com­m­i­ttee then votes on those com­p­a­nies that best answer our sus­t­a­inability and fin­a­n­cial con­s­i­derations. The sel­e­cted ones are moved to the “in-depth” stage of our pro­cess.

Morningstar Sustainability Rating

We con­duct all equity res­e­arch in-house. In order to best all­o­cate our res­o­u­rces in this time-con­s­u­ming res­e­arch pro­cess, we first con­duct a pre-res­e­arch check of all stocks on the short list. In this step, we det­e­r­mine whe­ther we even want to own a given com­pany from an eth­ical sta­n­d­point, whe­ther we have the com­p­e­tence to com­p­r­ehend the bus­i­ness model and und­e­r­stand the pro­d­ucts, and whe­ther we can gather suf­f­i­cient inf­o­r­mation on which to base a sound dec­i­sion (e.g. tra­n­s­parency, lan­g­uage, acc­o­u­nting, etc.). After just one day of res­e­arch, we dis­miss 9 out of 10 stocks bec­ause they don’t meet our exp­e­c­tations.

Morningstar Performance Rating

Morningstar Medalist Rating

This is the most detail-ori­e­nted stage. From among tho­u­s­ands of com­p­a­nies at the scr­e­e­ning stage, only about 10 reach the in-depth stage of our pro­cess every year. Here, we cus­t­o­mize the sus­t­a­inability res­e­arch to the ind­u­stry in which the com­pany ope­r­ates. Nat­u­r­ally, just as fin­a­n­cial met­rics differ sig­n­i­ficantly bet­ween the ban­king and man­u­f­acturing sec­tors, so does the sus­t­a­inability focus. At this stage, we also reg­u­l­arly engage with com­p­a­nies and make sus­t­a­inability a part of that con­v­e­rsation. Reg­a­r­dless of the met­rics used, the goal rem­ains the same: We are hoping to ide­n­tify a well-man­aged com­pany that min­i­m­izes its env­i­r­onmental foo­t­p­rint, is a good emp­l­oyer, is app­r­e­ciated by its com­m­u­nity and cre­ates value for its cus­t­o­mers.

Morningstar Sustainability Rating

At the core of our inv­e­s­tment pro­cess lies the deep res­e­arch phase. In order to assess the risks spe­c­ific to a firm, supply chain or com­p­e­titive sit­u­a­tion, or to gain an und­e­r­standing of the com­pany cul­ture, we go thr­ough a rig­o­rous and com­p­r­ehensive res­e­arch pro­cess. We dis­sect fin­a­n­cial sta­t­e­ments in search of ear­n­ings man­a­g­ement, meet with the man­a­g­ement to dis­cuss the firm’s str­a­tegy and vision, con­duct int­e­r­views with cli­ents to und­e­r­stand their pur-chase beh­a­vior and pre­f­e­rences, or occ­a­s­ionally meet with ind­u­stry reg­u­l­ators or pol­i­t­icians to better grasp the future cha­l­l­enges the com­pany might be facing. The goal is to gain a com­p­r­ehensive und­e­r­standing of the com­pany to make a well-inf­o­rmed inv­e­s­tment dec­i­sion.

Morningstar Performance Rating

Morningstar Medalist Rating

When our inv­e­s­tment com­m­i­ttee eva­l­u­ates a pot­e­n­tial stock for inc­l­u­sion in our fund, they eva­l­uate both fin­a­n­cial and sus­t­a­inability met­rics before sel­e­c­ting the best pos­s­ible inv­e­s­tment.

Morningstar Sustainability Rating

Prior to any dec­i­sion, all ana­l­ysts are asked to cha­l­l­enge the res­e­arch report. Ass­u­m­ptions are second-gue­ssed, thi­n­king turns to sce­n­a­rios or som­e­t­imes a pol­a­r­izing pos­i­tion is int­e­n­tionally taken in a dis­c­u­ssion. If we come to the con­c­l­usion that we have found a new inv­e­s­tment, then this new stock must rep­lace an exi­s­ting por­t­f­olio pos­i­tion. We call this the cha­l­l­enger pro­cess. It raises the bar for new stocks while for­cing us to reg­u­l­arly second-guess our cur­rent inv­e­s­tments.

Morningstar Performance Rating

Morningstar Medalist Rating