Detailing the impact of the revenues generated by every single portfolio company is intricate and labour intensive. However, this process supports a long-term investment horizon, promotes intimate company knowledge on behalf of portfolio managers and also encourages greater engagement with companies.
When investing in listed equities, quantifying the impact of the holdings can be a challenge, given the disparity between company activity. Some companies have an obvious positive or negative impact while it may be more difficult to tease out the true effect of some other activities. Making sense of this information is rising in importance among asset managers as investors are holding them to account.
Eoin Fahy, Head of Responsible Investing at KBI Global Investors, comments: “We developed our methodology to measure impact on the back of client demand. They wanted to quantify the good their investments are doing. Essentially, they wanted numbers to take to their stakeholders and tell them, quantitatively speaking, the impact their investments are having. We were waiting to see whether the industry was going to build a common framework but when that didn’t happen, we came up with our own approach.”
KBIGI’s approach to measuring impact is simple but requires a lot of work. The firm takes the revenues of every single company it invests in, within its impact strategies, and splits the revenues into different business activities. They then decide whether each one is contributing positively or negatively to the achievement of the relevant UN Sustainable Development Goal (SDG).
“After carrying out this exercise for the 50-60 stocks in each of the natural resource equity portfolios, we found out that in excess of 70% of the revenues generated by these companies were contributing positively to the SDGs,” Fahy outlines.
For example, within KBIGI’s Global Resource Solutions strategy, which is a blend of sustainable agri-business, clean energy and water investments, 19.3% of the revenues are aligned with SDG 7 which aims to “ensure access to affordable, reliable, sustainable and modern energy for all”. Fahy notes that there is a certain degree of subjectivity so that the exact number may vary slightly depending on what assumptions are made, but the figure is a close reflection of what is happening within those companies.
He says that 90 percent of the 160 business activities within KBIGI’s natural resource equity portfolios are straightforward to categorise in terms of negative or positive contribution to an SDG. “The debates around the other five to 10 percent can get quite heated, but we need to always remember that the majority of business activities are intuitively easily classified,” Fahy remarks.
However, some difficulty remains in performing such analysis. The primary challenge is that most companies don’t typically publish data in ways which are amenable to this exercise: “We typically have to do a bit of digging in company accounts and often need to speak to the company to get a breakdown of the revenues in ways that are useful to us. We also need to know the companies pretty well to do this effectively,” says Fahy.
It is imperative that the portfolios are kept small to ensure this scrutiny is carried out meticulously. Had the strategies been investing in 200 or 300 stocks, this would be a much more difficult job and the portfolio managers might not know the companies as well as they do.
Having a smaller number of names in a strategy impacts this intimacy between the portfolio managers and the companies. Fahy elaborates: “Doing this work helps us get to know the companies very well; more than we do already. Digging into their accounts, talking to management and asking questions throws up opportunities for engagement and debate with companies. We find ourselves in the position to request that companies to do things differently.”
Opportunity for engagement
The increased engagement can help or hinder a company’s position in the KBIGI portfolio. Fahy details: “There are circumstances in which companies give lip service answers which we don’t believe. In those cases, we either divest or significantly lower our shareholding. We might also look at proxy voting and expressing our views through shareholder resolutions.
“On the other hand, if we’re impressed with the way a company is tackling an issue, we can also increase our holding…so it works in both ways.”
Fahy observes how the KBIGI investment committee is thinking more about the fuel sources companies use, as opposed to simply focusing on what they produce. He talks of a particular case related to a polysilicon manufacturer producer in China (polysilicon is a key component for solar panels), where much of the electricity supply is coal-based. Fahy describes how the team was in talks with this company to encourage them to develop a cleaner energy source for their manufacturing. Following those discussions, this solar panel producer is now in process of putting that plan for cleaner energy in place.
Another instance of company engagement includes discussions about packaging with a company producing sandwiches. On the whole, the name would have been fairly neutral, however had it been using plastic packaging, it would have to be classified as considerably negative in terms of impact. Talks with the company found it was replacing all its plastic packaging with more environmentally friendly materials, thus mitigating the potential negative environmental impact.
Fahy explains the benefits of having a proprietary methodology for measuring impact: “The way we analyse our investments and quantify the impact and alignment with the SDGs is very transparent. It also puts us in the advantageous position of being able to talk to the investors in our strategies and tell them in granular detail the extent to which their holdings are aligned with every one of the SDGs – whether positively or negatively.”
The firm has been active in the ESG space as far back as 2000. At the time, it launched thematic ESG funds, long before the trend hit the financial services mainstream. Fahy stresses: “the ESG performance of the companies we invest in is absolutely critical to our investment decisions. Companies that do poorly in terms of ESG performance are much less likely to be in our portfolios and if they are included, we will hold a much smaller position in them compared to the companies that do well.”
KBI Global Investors Ltd is regulated by the Central Bank of Ireland
Eoin Fahy BA, ASIAI
Head of Responsible Investing, Chief Economist
Eoin joined the Research Department of the firm as an investment analyst on fixed interest markets in 1988, going on to become Chief Economist in 1990. Since 2014, he has held the position of Head of Responsible Investing, overseeing the firm’s approach to responsible investing and sustainability which achieved the maximum possible rating of A+ in every module, in the PRI’s annual assessment of the firm’s Responsible Investing activities. He is a founding member of SIF Ireland’s steering committee, a member of CDP Ireland’s steering committee, and a member of the PRI’s Macroeconomic Risks working group. He represents the firms in its interactions with various international sustainability and Responsible Investing organisations such as the PRI, CDP, the CERES Investor Network and the Institutional Investors Group on Climate Change.