Bring social risks into global stock analysis


Peter Rutter, Head of Equities

27 February 2018

More investors are making ESG – or environmental, social and governance factors – a part of their investment analysis. RLAM’s Global Equities team believes that ESG assessment can significantly enhance investment analysis, although in practice this is a task that requires effort and diligent thought.  
For example, take two companies: the first has no limited public regard for carbon emissions or disclosure on carbon, despite operating in a carbon-intensive industry, as well as questionable labour practices and an entrenched board. The second has a favourable social proposition that is helping to drive sales growth and it also has good disclosure on executive pay. A simplistic view is that the first should score poorly and the second much more highly. In reality, they are the same company – online retailer Amazon, which has both positive and negative ESG factors that influence risks and rewards in opposite directions.  
The RLAM global equity team looks at ESG as a part of the analysis of every stock it analyses, making this an integral part of its valuation analysis within the investment process, rather than a ‘bolt-on’ to a more traditional approach. 
An example is Provident Financial, which makes doorstep loans to people with poor credit histories. Historically the company has exhibited strong returns on capital and good growth, but our analysis of the bear case showed that it was also exposed to significant social risks because of concerns about the morality, sustainability and risks of doorstep lending. That is a significant downside risk, and while this was not our core scenario, we felt that there was too little upside potential to justify owning the shares. In this case, analysing the social risks associated with the company, and capturing that in downside scenarios, completely changed the potential pay-off that might come from investing in the stock. Provident Financial shares subsequently lost two-thirds of their value in 2017 amid a series of negative announcements including profit warnings and regulatory investigations into two of the company’s units.
To hear more from Peter Rutter’s recent webinar, click here. To see the team’s most recent update on markets, click here

More investors are making ESG – or environmental, social and governance factors – a part of their investment analysis. RLAM’s Global Equities team believes that ESG assessment can significantly enhance investment analysis, although in practice this is a task that requires effort and diligent thought.  

For example, take two companies: the first has no limited public regard for carbon emissions or disclosure on carbon, despite operating in a carbon-intensive industry, as well as questionable labour practices and an entrenched board. The second has a favourable social proposition that is helping to drive sales growth and it also has good disclosure on executive pay. A simplistic view is that the first should score poorly and the second much more highly. In reality, they are the same company – online retailer Amazon, which has both positive and negative ESG factors that influence risks and rewards in opposite directions.  

The RLAM global equity team looks at ESG as a part of the analysis of every stock it analyses, making this an integral part of its valuation analysis within the investment process, rather than a ‘bolt-on’ to a more traditional approach. 

An example is Provident Financial, which makes doorstep loans to people with poor credit histories. Historically the company has exhibited strong returns on capital and good growth, but our analysis of the bear case showed that it was also exposed to significant social risks because of concerns about the morality, sustainability and risks of doorstep lending. That is a significant downside risk, and while this was not our core scenario, we felt that there was too little upside potential to justify owning the shares. In this case, analysing the social risks associated with the company, and capturing that in downside scenarios, completely changed the potential pay-off that might come from investing in the stock. Provident Financial shares subsequently lost two-thirds of their value in 2017 amid a series of negative announcements including profit warnings and regulatory investigations into two of the company’s units.

To hear more from Peter Rutter’s recent webinar, click here. To see the team’s most recent update on markets, click here.

Past performance is no guide to the future. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.