As long-term investors, we are focused on identifying companies that are intelligently driving sustainable outcomes. We typically look for founders and management teams that have high governance standards and whose interests are well-aligned with minority shareholders.
The pursuit of immediate gains through short-sighted strategy and reckless conduct, or the exploitation of labour, tax loopholes, legislative arbitrage or the environment, runs contrary to our definition of quality.
Since the team’s establishment in 1988, we have been consistent in our belief that the integration of environmental, social, governance (ESG) and sustainability factors into the investment process is essential. We consider it to be prudent risk management and a fundamental part of our obligations to clients. As a firm, we have been signatories to the Principles of Responsible Investment (PRI) since 2007 (we view it as a minimum standard).
Our approach to responsible investing has been shaped by an emphasis on stewardship and the belief that quality managers and good governance should ensure that environmental and social concerns are rightfully addressed. We recognise that our investment activities can have an impact on society and the environment and good governance is the foundation on which great companies are built. That said, we realise it is an incredibly complex subject and there is no single approach or path to prescribe to investors or companies – rather, it is the direction of travel that is more important.
At FSSA we believe it is everyone’s responsibility to think about ESG issues during daily decision-making and interactions with company management. Just as we wouldn’t outsource or confine our analysis of the quality of a company’s financials to a team of accountants, we believe there is no reason to separate the ESG and sustainability elements from our research process. The variables are intertwined and a complete assessment of quality is necessary.
Stewardship and ESG integration
As long-term investors, we are focused on identifying companies that are intelligently driving sustainable outcomes. A key part of our philosophy is seeking founders and management teams with high governance standards and whose interests are well-aligned with minority shareholders. These are franchises that have the ability to deliver sustainable and predictable returns even in down markets, comfortably in excess of the cost of capital.
Every member of our team integrates ESG as part of our bottom-up research approach to assess for quality. For example, we have seen manufacturing flaws cause product health and safety concerns but management swiftly recalled the product and held honest and constructive dialogue around the situation. In such cases, we focus on understanding actions taken to minimize harm to the company’s key stakeholders and business, and what was done to mitigate the risk of recurrence. This gives us a sense on whether management truly are good long-term stewards. By evaluating ESG factors, we can assess what might improve or even destroy the investment case. We closely engage and track management’s response to ESG concerns including analysing targets and supporting KPIs.
Environmental and climate change
Climate change is a key consideration in FSSA’s investment process. We accept the evidence of climate change and the need to transition to a low carbon global economy. We consider it our duty to assess the related risks and opportunities in our investment decision-making and ownership practices, and look to invest in companies that are actively taking steps to reduce the impacts of climate change.
As shareholders of quick-service and fast casual restaurants (QSR), we are concerned about the environmental impacts of their supply chains from sourcing standards to greenhouse gas emissions produced. We actively engaged on these materials risks and have seen improvements through adopting RSPO-certified palm oil, environmental risk management databases, water reduction projects and procurement contracts that prioritise the environment. Disclosure is a best practice and for companies with complex supply chains, we encourage the tracking and disclosing on Scope 3 emissions as a crucial step in identifying and tackling climate-related risks.
A company’s social license to operate is a crucial part of our quality-focused investment process. This means we only invest in companies where we perceive management operates the business effectively and in the interest of all its stakeholders — customers, employees, suppliers and the larger community. A company that does not weigh stakeholder interests as highly as its own, in our view, will not be rewarding for long-term investors.
Social considerations are a complex and broad set of issues we engage on, ranging from data privacy to workplace diversity at the board, management and employee level. Addiction to certain products and services has recently come to the forefront. Companies that are proactive in addressing upcoming regulatory and consumer changes have become beneficiaries of such developments. Discourse around gender equality is also a vital topic. We frequently discuss gender diversity with companies, expressing the benefits and international standards. We have been impressed with the willingness and progress in promoting gender equality across our portfolios.
We recognise that as a long-term shareholder, we are in a position to influence the environmental, social and governance performance of companies via constructive engagement with management teams and boards of directors, and through the exercising of proxy votes.
Essential to understanding corporate governance is being able to assess the quality of management through frequent company meetings. These conversations also reveal details of shareholders rights, transparency, related parties and oversight, among others. We believe voting is an important investor right and should be exercised in the best interest of our clients at the time of asking. Where we disagree with a proposal, we first seek to resolve concerns through constructive dialogue and cast negative votes as a secondary or last step in our engagement process. This approach results in low negative votes and high quality companies.
FSSA’s ESG mandate is such that all stock selections are based on positive contributions to society and the protection of the environment, as determined through our quality criteria process. We use the following to guide us:
- Support and uphold fundamental principles of human rights,
- Support international norms and standards in widely adopted treaties, conventions and codes of practice, and
- Uphold the highest standards of environmental stewardship
Our process inherently excludes a number of industries in their entirety or where we apply thresholds. Applying thresholds enables us to engage with the company on the less sustainable parts of their business as long as we are confident in their ability to improve and we believe their business model is fundamentally purposeful.
Please see our Exclusion Policy for more details.
Some companies benefit in times of crises – such as personal protective equipment (PPE) suppliers during the COVID-19 pandemic. While these necessary products have positive impacts on society, a look at supply chains revealed concerning practices linked to modern slavery. Besides communicating our concerns, we often share global best practices, resources and examples of companies that have shown improvement. We check on progress to ensure complete remediation and communicate when more should be done.