We are committed to integrating ESG analysis into our existing fundamental research processes and see ESG as a natural complement to our strengths as a active investment manager. Our boutique environment empowers each investment team to make decisions in line with its investment philosophy and clients' objectives.

Sustainability: Globally Committed, Locally Defined

For our public markets investing, our global footprint means that sustainability in our research, integration, and engagement efforts take shape in accordance with local implementation and expertise. While our global ESG team provides an overarching and holistic approach focused on defining the materiality of risks and opportunities for value creation, each of our investment teams is empowered to apply sustainability principles to investment analysis in a way that reflects local context and the team’s deep local market expertise.

The degree to which an ESG incorporation strategy may influence the composition of the portfolio or investment universe will vary from team to team. Broadly, each team has a distinct investment process and the consideration of ESG factors is complementary to their existing process rather than disruptive.

Case Studies

U.S. equity team example:

One of our U.S. equity teams has an investment process that is based on understanding the recurring free cash flow of a company and using projections that determine the valuation of a company going forward, under a range of scenarios. As an integral part of this process:

  • ESG research is compiled from a variety of data sources, including company reporting, external ESG research, CDP, and Bloomberg
  • ESG data is sifted to focus on relevant and material information that team analysts then quantify according to the team's valuation process
  • If ESG factors are material, this will impact the scenarios and valuations for the company under review
  • While the team does not explicitly exclude any companies, the ESG integration process may implicitly lead to some exclusions
  • The team’s analysis includes a detailed ESG analysis report focusing on the materiality analysis of ESG factors—and which identifies issues for potential engagement

In this case, ESG factors are incorporated to better measure the risk/opportunities to companies, and therefore their valuation—meaning the free cash flow and volatility to the free cash flow. Furthermore, the ESG analysis has a direct impact on the active ownership strategy of the investment team.

ESG issue—Packaging material and waste example:

A multi-national beverage company was assessed across key ESG factors. On the issue of packaging material and waste, the analyst noted that the company:

  • Had not yet set group-wide and time-bound targets for reducing the weight of its packaging materials or for increasing the use of recycled content
  • Didn’t report on year-over-year performance for reducing weight of packaging
  • Didn’t have a strong packaging management strategy in place
  • Was exposed to regulatory risk in the European market, where the directive proposal on plastic is likely to be passed

The analyst used industry-based key metrics to determine the relevant impact on company valuation, considering factors such as the risk of increased compliance costs or market access constraints due to new regulations, particularly in Europe, on product packaging and end-of-life recycling or disposal. Consequently, the analyst adjusted the downside case to stress European margins and assumed a 20% increase in packaging costs.

Canadian core equity team example—ESG issue: executive compensation

ESG analysis conducted by our Canadian Core investment team is incorporated within the team' fundamental research on individual stocks. The team focuses on quantifiable and material ESG factors that may impact future free cash flow generation and cash flow return on investment. The team views good corporate governance and incentive compensation as critical to help drive effective capital allocation decisions.

  • A technology holding in the portfolio experienced material relative share price underperformance
  • The investment team initiated a formal review process that incorporated an ESG analysis
  • The review determined that underperformance was linked to a declining return on investment capital (ROIC) resulting from the relatively high price of recent acquisitions
  • This led the team to more closely consider certain governance issues, specifically incentive compensation structures and the impact on valuation multiples paid for acquisitions

The company committed to review and align their executive comp structure to take into account the points raised.

ESG Issue—human capital development, privacy, and data security:

As a result of ESG analysis, it was determined that a multinational e-commerce company was overly exposed to certain ESG risks: human capital development and privacy and data security. The analyst's considerations included the following:

Weak human capital development

  • The company was exposed to the risk of increased turnover and associated costs of rehiring, loss of intellectual and human capital through attrition, and reduced ability to attract talent
  • This risk exposure was further elevated given the frequency of organizational changes

Privacy and data security

  • The company was highly exposed to the risk of compliance cost increases or reputational damage from data breaches or controversial use of personal data
  • Both OpEx and CapEx would increase from a serious security breach
  • The company did have a prior serious breach already
  • Indirect costs could include employees' time, effort, and other organizational resources spent notifying victims and investigating the incident, as well as the loss of goodwill and customer churn

Examining the social aspects in aggregate, in the downside case, the analyst adjusted his capex numbers and pressure margins to account for a possible negative outcome from privacy and data breaches, along with the ramifications of rising labor costs in the company's industry. Stress testing the model created a 15% to 20% downside variations in the free cash flow profile if a negative scenario were to materialize.

Case studies are for illustrative purposes only. The citation of trades or strategies is intended only to illustrate some of the investment methodologies and philosophies of the investment team. The material does not constitute an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security. This material should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any investment products or to adopt any investment strategy. The historical success, or the investment team's belief in the future success, of any of the strategies is not indicative of, and has no bearing on, future results. Risk controls and other proprietary technology do not promise any level of performance or guarantee against loss of principal. Approaches by individual investment teams may vary.