Page 16 - DIY Investor Magazine Issue 24

ESG: SUSTAINABLE FINANCIAL RETURNS FOR LONG-TERM GROWTH
Environmental Social and Governance considerations are becoming more important for investors. Adam Avigdori, Co-Manager of the BlackRock Income and Growth Investment Trust PLC, discusses how they draw ESG analysis into their investment process.
On the BlackRock Income and Growth Investment Trust, we are looking for companies that generate a high return on capital and can grow dividends over time.
In order for companies to do this, they need to score highly on a range of financial factors, but non-financial factors are equally important to ensure those returns are sustainable. This is where our environmental, social and governance (ESG) analysis comes in.
This part of our analysis has always been important.
However, as issues such as climate change come under greater scrutiny from policymakers, consumers and regulators, we are conscious that shareholders are becoming increasingly sensitive about owning any company that isn’t actively managing the associated risks.
However, we have always felt that considering ESG factors is the best way to manage businesses over the long term for all stakeholders.
EMBEDDED ESG
Whilst we have no direct ESG mandate, these factors have always been an integral part of our analysis.
In our 1,000+ company meetings each year, we seek to understand how companies are performing, the industry dynamics they face, what differentiates them versus their competitors and importantly how sustainable this competitive position is, and therefore how it is likely to evolve over time.
This research is complemented by our analysis of the ecosystem surrounding the company; understanding the company’s relationships with its customers, regulators, suppliers, employees and shareholders.
We believe that companies that promote sustainable relationships with all their stakeholders are better positioned to mitigate risks and to sustain their financial returns over the long term.
‘WE BELIEVE THAT COMPANIES THAT PROMOTE SUSTAINABLE RELATIONSHIPS WITH ALL THEIR STAKEHOLDERS ARE BETTER POSITIONED TO MITIGATE RISKS AND TO SUSTAIN THEIR FINANCIAL RETURNS’
Our analysis of the ecosystem highlights both the risks as well as the opportunities facing companies over the long term. We are particularly interested in the growing interdependencies between stakeholders as the focus on ESG increases.
For example, a company may differentiate its products or services by reducing their environmental footprint. However, this can also differentiate the company as an employer and influence its ability to attract and retain talent as employees are increasingly responsive to companies’ ESG practices.
This in turn can influence the financial factors as well as influence other stakeholders such as the shareholders and the cost of capital.
‘WE LIKE TO SEE A COMPANY IMPROVING ITS RESOURCE EFFICIENCY’
BEYOND FINANCIAL FACTORS
As such, while analysis of financial factors such as
its revenue growth, profitability, cash generation and allocation, the balance sheet and return on capital are vitally important, our analysis of ESG factors provides us with conviction that these returns are sustainable over the long term.
DIY Investor Magazine | Apr 2020 16