Our approach to responsible investing is founded on the following beliefs:
At the heart of the Constantia investment philosophy lies the idea that high-quality businesses will deliver superior long-term sustainable returns for all stakeholders. To us, a quality business not only ticks the right boxes in terms of financial metrics. It must also have a proven track record of allocating capital in a manner that is consistent with generating positive results for its customers, suppliers, employees, the communities in which it operates, regulators and equity owners.
We are committed to being responsible stewards of our investor’s capital. At its most basic, our job is to prudently allocate our clients’ investment with us to trustworthy people at an attractive price, and then to let them get on with creating long-term value. Businesses that are not managed to be sustainable are simply unlikely to achieve this goal. As such, an assessment of business sustainability and governance practices are inherent to our process when evaluating a business for ‘quality’. In industry parlance, this is evaluation is frequently referred to as ‘ESG’. We simply see it as part and parcel of good business practices, and a foundational requirement for the ‘business-ownership perspective’ style of investing that we practice.
Our preferred businesses therefore operate in a manner that is sustainable to the long-term wellbeing of their employees, the communities within which they operate, the environmental footprint that they leave behind, and the impact on society at large.
Reputable corporate governance is a key requirement to the durability of a company’s long-term performance, and thus we place a lot of emphasis on it. We seek to support management teams and boards that minimise the inherent principal-agent conflict through properly aligned incentives that encourage behaving like business-owners, rather than seeking to maximise annual compensation. We believe that management and the board should have a demonstrable history of acting on behalf of minority investors’ interests, rather than their own.
As long-term investors and active custodians, sustainability is fundamental to compounding investor wealth overtime. We believe that sustainable investing requires a tailored approach on a company-by-company basis. We focus equally on how each company we invest in defines their destination, as well as the journey to reach that point. We do not believe in a one-size-fits-all approach in this regard. Careful consideration of ESG factors on a case-by-case basis (rather than a blanket approach) allows us to capture and assess the nuances of each industry and sector that we consider when investing. By way of example, speciality chemicals provider Croda is an industry leader in the transition towards bio based, ecologically friendly surfactants, manufacturer using renewable energy. Users of Coda’s products increasingly identify with the sustainability of the ingredients they consume which creates an opportunity to take market share from less forward thinking peers. Traceability of Croda’s products sold all the way back to the source of those ingredients is another way in which the management team are ensuring the measurable sustainability of the supply chain. These superior business practises will ultimately lead to enhanced shareholder value over time. In contrast, Berkshire Hathaway Energy is itself a leader in the move away from fossil fuels and towards renewable energy. More than 85% of the capital deployed by the group as at 31 December 2020 was in renewables i.e. in assets not related to coal or natural gas generation. We expect this leadership position to be further extended going forward as more capital is deployed into green technologies. Two very different examples of why we believe each investment requires an individualised approach to sustainability.
We engage with management teams directly and corporate boards via our proxy voting process on any of the issues outlined above.
As a quality-focused investor, we inherently have to say ‘no’ far more frequently than ‘yes’. By their very nature, certain industries (such as capital-intensive businesses that rely on depleting natural resources) do not pass our sustainability or return on capital criteria for investment. We do not believe in outsourcing our responsible investing duty to third parties, as it is a core component of our investment process and is therefore best executed upon by investment team.
Our stock selection and portfolio management processes incorporate and quantify the qualitative aspects of sustainability, ensuring our journey as business owners is aligned to that of the companies we invest in and the clients on whose behalf we invest.
Importantly, our investment process places equal significance on ESG considerations as it does on the quality of the management and capital allocation, amongst other factors. We do this intentionally so as not to underplay the importance of any single aspect of a company’s qualitative attributes, thereby ensuring each investment is viewed holistically.
When investing from a business-ownership perspective, good investment stewardship goes hand in hand with long term wealth creation.