Why materiality matters

Responsible investing is at the heart of our investment philosophy and approach6. We are long-term investors which means we want to invest in truly competitively advantaged businesses that we believe will prosper well into the future.

ESG issues – whether climate change, labour relations or cybersecurity – have economic implications and are therefore fundamental investment issues. Which is why ESG analysis is explicitly and systematically integrated in our approach and all investments are evaluated through an ESG lens.

Experience informs us these businesses are also more resilient to unexpected market shocks, like COVID-19. However, not all ESG factors have equal relevance to all businesses.

Regular readers of this report and clients who are familiar with our approach will remember that we introduced ‘materiality maps’ in 2018, which help us identify relevant ESG risks and opportunities when making investment decisions.

These materiality maps are now fully embedded within our process and form part of our initial due diligence and ongoing monitoring, while also enabling us to focus our engagement activities with companies and third-party funds on ESG issues.

To illustrate this, we have selected a handful of portfolio companies and outlined below the material ESG areas in which they were most active in 2020.

ESG analysis is explicitly and systematically integrated in our approach and all investments are evaluated through an ESG lens.

Environment

When faced with climate change risks, it can be easy to overlook the opportunities. However, global industrial gases and engineering company Linde already plays an important role in the energy transition and mitigating the effects of climate change by supplying products and technologies that enable its customers to meaningfully reduce their carbon emissions.

In 2020, Linde embarked on a number of key activities that furthered its environmental credentials. The company:

  • Announced an exclusive partnership with Shell to promote low-carbon technology innovations.
  • Achieved a Gold sustainability rating (top 5% of companies) from corporate social responsibility ratings firm EcoVadis.
  • Launched key pilot projects to test green hydrogen technologies.

The latter development is one we believe represents great long-term potential for Linde, with hydrogen (H2) demand predicted to increase significantly over the coming decades.

Linde currently produces approximately 2.6 tonnes of H2 every year, but some estimates forecast global demand could be as high as 650 tonnes per annum by 2050. Green hydrogen, which is produced using renewable energy rather than fossil fuels, could therefore become a major growth area as economies continue to decarbonise.

However, green hydrogen is currently uneconomic to produce in comparison to other energy carriers, which is why the technologies that Linde is pioneering, are important to bring costs down and make this a viable alternative.

Social

A well-functioning financial system is fundamental to a modern economy. Banks and other financial services firms provide essential services to society, not only supporting the economy in the midst of a downturn but also shaping the eventual recovery.

COVID-19 was no exception, and American Express introduced a number of measures to support staff, customers and communities during the pandemic, while also looking to address historic inequalities and other pressing social issues.

For customers

  • Launched a Customer Pandemic Relief Programme to offer short-term support for those affected by COVID-19.
  • Expanded a longer-term Financial Relief Programme to customers in 20 countries.
  • Raised transaction levels on contactless payments to minimise physical contact between merchants and their customers.

For employees

  • Significantly increased the number of women in management, board and executive committee positions.
  • Created an Office of Enterprise Inclusion, Diversity and Business Engagement, which reports directly to CEO Stephen Squeri.
  • Committed to greater transparency regarding diversity progress, including enhanced disclosures on representation within the workforce.

Supplementing our own research

Identifying the ESG risks and opportunities of companies, securities and funds is an ongoing challenge. It is difficult to accurately capture the impact of assets on the complex, interconnected environmental and social systems they interact with.

We are therefore always looking to improve how we assess and monitor these issues. One of the ways we do this is by supplementing our internal proprietary research with high-quality data from an external provider.

In 2020, following a comprehensive review at the Rothschild & Co group level, we appointed MSCI as our new ESG research partner. MSCI is a leading provider of data, support tools and services, which helps us to identify ESG factors that could affect our investments.

As MSCI already provides data to other business divisions at Rothschild & Co, this move also enabled us to better align our ESG metrics across the group.

Governance

Corporate governance is a key consideration when we invest, with factors such as board composition, executive compensation and reporting transparency providing insight into the long-term viability of a company’s business model and practices.

Credit ratings agency Moody’s made notable progress in its sustainability-related governance practices in 2020 by becoming the first S&P 500 company to join the ‘Say on Climate’ initiative.

The ‘Say on Climate’ campaign has a mission to hold companies to account on climate change. The aim of the initiative is to improve annual corporate emissions disclosures, while also encouraging companies to produce Climate Transition Action Plans that offer measures for managing and reducing these emissions over time. Additionally, participating companies pledge to hold votes on their plans at annual general meetings.

As a long-term investor in Moody’s, we were pleased the company was considering committing to the ‘Say on Climate’ principles. In fact, we were consulted by them on this decision and other ESGrelated matters in late 2020, including the possibility of Moody’s integrating ESG factors into their ratings.

The ‘Say on Climate’ announcement concluded a strong year for the company with regards to its sustainability goals. In 2020, Moody’s also:

  • Committed to net-zero emissions by 2050.
  • Reported disclosures in line with the Task Force on Climate-Related Financial Disclosure (TCFD) recommendations.
  • Set out plans for 100% renewable electricity procurement for its global operations.

Third-party fund progress

We regard our third-party fund managers as an extension of our own investment team. They generally share our investment philosophy and act as our eyes and ears on the ground in regions and markets that are beyond our expertise or internal resources.

Naturally, we set a high bar for these managers, which includes our expectations for their approach to responsible investment.

We expect all our managers to have a formal Responsible Investment policy and to demonstrate an ongoing commitment to these principles. In recent years, we have encouraged managers who didn’t have a policy to establish one and have worked closely with some of our managers to help them with this process.

At the end of 2019, most of the managers we invest in had published a formal policy. Two that had not were Bares Capital and Lansdowne Partners.

Throughout 2020, we continued our discussions with these managers and would like to report further progress they’ve made.

Early last year, Bares engaged consultants to provide input and support on their approach to responsible investment. Subsequently, we were pleased to receive the company’s responsible investment policy in May 2020, as well as an assurance that they would provide full transparency on their annual proxy voting.

At the end of the year, Bares also confirmed that they would become a signatory to the UN PRI as of March 2021.

Meanwhile, Lansdowne also made promising progress on Responsible Investment in 2020. In our view, Lansdowne had been one of our managers with the most room for improvement in its approach to responsible investment policies, disclosures and engagement.

Having identified certain holdings with material ESG concerns in the Developed Markets Long Only fund in which we were investing, we initiated discussions with Lansdowne on their approach. These exchanges revealed that the firm was putting serious effort behind their ESG analysis and they subsequently finalised a responsible investment policy, committing to providing more detailed ESG analysis of their portfolio holdings. The manager will also regularly share their engagement activity with us in a more formal manner moving forward.

We are very satisfied with the progress made by Bares, Lansdowne and our other third-party managers during 2020. And for our part, we will continue to provide constructive feedback and share bestpractice guidance with them on sustainability issues.

(6) For more information on our approach to responsible investing, please read our Responsible Investment Policy ‘Investing in our future’: https://www.rothschildandco.com/siteassets/publications/rothschildandco/private_wealth/2020/en_2020_wmuk_responsible_investment_policy.pdf