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As responsible and sustainable investors, we watch these trends closely and through our research explore not only how these issues will affect the environment and society, but also how they will fundamentally change the way our economy operates and therefore how our investment portfolios are constructed and how they perform.

The importance of research in our investment process

Esmé van Herwijnen Esmé van Herwijnen Responsible Investment Analyst
Opinion

The importance of research in our investment process

Esmé van Herwijnen

Esmé van Herwijnen
Responsible Investment Analyst

Our world today is facing numerous systemic challenges. We are in the midst of a climate crisis, presenting a threat for people and their livelihoods around the world; economic inequality is one of the greatest structural challenges facing many societies; global supply chains are becoming incredibly complex, exposing companies more and more to the potential of environmental and social violations under their watch; and urban migration continues to experience rapid growth, with the number of urban dwellers expected to rise to 5 billion by 2030.

As responsible and sustainable investors, we watch these trends closely and through our research explore not only how these issues will affect the environment and society, but also how they will fundamentally change the way our economy operates and therefore how our investment portfolios are constructed and how they perform.

EdenTree’s responsible and sustainable investment approach is based on four pillars of activity;

          1. The screening of stock ideas

          2. Research into investment themes

          3. Voting at company meetings and holding the companies we invest in to a higher standard of governance 

          4. Engaging with the companies we hold over the long-term on ESG themes

Achieving all of this is not possible using a passive approach. We are active stock pickers, and as such research plays a particularly important role in our investment process. Research is what helps us to identify new trends, investigate long-term sustainable themes and contribute to the idea generation process that identifies specific new investment opportunities.

To accomplish this, our responsible and sustainable approach is fully integrated into our investment management process. The fund managers and the responsible investment team work side by side to generate ideas, analyse opportunities, create meaningful and diversified portfolios and undertake an ongoing evaluation of holdings.

In addition to supporting our investment process and contributing to stock idea generation, our research also aims to shine a light on the many challenges for responsible investors, and to share with clients our view of the world as it aspires to transition to a more sustainable economy and fairer society, whilst keeping within the natural boundaries of our planet.

For example, three times a year we publish our flagship EdenTree Insight publications, which provide a responsible and sustainable perspective on some of the biggest challenges facing our world today, and how we as responsible and sustainable investors can be a part of the solution.

In the past, our Insights have for example looked at sectors undergoing significant change, such as within ‘The Life Code’, where we looked at cutting edge developments in medical science, and the ethical dilemmas this presents, such as data privacy or genetic editing that are emerging in an area as yet unregulated by policy makers. Another example is ‘The Energy Paradox’, which highlighted the challenges in meeting global energy needs whilst also meeting the goals of the Paris Agreement. Our Insights have also been an opportunity to assess structural problems such as global economic inequality, natural capital depletion or the rising frequency and magnitude of cyber-crime.

In an example from our Insight ‘Thirsty Planet Revisited’, we looked at water scarcity as a macro theme increasingly affecting a number of regions around the world. Our research identified smart irrigation as one technology that can be harnessed to increase the yield of crops whilst reducing water usage. This in turn led to fund managers assessing and analysing a number of global leaders in the water irrigation sector and an investment in Valmont. Valmont is the global leader in smart centre-point precision irrigation solutions, increasing the efficiency of fresh water usage in agriculture.

We are active stock pickers, and as such research plays a particularly important role in our investment process. Research is what helps us to identify new trends, investigate long-term sustainable themes and contribute to the idea generation process that identifies specific new investment opportunities.   

Our research aims to explore a subject fully, from all different angles. For instance, in our last Insight, ‘Changing Gear: The Future of Road Transport’, we examined the current state of the sector before taking a closer look at the different challenges of the existing model: accidents, air pollution, climate change and access. We then looked at what sustainable road transport could look like, and explored different changes that are likely to affect companies in the value chain. We recognise the need to decarbonise, but also warn against new risks that come from electrification and expose the environmental and social challenges of the electric vehicle supply chain.

Our Insights often conclude by exploring the associated investment value chain that is available to responsible and sustainable investors, which presents unique investment opportunities but accounts for potential ESG risks as well. We explore how these investable themes are reflected within our range of responsible and sustainable funds, and explain how we are looking to gain exposure to trends we strongly believe are shaping the 21st Century whilst adhering to our ‘profits with principles’ approach.  

For example, whilst we might not invest in traditional car manufacturers, we might be able to gain exposure to the automotive sector through specialised components manufacturers, such as safety specialist Autoliv or lighting and electronic components manufacturer Hella. As the electrification and digitalisation of our global fleets bring new challenges related to cobalt sourcing or cybersecurity, specific parts of the electric vehicle value chain might be better suited for responsible investors, such as Aptiv, an expert in smart mobility solutions or Elmos, a leader in semiconductors for the automotive industry.

In addition to supporting the generation of stock ideas, our research also helps to shape our engagement with companies and our screening process. In our Insight ‘Sustainable Cities’ we highlighted the challenges related to the sourcing of sand for the construction industry; as a result we then engaged with our holdings in the construction sector to understand how they manage the sourcing of sand in their supply chains in a responsible way. Similarly, following the publication of ‘The Waste Problem’ we engaged with house builders held in our portfolios to encourage better waste management and reduce the volumes of waste generated.

EdenTree’s thought-leadership research draws on an unrivalled depth of expertise that has built up over 30 years’ as pioneers in responsible and sustainable investing. We published the first in our range of flagship Insights in 2008 and have since produced over 30 responsible investment research pieces, covering a wide variety of topics including; shipping, aviation, food, water, investing in China, nuclear energy, sustainable cities and corporate governance. We believe our research is a key differentiator in our investment process, providing a different view from traditional investment research and one which puts our ‘profit and principles approach’ at the heart of our thinking.