Approaching ESG Holistically

As an active manager whose heritage is built on rigorous, fundamental analysis, environmental, social, and governance (ESG) considerations have always informed our investment decisions.

Integrated

Act

ively

Impact Investing:
Using Capital for Global Good

All investments have consequences—not just for investors, but for entire communities and the economy at large.

What is impact investing? How is it tied to corporate value creation? And how does it drive returns?

In this video series, Stephanie Braming, CFA, partner, global head of William Blair Investment Management, tells The Economist why she believes impact refers to the way a firm behaves toward its clients, its employees, and its industry.

Also learn how we integrate ESG factors into our investment process from Blake Pontius, CFA, director of sustainable investing and global portfolio specialist, and Romina Graiver, global portfolio specialist.

Enhancing Our
Search for Quality

By incorporating ESG factors into our fundamental analysis, we create a more complete picture of the risks and opportunities facing companies today and in the future.

Naturally Aligned

ESG factors have a meaningful impact on a company’s ability to create value over time, so our core investment philosophies and processes are naturally aligned with sustainable investing principles.

A More Holistic View

As the link between off-balance-sheet risk factors and a company’s financial performance has become clear over the past decade, we have realized our need to be even more intentional and systematic in how we integrate ESG factors into our investment process.

Sustainable Value Creation

Across our fundamental equity strategies, we seek to identify companies that can produce excess returns on invested capital and use those returns to control their destinies. We believe that a company’s ability to do this is inextricably linked to ESG factors.

OUR COMMITMENTS

  • U.N.-Supported Principles for Responsible Investment (PRI) Signatory
  • Investor Stewardship Group Member (Framework for U.S. Stewardship and Governance)
  • Tier-1 U.K. Stewardship Signatory
  • Member of the International Corporate Governance Network
  • Signatory to the Japan and Korea Stewardship Codes
  • Oversight by director of sustainable investing and ESG working group

The journey to deeper, more authentic ESG integration at William Blair is an ongoing one—and it’s central to our mission to continually improve
as investors.

Stephanie Braming, CFA, Partner
Global Head of Investment Management

ESG Integration in Our Investment Process

We look at ESG factors from a bottom-up perspective, incorporating third-party ratings into our own due diligence—because ratings only tell part of the story.

Beyond Third-Party Ratings

Because they’re based largely on publicly available data, third-party ratings don’t always convey the nuanced factors that affect a company’s ESG profile—or assess how material these factors are to financial performance. Furthermore, the availability of ratings data varies.

Opportunities for Active Managers

Digging deeper to find information that isn’t readily available and scrutinizing that information to determine what it truly means for a company’s prospects is the essence of our fundamental, bottom-up research process.

A More Nuanced Approach

Our research analysts develop long-term relationships with corporate management teams and understand how sustainability aligns with longer-term strategy and financial performance—a more thoughtful, nuanced approach we believe can create significant value for our clients.

ESG CASE STUDY: FOOD AND STAPLES RETAILER

One global food and staples retailer had generated strong corporate performance over the past 20 years, but received the lowest possible third-party ESG rating.

In seeking to identify the drivers of that rating, we found that the largest element was social impact, primarily in terms of food safety.

This is a problem inherent in food production and retailing because such companies have large global supply chains. This company, specifically, had a problem a few years prior when a food poisoning outbreak was linked to shrimp it sourced from Thailand.

After determining this was a temporary rather than structural problem, we looked at how the company responded. In this case, the problem was resolved, and the company took measures to ensure that food safety along its supply chain is well identified and controlled.

Our assessment of ESG quality for the company was thus higher than the third-party rating.

Focusing on
Materiality

Not all ESG factors are equal in their influence on a company’s financial performance. That’s why our approach to ESG integration begins with determining which ESG factors are material for a given industry.

Sharing Expertise

When exploring industry-specific ESG factors, we reviewed the provisional materiality framework developed by the Sustainability Accounting Standards Board and brought in experts from sustainability-focused research partners to sharpen our analysts’ thinking in terms of materiality assessments.

Prioritizing Factors

Then, sector by sector, we held internal discussions to identify which ESG factors were most relevant at the industry level. We would rather our financial analysts spend time researching climate-change implications for an insurance company than for a regional bank, for example.

Investment-Process Integration

To ensure material factors become engrained in our research process, analysts address material ESG factors in Summit, our proprietary research platform, and discuss with management teams the challenges and improvements a company has experienced in implementing sustainable practices.

Focusing on materiality allows us
to zero in on the factors that have a meaningful impact on corporate performance in each sector.

Blake Pontius, CFA
Director of Sustainable Investing, Global Portfolio Specialist

Our Evolution

The ESG-related risks and opportunities companies face are constantly evolving, so we are continually evaluating and improving our efforts to fully integrate ESG factors into our fundamental research.

Proprietary ESG Ratings

Building on our materiality framework, we’re developing a proprietary qualitative ratings system that is fully aligned with our views on the ESG factors that affect company performance by industry.

Enhanced Data-Capturing Tools

We continue to invest in technology that will improve our ability to capture and categorize the increasing data about ESG characteristics in a way that makes it more useful for analysts and portfolio managers.

Aligned Proxy Voting Guidelines

In addition to improving reporting on our proxy voting activity, we’ve implemented voting guidelines that are focused on financial returns and consistent with the objectives of sustainability-minded investors.

As our ESG integration efforts have deepened over the years, so have the insights from our analysts on these topics. Their judgment is critical in our ability to form a more holistic view of corporate risks and opportunities.

David Fording, CFA, Partner
Portfolio Manager, U.S. Equity Team

WILLIAM BLAIR ESG BLOG POSTS

Is Sustainability Sustainable?

Given investors’ surging interest in combining financial return objectives with ESG factors, some may be tempted to dismiss this as a transient trend…

Going Green in Fixed Income

ESG investing has historically been more associated with equities. But if you’re a fixed-income investor and you’re not thinking about sustainability themes, you may be overlooking…

Tailwinds of Change

As interest in renewable power generation grows, investments in wind energy should surge because it has become one of the most affordable forms of electricity today…

More ESG Blog Posts

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Any statements or opinions expressed are those of the author as of the date of publication, are subject to change without notice as economic and market conditions dictate, and may not reflect the opinions of other investment teams within William Blair Investment Management, LLC.

This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor’s objectives, guidelines, and restrictions.

Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Statements concerning financial market trends are based on current market conditions, which will fluctuate. William Blair does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax questions and concerns.

Investing involves risks, including the possible loss of principal. Equity securities may decline in value due to both real and perceived general market, economic, and industry conditions. The securities of smaller companies may be more volatile and less liquid than securities of larger companies. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit, and inflation risk. Currency transactions are affected by fluctuations in exchange rates; currency exchange rates may fluctuate significantly over short periods of time. Different investment styles may shift in and out of favor depending on market conditions. Diversification does not ensure against loss. Any investment or strategy mentioned herein may not be suitable for every investor. Past performance is not indicative of future results.

The MSCI ACWI IMI Index is a free float-adjusted, market capitalization-weighted index that captures large, mid, and small cap representation across developed and emerging markets. The MSCI ACWI ex-US IMI Index is a free float-adjusted, market capitalization-weighted index that captures large, mid, and small cap representation across developed and emerging markets, excluding the U.S. The Value and Growth Indices are a subset of the Index that adopt a framework for style segmentation in which value and growth securities are characterized using different attributes. Multiple factors are used to identify value and growth characteristics. The MSCI ACWI Small Cap Index is a free float-adjusted, market capitalization-weighted index that captures small cap representation across developed and emerging markets. The MSCI Emerging Markets Index is a free float-adjusted, market capitalization-weighted index that is designed to measure the equity market performance of emerging markets. The MSCI World Index is a free float-adjusted, market capitalization-weighted index that is designed to measure the equity market performance of developed markets. The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, mortgage-backed securities (agency fixed-rate and hybrid ARM pass-throughs), asset-backed securities and commercial mortgage backed securities. The Russell 2000 Index is a market capitalization-weighted index designed to represent the small cap segment of the U.S. equity universe. Index performance is for illustrative purposes only. The indices are unmanaged, do not incur fees or expenses, and cannot be invested in directly.

Alpha is a measure of an investment's return in excess of the market's return, after both have been adjusted for risk.

Half-life is a statistical measure of the time required for the discrepancy between price and value to contract by half of its starting value. Fundamental value estimates are based on the Dynamic Allocation Strategies team's proprietary research.

P/E Ratio is a measure of valuation which compares share price to earnings per share, calculated using estimates for the next twelve months.

Standard deviation is a statistical measurement of variations from the average.

QUANTITATIVE MODELS—FACTOR DEFINITIONS

The William Blair Earnings Trend Model captures information about short- and medium-term changes in analyst estimates in an attempt to anticipate future estimate changes and stock performance. The score combines measurements of earnings revisions, momentum, and earnings surprise.

The William Blair Valuation Model combines varying metrics used to characterize the relationship between the stock’s trading price and its intrinsic value. By going beyond using only one or two measures, the model attempts to build a more holistic version of a stock’s worth vis-a-vis the market. The score combines measurements of earnings/cash flow based, asset-based, and model-based factors.

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