Our investment team is mindful of the risks associated with ESG issues, which are therefore considered from a risk-assessment standpoint. We also believe that certain investment opportunities may arise from ESG factors. We apply sustainable investment practices to all our assets because they promote financial stability and create long-term value. Our ESG philosophy plays a role in the decision-making processes of all our strategies, but the approach we use varies from one portfolio to another. When it comes to ESG issues, investors have differing expectations, which we think can be reconciled with our convictions. To that end, we offer a range of approaches that take advantage of our investment style while integrating ESG criteria to varying degrees.
Hexavest favours an active, top-down investment approach to build a highly diversified equity portfolio while minimizing stock-specific risks. Our global portfolios therefore hold more than 300 stocks. Our efforts are focused on top-down decisions, such as selection of regions, countries, currencies, sectors and industries. Stock selection represents a smaller proportion of our decision-making process. We actively manage several decision-making levels, using mainly fundamental analysis and an investment horizon ranging from 12 to 18 months. Our fundamental analysis is based on three vectors: the macroeconomic environment, market valuation and investor sentiment.
Material ESG factors are considered under the first vector, namely the macroeconomic environment. For example, if a sector is likely to be adversely affected by new privacy protection regulation or if a country benefits from improved corporate governance standards, the portfolio managers will take these factors into account in their research and analysis, which may have a positive or negative impact on their decision. All research reports written by our managers and analysts include an analysis of ESG issues.
The managers use quantitative tools to support the portfolio construction process, including a stock selection model. The model ranks companies according to the main families of variables. The ESG risk rating represents one of these families of variables. Thus, companies’ ESG risk systematically affects their rank among their peers and can ultimately influence their presence in the portfolio.
This ESG integration approach is complemented by our strategy of shareholder engagement with portfolio companies that present issues covered by our dialogue plan. Another section of this report discusses our engagement practices.
To meet the needs of investors who want a more stringent sustainable investment strategy, we have developed a proprietary methodology based on an ESG approach that involves applying negative and positive (best-in-class) filters. This sophisticated approach allows us to build ESG universes that can be adjusted to varying degrees of ESG criteria stringency. Our methodology for creating ESG universes is based on the following process:
The proprietary methodology that Hexavest uses to create its ESG universe means that portfolios can be customized to meet specific investor criteria. Moreover, our optimization tools allow us to replicate, in personalized investment universes, top-down decisions based on fundamental analysis by our managers. This approach is used for the separately managed portfolios of those Hexavest clients who decide to exclude controversial sectors from their investment policies, such as tobacco, gambling and weapons. Hexavest’s Climate Vector Strategy is another example of a customized ESG approach. This strategy is intended for investors who want to reduce their exposure to climate-change risks through an exclusionary approach. The portfolio is invested in the MSCI All Country Index, but excludes companies with proven or probable reserves of oil, gas or coal, as well as companies that use coal as an energy source. This strategy also leverages our optimization capabilities. Thus investors who opt for a divestment approach can aim for the same value-added profile as our traditional equity portfolios, without exposure to fossil fuels. Lastly, the Hexavest Global Environment Multifactor Strategy is intended for investors looking for a global portfolio of the companies that are best at managing environmental issues. This strategy leverages our best-in-class ESG methodology and our quantitative investment models.