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Didner & Gerge Global has a long-term view for all investments. The main focus is to find well- managed companies with sustainable business models. In our mind, that is the most likely road to success and survival as a long-only equity fund manager. A minimum threshold of 70% of the fund’s AUM always need to be invested in holdings that meet the definition of having strong sustainability practices.
The key is in the definition
As always, the key is in the definition. Our definition cover what the company produces, how they practice and performs with respect to different aspects of its stakeholders.
A sustainable business model to us is one that has a great chance of being stronger in a decade’s time; that means durability and solving client-demands is of utmost essence.
Or in a very short wording – Being Intentional About Sustainability
Sustainability needs to be incorporated into corporate strategies and reflected in organizational business goals. This means making this a priority in every aspect of organizational operations.
As with any other business initiative, you need to make a plan of action and assign accountability. Hold people accountable and measure the results.
In order for a business to be able to achieve that, it needs to govern the business with integrity, treat employees and customers well, use resources efficiently and run a business that creates value over time. All of this of course requires robust financials to be able to keep investing in products and the company´s ecosystem even during harsher times (which all businesses go through). All businesses that thrive over long time periods need an implicit or explicit social license to operate, which is a mental framework we apply in our analysis.
In our own opinion, Didner & Gerge Global looks at every potential investment through a much wider sustainability lens than how third party ESG-ratings work, which cover only a portion of the above. Hence, while we track these ratings and do follow up on certain issue they highlight if deemed important, it is not used as an inclusion- or exclusion-factor.
Final assessment
Didner & Gerge Global conducts a in depth analysis of each current and potential holding. The overall assessment is conducted continuously, and is updated at least once yearly, or, in advance of any potential new investment. Some of the KPIs are updated on a monthly or quarterly basis.
The analysis gathers information from multiple sources. Some of these are described briefly on the following pages. An internal qualitative approach and analysis is also included in the process. After the external and internal analysis has been conducted, we summarize information in the Environmental, Social, and Governance segments in our In-house analysis – called the Pocket Guide. Also included in this section is the sustainability angle of the business model, the degree of EU Taxonomy alignment, as well as potential awards received within the area as well as potential negative aspects regarding the above-mentioned factors.
The importance of E, S, G, and the degree of EU Taxonomy alignment can have different weights depending on what kind of company is being analyzed, but the overall assessment must be strong for each individual (potential) holding.
Other factors considered in the sustainability due diligence process include documentation of different external ESG metrics as well if the company is signatory of Science Based Targets, UN Global Compact, etc.
Ultimately, the final assessment is conducted in a 16-field checklist. To be defined as a company with strong sustainability practices, the company must fulfill a clear majority of applicable factors considered.
The checklist
The checklist includes minimum threshold factors (i.e. the company needs to pass the norm-based exclusion screening), as well as neutral factors (i.e. pass the ‘no harm’ criteria– the company should not have a negative sustainability angle by nature of its operations (internal qualitative assessment and third-party scores) and finally pass the overall assessment regarding E, S, G and other key sustainability factors via an in-house analysis with qualitative assessment (aided by knowledge from external sources). These include factors like a) having an undisputable and positive environmental focus (backed up by the nature of its operations, low emissions, or verified third-party scores. b) having an undisputable and positive social focus. or c) having an undisputable and positive governance focus. If a company cannot pass the clear majority of the above-mentioned factors, the company is viewed to lack strong sustainability practices.
Additional information – Sustainability Assessment
External sustainability analysis
Didner & Gerge Global has integrated sustainability in the selection process since the fund´s inception in 2011. As mentioned above, we look at sustainability in terms of being able to prosper as a business for a decade or more by running a just operation, treating people well and operating within a socially accepted license of doing business. Which changes and develops over time!
In order to use a wider sustainability lens than provided by third-party ESG rating firms, we use a raft of different sources. Below the most important ones are disclosed.
HOLT Sustainability Score
Of the external sources we use, perhaps the HOLT Sustainability Score© is the premier one. This is due several attributes:
1) It is objective, transparent and covers a very big universe
2) It includes sustainability factors that deals with the duration aspect of a sustainable business model: quality of its operations, strong financials, honest accounting, and investments into future success (R&D).
3) It defines “Governance” in a way we sympathize with (and look for similar points of evidence) – how is management incentivized and how are they paid.
4) It measures carbon efficiency in absolute terms, not relative to industry peers. I.e., it is more important to contribute to an environmentally friendly world than destroy it at a slower pace.
A summary of the scoring model can be seen below.
HOLT Sustainability Score construction
As of October 2022, Didner & Gerge Global had a HOLT Sustainability Score of 84, compared to a global average of 54 (100 is best). 40% of the holdings scored in the top decile.
Corporate Knights – sustainability rankings
The award-winning business and society magazine Corporate Knights has a research division which produces corporate rankings, research reports and financial product ratings based on corporate sustainability performance.
As one of the world’s largest circulation (125K+) magazines focused on the intersection of business and society, Corporate Knights is the most prominent brand in the clean capitalism media space. They define “clean capitalism” as an economic system in which prices incorporate social, economic, and ecological benefits and costs, and actors know the full impacts of their actions.
Its best-known rankings include the Global 100 Most Sustainable Corporations, introduced in 2005. As there is no cost associated with participating in the ranking, all publicly traded companies with over US$1 billion in revenue are assessed across 24 key performance indicators, including % sustainable revenue, % sustainable investment, % taxes paid, carbon productivity, and racial and gender diversity. Companies engaging in “red flag” activities such as thermal coal, blocking climate policy and deforestation are disqualified. The methodology illuminates the say-do gap. Only those companies making sustainable solutions a core part of their business offerings and allocating meaningful investments to reduce their carbon footprints make the grade.
On the latest (2022) ranking, five of the holdings of Didner & Gerge Global finished in the top 30.
UN Global Compact & UN Sustainable Development Goals
In September 2015, all 193 Member States of the United Nations adopted a plan for achieving a better future for all — laying out a path over the next 15 years to end extreme poverty, fight inequality and injustice, and protect our planet. At the heart of “Agenda 2030” are the 17 Sustainable Development Goals (SDGs) which clearly define the world we want — applying to all nations and leaving no one behind.
The new Global Goals result from a process that has been more inclusive than ever, with Governments involving business, civil society, and citizens from the outset. We are all in agreement on where the world needs to go. Fulfilling these ambitions will take an unprecedented effort by all sectors in society — and business must play a very important role in the process. Didner & Gerge Global track signatory status regarding UN Global Compact as well as the alignment with these 17 SDGs for current and prospect holdings.
As of the latest (2022) Annual Report provided to Nordic Ecolabel, 14 of the holdings of Didner & Gerge Global had signed UN Global Compact and many more are actively working with the SDGs.
Science Based Targets
Science-based targets provide a clearly defined pathway for companies to reduce greenhouse gas (GHG) emissions, helping prevent the worst impacts of climate change and future-proof business growth.
Targets are considered ‘science-based’ if they are in line with what the latest climate science deems necessary to meet the goals of the Paris Agreement – limiting global warming to well-below 2°C above pre-industrial levels and pursuing efforts to limit warming to 1.5°C.
As of the latest (2022) Annual Report provided to Nordic Ecolabel, 12 of the holdings of Didner & Gerge Global had joined the SBTi.
Taxonomy
The sustainability taxonomy is the EU’s single most important piece of ESG regulation. As such, it is an important part of our research into a company´s sustainability profile. As the framework develops, expands and more companies start disclosing numbers on this, it will grow even more in importance. We show the numbers in our “Sustainable Business Models” spreadsheet, but as there are very few companies that as of now do report this, limited conclusions can be drawn from this. But of more importance as of today, the “Do No Significant Harm” aspect of the Taxonomy is something we include for all holdings in our analysis. We will of course stay abreast of developments in this area and look forward to more companies disclosing numbers in the coming year.
Other external sources
In terms of other external sources that we use to define strong sustainability practices, these can be mentioned:
- ISS – used for screening in order to exclude all companies involved in military equipment, tobacco, alcohol, gambling, pornography and all companies not compliant with UN regulations and PRI.
- Sustainalytics – knowledge about ESG risks in a company
- SASB – materiality factors
- Glassdoor to gain knowledge how a company is rated by its employees
- Quality Shareholders Initiative – find companies with outstanding and proven ownership structures http://cup.columbia.edu/book/quality-shareholders/9780231198806
- Fortune lists – Best Company To Work For and more
- 3BL Media – Best Corporate Citizens list
- Bloomberg ESG data – EU Taxonomy, SAM Robecco ESG Score, MSCI ESG rating, and other.
In-house analysis
A key aspect in how we view strong sustainability practices is to ‘invest ESG positively’. By that we mean to not merely exclude companies that on some rating or another are rated poorly, but to actually select the companies that we deem to have business models that benefit the most from the increased focus on sustainability in all aspects. One example could be a renewable power operator (Brookfield Renewable), another could be a company with (verified) outstanding employee practices leading to a competitive advantage (Markel). A third example might be a company with outstanding client reputation, earned over decades of built trust (Shimano).
Our internal analysis includes questions as below.
Moat / Sustainable business model
- Explain to me your long-term business plan
- What is your main competitive advantage and how do you protect it?
- What is the major strength as a company? Weakness?
- What is the biggest criticism/pushback you get?
- How do you measure the ways in which you are successful in running the business?
- Describe some key words that define your corporate culture?
- What are the most important tasks of the CEO?
- What management role models do you have?
- Are you certain that your most promising growth adventures are led by your most talented managers?
- How do you communicate with employees? How often out and meet them?
- Please define great customer service.
- Give me an example of how you work with a client that shows what your company is about
- Which competitor do you respect the most?
Sustainability topics
- What major sustainability trends are impacting you and how are you dealing with them?
- How many people within the company are working on sustainability topics/issues?
- What percent of revenue do you get from products that are meaningfully better from an environmental- and or health perspective
- How are sustainability topics included in your business planning? Does sustainability align with your goals, mission, or values
- Do your company have a board-level committee dedicated to sustainability issues?
- Where can I find more information around your sustainability work?
- If you don’t report on sustainability topics, why not? In the future?
- Do you and to what extent do you commit R&D resources to developing sustainable products/services
- How do you manage your reputation for sustainability?
Products
- What major product cycles will meaningfully impact your sales over the next planning period?
- Describe what factors around sales and profitability that can you impact, and which are out of your control?
- What major (if any) developments in the industry can have an impact?
- The price of your product is $x, why not $x + 10%. How did you come up with that price?
- To what extent do you include the sustainability angle when it comes to pricing strategy
Financial
- What are your most important financial objectives?
- What are your long-term expectations for margins and return on capital?
- How do you normally set your capex budget?
- What do you need to spend on in the future?
- How do you think about capital allocation going forward? What would make you change this approach?
- Any particular asset out there that you would like to buy?
- What targets do you have around your incentive scheme? Why those?
SASB MATERIALITY FACTORS
Environmental
We generally view SASB´s Materiality Map as a useful source of factors to look at for specific sectors (see document submitted in our file).
The standard factors considered are (ranked by Didner & Gerge Global in order of importance to us):
- GHG emissions.
- Water management
- Energy management
- Air quality
- Fuel management
- Waste and hazardous materials
- Biodiversity
Social
We generally view SASB´s Materiality Map as a useful source of factors to look at for specific sectors (see document submitted in our file).
The standard factors considered are (grouped, but bolded to signify high importance to Didner & Gerge Global):
- Employee Turnover
- Employee Development & Retention
- The Employee Diversity – Diversity. Women in Management, female employees.
- Employee Training – Training and Development Policies
- Worker Safety
- Total Injury Rate
- Fatality Rate
- Customer Relations
- Community Relations
- Corporate Foundations work
- Data Privacy Policy
- Customer Health & Safety Policy
- Supply Chain Management
- Supply Chain H&S Policy
- Environmental Supply Chain Policy
- Child and Forced Labor Policy
- Business Ethics
- Bribery and Corruption Policy
Governance
We generally view SASB´s Materiality Map as a useful source of factors to look at for specific sectors (see document submitted in our file).
The standard factors considered are (ranked in order of importance to Didner & Gerge Global):
- Ownership structure and past treatment of shareholders
- Executive ownership & Executive compensation
- Competitive behavior
- Accounting quality and general code of conduct
- Business model lifecycle impact of products
- Product quality
- Diversity of board
- Risk management
