“It is inevitable demand for investments in companies with high ESG scores will exceed demand for those with low ESG scores over and above that which is justified by these companies’ superior long-term prospects. This reduces positive ESG companies cost of capital and therefore, enhances their performance, driving positive change over time.
“In contrast those polluting, harmful or poorly governed businesses will suffer a higher cost of capital than even that justified by their poor business models. This creates a headwind for performance over time for these companies and reduces their access to capital.
“We see this as a similar shift as that towards to indexation over the past decade or so. More and more funds have moved to an indexed mandate for cost reasons over the past decade. This has driven demand for the largest stocks that appear in the most indices. This in turn has led to outperformance and a lower cost of capital for the largest, most popular stocks at the expense of smaller companies.
“As active managers, we have always had a preference for well governed businesses with ‘future proof’ business models. The ESG trend makes it likely such companies should be even more popular with investors than less ESG-friendly businesses. That creates a trend that we, as active managers, can take advantage of to gain an edge. We would not seek to constrain our process, but the bar to invest in bad businesses is clearly being raised over time and like-for-like we will continue to have a clear preference for positive impact businesses.”
