ESG factors are incorporated into our investment processes for risk management purposes. Using the following investment principles—target drivers of return supported by solid research—we first design our portfolios.
When appropriate, diversify among issuers, industries, and nations; take into account daily price information; and methodically implement portfolios by carefully balancing expected returns, expenses, and risks.
Diversification is used in the approach described above to lower idiosyncratic risks, including risks related to ESG, but we also add a layer of ESG-specific risk management. For instance, because privately held businesses with significant strategic shareholders may not adequately represent the interests of all shareholders, we may choose to exclude them from our universe of eligible securities. We may also decide not to buy businesses where, based on available information, we think there is a higher risk of fraud or other actions that could render the financial statements of the business unreliable. Additionally, we monitor the news each day to find portfolio companies that are embroiled in disputes that could have a big effect on their bottom line, such as those involving social or environmental issues.
These businesses might have their purchases temporarily stopped, or they might be referred to our Stewardship team for engagement. These additional procedures, in our opinion, add yet another component to risk management that takes ESG factors into account.