GIC’s approach to materiality
We seek to assess the strength of a company’s sustainability practices on factors that are financially material to that company. This is grounded in our belief that companies with strong sustainability practices offer prospects of better risk-adjusted returns over the long term, and that this relationship will strengthen over time as market externalities get priced in through the actions of regulators, businesses and consumers. We integrate sustainability into our investment processesin a way that recognises the diversity of the industries and markets in which we operate, and the trade-offs between different sustainability objectives that may arise in the shorter term.
In practice, GIC has used SASB as a reference to guide investment analysis, but deep research into each sector and company is still required. Some of the steps taken by the investment teams include:
- Validate each set of metrics with internal research and analysts’ perspectives, and capture these in engagement guides that investment groups across GIC may use.
- Sector-focused workshops with external industry specialists may be conducted to expose analysts to issues on the ground, and to enhance appreciation of the materiality of the factors considered and how they should be incorporated into asset valuation.
- Where possible, data acquired on material ESG metrics are also used in portfolio reporting and analytics as part of ongoing investment monitoring.
- For material indicators where data gaps are evident, or where data is not readily available, analysts would leverage their regular meetings with company management to better understand how those issues are being managed, and insights gained would inform the assumptions in their financial models.
The focus on materiality has enhanced our investment teams’ underwriting of opportunities and portfolio companies, and enriched our portfolio managers’ dialogues with company management. By considering where companies are leading or lagging on material metrics against peers in the sector, we can customise our engagement agenda for each company. An understanding of drivers material to a company’s performance, such as exposure to green revenue or dependency on external voluntary carbon credits, also helps our teams identify opportunities for potential investment.
For example, we have, on occasion, advised companies on how disclosures of targeted, material metrics could amplify their stakeholder communications. In the case of a European specialty chemicals company, which is a supplier to the industrial and consumer sectors, we encouraged the company to enhance its reporting of the full product life cycle carbon footprint of its innovative, low carbon products and carbon-efficient operations. This benefited the company through its wider recognition as a provider of effective solutions in the global effort to reduce carbon emissions.
A structured approach to materiality assessment allows our investment teams to identify and evaluate the ESG issues most relevant to a company in a more targeted way, enabling them to go beyond superficial, ‘check-the-box-type’ discussions on ESG with their investee companies. In addition, being aware of upcoming regulatory requirements or regulatory direction, and hence identifying factors that could become material over time, can help investment teams make better pre-emptive risk assessments of companies. All these allow us to better manage longer-term portfolio risks, as well as engage and support companies in their transition towards more sustainable outcomes.