ClearBridge believes that ESG is the future of investing and that someday it won’t even be called “ESG” or designated as a separate discipline; it will become an integral part of the way investors analyze companies. At ClearBridge, ESG is not merely a screen or an overlay; it is part of how we conduct fundamental research and it defines how we think about all companies considered for investment in all client portfolios. Our clients, whether or not they desire an explicit ESG mandate, all have investment goals — growing pensions, funding grants or delivering retirement income — to be achieved far into the future. They deserve to invest in companies that plan carefully for what’s ahead and that care about the environment, their employees, their customers and their community. We believe such companies are most likely to provide the kind of performance our clients need to meet their long-term goals.
ClearBridge’s tradition of long-term investing in quality businesses aligns closely with an ESG investing approach. This approach fosters meaningful ownership positions in portfolio companies and significantly lower portfolio turnover compared to peers. This long-term approach is reflected in the Firm’s compensation structure, which bases incentive compensation for portfolio managers primarily on three- and five-year investment performance. A portion of portfolio managers’ compensation is invested in the portfolios they manage and vests over four years. These practices align the incentives of our portfolio managers with the long-term interests of our clients.
Our bottom-up, fundamental research targets companies with:
This overall stock selection process lends itself well to ESG integration. Rather than rely on negative screening or overlays, ESG integration ensures a more holistic approach to sustainability that measures progress and promotes improvement over time.
ClearBridge ESG portfolios do not simply avoid certain industries; we integrate industry-specific ESG factors into our fundamental research process and favor companies that promote best practices on ESG issues. All companies considered for investment across the platform are given an ESG rating, updated at least annually, and only companies rated “A” or better may be included in ESG portfolios. We also work actively with companies seeking to improve their ESG performance through direct engagement and proxy voting.
At ClearBridge, ESG is not merely a screen or an overlay; it is how we conduct fundamental research and defines how we think about all companies considered for investment. Many investors say they integrate ESG into their investment process, but there are many different approaches being employed. When we say our ESG research is “integrated” we mean that it is included in an analyst’s process for covering a company. This is a key point — ESG research is not done by separate analysts or simply as an overlay of research from a third party.
The majority of managers still use the segregated approaches shown in models 1 and 2.
Like all of our fundamental analysis, ESG analysis is internally generated by our investment team, including portfolio managers and research analysts examining specific ESG considerations for the companies they cover. Analyst assessments of a company’s ESG issues are encapsulated in a codified ESG rating. This ensures we are conducting intentional and systematic assessments of risk and opportunity around ESG issues.ClearBridge established its central research platform in 2005. This team of sector analysts is responsible for ESG analysis of the companies they cover, developing best practices that have progressed from general ESG assessments to a proprietary internal ratings system.
ClearBridge’s sector analysts have an average of 10 years of investment industry experience. The analysts have developed their own framework that identifies the key ESG considerations for each sub-sector in their coverage area. The framework leverages the analysts’ many years of experience to focus on the ESG issues that truly matter for each company. For every stock recommendation, each analyst presents the investment thesis, risk/reward profile, valuation, target price and internal ESG rating. This information helps to inform portfolio managers and other analysts with a holistic view of the stock, inclusive of financial and ESG drivers.
Asset-weighted ESG Ratings Distribution for ClearBridge Portfolio Companies
In general, the ratings correspond to the following levels of ESG success or leadership:
Mercer’s report The Long and Winding Road: How Long-Only Equity Managers Turn Over Their Portfolios Every 1.7 Years was produced as part of the “Tragedy of the Horizon” research which seeks to explore the potential for long-term suboptimal allocation of capital due to the finance sector’s limited ability to capture long-term risks within short-term risk assessment frameworks.