Contrary to popular belief, Alex Duffy, portfolio manager for Fidelity International, believes ESG is more than just a buzzword. He says it is inseparable from basic fundamental analysis of modern-day investing.
This is especially true when investing in a highly volatile foreign markets, or emerging markets, where corporations are more likely to act in political or self-interest.
Mr Duffy believes taking a look at ESG is the same as fundamental research investors undertake.
“So when investors talk about fundamentals and returns of business, what they are really talking about is the sustainability of the profit profile of a company. So, what does it do? Does it have an advantage? And what is the value of the product to the end-user? Why can’t another company do it cheaper? If the answer to that is because this company achieves this profit by exporting child labour at a low cost, then that is an unsustainable cash flow profit. So that level of profitability is not sustainable," he said.
“We can think about sustainability in social implication, environmental implications or we can think about it in the form of a competitor that will come into the market with a more innovative product, but I don’t think you can differentiate between fundamental research in the traditional sense and disaggregate sustainability from that,” said Mr Duffy.
Will the term ESG exist in 5 years?
Mr Duffy believes the term itself will not be around in five years’ time, because it will be a regular part of research investors do.
“At the end of the day, we are trying to achieve long-term financial outcomes that meet the goals of our investors, and there will be a balance of environmental, social and governance outcomes that go to what is a successful outcome. The term ESG will be totally redundant in five years’ time because anyone that tells you they are an unsustainable investor, which is the other side of the coin, doesn’t make sense,” Mr Duffy said.