Yield. Valuation. Fundamentals.
DRZ has been a signatory to the United Nations supported Principles for Responsible Investment since August of 2020. As a signatory, DRZ is committed to principles which include, among others, incorporating ESG matters into our investment process. We believe ESG can have a material impact on a company’s performance and the world we live in.
Our investment process evaluates each company on its own merit. We believe there are no hard and fast ESG factors that can be universally applied. Relevant ESG considerations are specific to each particular company. Our fundamental research process considers elements that may impact relative value, either positively or negatively, including environmental, social and governance risks. Our focus on the impact to relative value means we take a fundamental research stance on ESG, as opposed to a subjective one. We strive to understand whether ESG risk/opportunity is priced into the security. Superior investment performance remains our ultimate goal.
We view ESG factors no differently than balance sheet improvement, competitive pricing advantages, and technological superiority, to name just a few. Considerations include, among others, a company’s sensitivity to carbon prices as well as environmental, litigation and insurance costs. We utilize internal and external sources to determine the probability and presence of ESG risks and whether they materially impact earnings. Adjustments are made to our relative valuation ranges for the expected impact of ESG factors. The quality and integrity of external ESG data varies widely, just as external investment research of any kind. For this reason, external sources are complementary to our own findings.
We view climate risk fundamentally as opposed to ideologically. As an example, there are companies benefitting from the growing green initiative supply chain. We view these companies no differently than we may view a supplier in the Apple supply chain. Our research is geared towards improving shareholder value and relative valuation.
Governance considerations have long been a fundamental component of our investment process. We assess the track record and incentive structures of management teams to determine whether they are effective stewards of capital. Governance is often the catalyst for change that revalues a company going forward. We regularly engage with executive management as well as with boards before and during our investment on issues we deem central to improving shareholder value. Our engagement is direct in the form of conversations with management and at times indirect with written correspondence to Boards of Directors.
As a bottom up, stock picking firm, we strive for independence to form our own views. Company filings and direct discussions with company executives are the primary source of material for our fundamental ESG analysis. Complimentary external resources include MSCI, Bloomberg, and Glass Lewis, all of which are global leaders in ESG research and ratings. Our research on a prospective investment, as well as maintenance research on existing holdings, includes a review of ratings changes from these external sources. Internal research notes document ESG considerations identified in our own research as well as those cited by Bloomberg, MSCI, and Glass Lewis. We value the information provided by issuers. As such, we are advocates for increased transparency as well as timely and accurate dissemination of a company’s ESG data upon which we can make informed decisions.