Some of the activity discussed here has led to portfolio change; other areas may require further work and engagement, which can sometimes lead to a decision not to invest in a particular company or sector. However, it is important that we continuously challenge ourselves to understand and assess new opportunities across all of the regions and sectors making up our investment universe and avoid falling in love with companies we already own.
Maintaining an open mind helps ensure the portfolios we manage can meet the challenge of the future and increases the likelihood of them meeting our long-term absolute return aspirations.
Two Sides of the Same Coin
In previous years we have produced both a Research Review and a separate Sustainability Review to highlight our bottom-up-driven work in these areas. We have made a change this year and combined them in a single Annual Review. This is driven by a recognition that producing two separate documents risks communicating a belief that investment research and sustainability analysis are two separate spheres of work. Nothing could be further from the truth in our eyes – we see these issues as being ‘two sides of the same coin’.
At Skerryvore we have long believed that for a company to deliver valuable returns for our clients over the long term, it has to behave sustainably. The long-term cash flows that businesses produce must sustain them and the role of our investment research and engagement is to consider both the financial and the non-financial risks inherent in a business model. We always question whether any business we are considering for investment is doing anything that could threaten its long-term existence, and therefore the quantum of future growth and returns. To our minds this is just sensible long-term investing, with sustainability and environmental, social and governance (ESG) considerations just a subset of the overall investment process.
What’s in this Review?
We start by sharing our perspective on a group of businesses we believe present resilient and compelling long-term investment opportunities in emerging markets. In Think Local, Act Local: The Power of The Coca-Cola Company’s Partnerships in Emerging Markets we dig into the creation of aligned businesses with strong pricing power. Water usage is one of a number of important sustainability risks that must be considered as part of the overall long-term investment case for both the companies in which we have holdings and the broader industry at large, and we share more insight on this in Water Stewardship in the CocaCola System: Addressing Long-Term Sustainability Risks. This underpins why we believe that assessing sustainability factors is key when considering the longterm financial health of a business. If left unattended, over time sustainability risks inevitably become financial or reputational risks.
We also share the conclusions of a project we started in 2022 to better assess and understand how our portfolio companies are addressing their carbon footprints. This body of work is designed to supplement, from an in-house and bottom-up perspective, data and analysis that is provided to the investment team and clients by the likes of ISS and S&P CapIQ. Three years on, we have been encouraged by our most recent review of this work, which showed that the vast majority of our holdings either have achieved or are on track to meet their targets. However, a small minority of our companies have struggled to meet their own timelines and in Tracking Progress on Carbon Emissions: Why Some Companies Are Falling Behind we consider the common features of those businesses that are not necessarily where either they or we would wish them to be.
Lastly, in addition to providing a snapshot of the carbon emissions profile for our strategies, we have also included a more in-depth look at our engagement and stewardship activity over the past 12 months on issues other than emissions. In Hindustan Unilever: India’s Plastic Packaging Challenge we provide an example of our engagement with this company on what we believe is a material long-term business risk. Although Skerryvore is not an activist investor, we do seek to keep the spotlight firmly on the most relevant issues as we see them and encourage behaviour that contributes to the long-term maximisation of shareholder value.
We hope you will find this document interesting and useful. Should you have any follow-up questions or thoughts, please do feel free to get in touch.
