How we assess Environmental, Social and Governance (ESG) factors within the investment process.
Our investment approach incorporates a materiality process to integrate the consideration of key risks and opportunities, including those that are ESG related, into the investment decision making process for the EIT portfolio. As part of the fundamental assessment of a holding, we undertake a materiality assessment on the risks and opportunities faced by each holding over a time horizon of one to three years.
To illustrate, EIT is invested in US gold miner, Newmont. The following are an example of key issues we think face Newmont:
- The opportunity that the Group has to reduce its carbon footprint and energy costs through automation and improved efficiency.
- The risk that the Group’s health and safety record deteriorates.
- The risk that the Group’s relationships with the governments and/or communities where it has operations deteriorate.
These key ESG issues are mapped on a materiality matrix alongside other investment considerations (based on their likelihood and impact) and are important for the following reasons:
- All these issues lead the team’s engagement with Newmont. Through engagement, the team aims to understand how Newmont is managing these issues. This information is central to the resiliency score that the team assigns for Newmont.
- How Newmont is managing them may also impact the team’s conviction score for Newmont in the EIT portfolio.
The ‘resiliency’ score for Newmont is ‘3’ (an average score on our one 1 to 5 scale) due to: its track record of operating mines safely; providing employment and tax revenue in remote and often reasonably poor places, benefitting both the local government and communities; and having science-based targets to reduce carbon emissions by 30% by 2030 and reach net zero by 2050, helping to reduce its carbon footprint. Newmont’s resiliency score was recently reduced (from 4 to 3) in light of the decreased efficiency of operations: the company has been facing challenges due to rising energy costs, supply chain issues, and labour shortages which led Newmont to downgrade its production guidance.
Finally, we assign a ‘conviction’ score. The team downgraded Newmont’s score to an average ‘3’ in September 2022 to reflect the challenging operational performance of the mines. This corresponded to a decrease in the weighting of Newmont in the EIT portfolio. The score still takes account of the increased attractiveness of gold (and gold miners) given the multiple uncertainties worldwide. An economic slowdown now seems more likely given higher inflation, which tends to favour gold. Use of sanctions by the US may also encourage more central banks to hold more of their reserves in gold and thus may drive additional demand for the commodity.