Sustainability and ESG Investment Policy

Updated May 24, 2024

Purpose

The purpose of this document is to explain what we understand by sustainability and ESG, why they are important for our clients and how we integrate them into our investment research, decisions and reporting for clients.

The Importance of Sustainability

At Cambridge Associates our mission is helping our global clients meet or exceed their investment objectives by providing proactive, independent, and objective advice that is grounded in intensive research. To achieve that mission, we strive to be good stewards of clients’ capital, sustaining and growing the value of portfolios into the uncertain future. To be good stewards of capital we also seek to be good stewards of the natural and socio-economic systems that ultimately drive long-term value creation: If we don’t have a healthy planet and societies, then it will be hard to sustain a healthy economic system that works for any of us.

For Cambridge Associates, sustainable investing aims to meet present return needs without compromising future returns. To do so it recognizes that businesses and economies operate within ecological and social systems, and their long-term success is interdependent with the health of these systems. Over long horizons, financial sustainability converges with environmental and social sustainability, and a sustainable investment approach will tend to align financial objectives more closely to broader societal gain, promoting responsible stewardship of capital for the benefit of both investors and society as a whole.

It is not only long horizon investors who should care about sustainability. Unsustainable practices may have gradual underlying impact but may also raise the probability of sudden, large, changes while markets reprice future risks rapidly based on new understanding. Regulatory or tax changes can also make an activity uneconomic overnight, as happened to coal-fired power generation in the UK in 2015. For these reasons some fear a ‘Minsky moment’ when one event precipitates a dramatic repricing of climate risk in a short period. Investors can never be confident when sustainability problems come home to roost – it could be 20 years hence or it could be tomorrow.

Sustainability requires a specific focus and additional tools beyond traditional, backward-looking accounting approaches. Over more than fifty years executing our investment mission we have learned that regular financial reporting does not incorporate all relevant and material information for investors. This fact is increasingly recognized by mainstream standard setters like the International Financial Reporting Standards (IFRS) Foundation, parent of the International Accounting Standards Board. In 2021 IFRS launched the International Sustainability Standards Board (ISSB) to ensure investors and others have access to “high-quality, globally comparable information on sustainability-related risks and opportunities”.

ESG

If sustainability is the goal, “ESG” (environmental, social, and governance) provides the main tools to achieve it. ESG analysis is an approach to research that generates information about companies and other investment assets that does not typically feature in financial and regulatory statements, but nonetheless can enhance investment decisions. Under the headings of ESG lie fundamental investment factors (sustainability factors) that can be highly material to long run returns but absent from standard reporting. These factors help to determine sustainability risks and ignoring them runs the risk of placing a ticking time bomb in an investor’s portfolio. Equally, they may identify structural return drivers from evolution of the economy in line with its social and environmental context. Ignoring ESG considerations could mean missing the winners of the next decade.

ESG research has expanded meaningfully over the past decade, along with the number of academics and financial professionals engaged in it. Priorities, standards, and metrics are evolving continuously both on a business and on a regulatory basis and a growing group of data providers with differentiated approaches compete to sell services. Cambridge Associates works to integrate relevant requirements by assessing strengths and weaknesses among providers and promoting more common measures, frameworks, and language among investor peers.

Despite the distinctions, and occasional inconsistencies in the industry, there are common and fundamental pillars to ESG analysis that professionals in the field value: transparency and disclosure from companies; independent information and standardized data about companies; and understanding pathways for and responsiveness to investor engagement. We believe these principles align well with those of any diligent investor.

Materiality

ESG analysis is not an end to itself and applying an ESG score, or framework is not a replacement for traditional fundamental research. Rather, the understanding of ESG factors is a valuable component of comprehensive investment analysis. Consideration of these factors is driven by materiality, by which we mean the relevance/impact of a given factor to a specific investment. A common template cannot be applied to everything and ESG ‘scores’ that aggregate many factors in a similar way for every investment provide little value for decision making. ESG factors differ in their materiality between sectors and investments: Energy efficiency, for example, is more important for a cement company than an advertising agency. We refer to industry standards such as the SASB Materiality Map/Finder for guidance on relevant factors to incorporate into a diligence process. ESG factors represent diagnostic tools to understand the sustainability and value of each investment on a case-by-case basis. Used in this way, ESG analysis would be financially material for all investors.

Values & Impact

The materiality approach described above is distinct from but overlaps with ‘values-based’ investing, where some investors, based on their mission or values, may assign greater significance to specific ESG factors, and make different trade-offs in their investment decisions. Examples of this may be exclusion of certain sectors, setting minimum ESG standards or favoring investments with specific impact outcomes.

All investment decisions involve trade-offs, compromise between multiple different factors in search of the best outcome for the investor. For all clients we seek to employ sustainability thinking and ESG tools through our manager due diligence process for the purpose of improving long term return prospects. Some clients ask us to use the same understanding to achieve other portfolio goals as well. This is why we refer to Sustainability and Impact Investing (SII) rather than ESG since SII is more goal-orientated and speaks to the needs of both values-driven as well as mainstream clients.

What Are the Benefits?

The firm’s cultivation of ESG insights builds a dynamic knowledge base that enables our clients and teams to:

• Add to our understanding of managers’ investment competence through the way they incorporate a broader range of real-world inputs and assess relative financial materiality to find differentiated insights.
• Target improved client returns by encouraging the use of all relevant information, promoting a focus on the long term, and better identifying the key drivers of thematic risk and return opportunity. Cut through the noise and plethora of data to provide relevant, material and decision-useful information for clients and colleagues.
• Enable interested clients to target broader environmental or social impact goals through their investments and to track the results with relevant data.
• Meet client’s sustainability preferences in alignment with applicable regulations.
• Ensure clients can align portfolios with their mission and values, for example by identifying and managing exposures that may impact climate change, a healthy environment, social equity, or thriving communities.

How Do We Integrate ESG Insights Across Our Investment Platform?

At Cambridge Associates we employ ESG insights in different ways:

Manager Research

• We embed ESG analysis across our research platform such that it considers sustainability factors as part of every manager due diligence.

Learning Culture

• Since this is a fast-evolving field, we develop our approach and governance on an ongoing basis. We seek to learn proactively and by doing and observing what works best in practice as well as through the primary research conducted by our SII team. We maintain a constant firmwide dialogue that includes different functions and regions to avoid siloed thinking and ensure all clients benefit from our best sustainability knowledge.

Client Advice and Portfolio Management

• Our investment teams incorporate sustainability factors with the aim of meeting or exceeding return objectives in ways tailored to the needs and preferences of each client. This may include pursuing specific impact goals and/or emphasizing specific sustainability risks as directed by clients.

Stewardship and Engagement

• Stewardship is the responsible allocation, management, and oversight of capital with the aim of creating long-term value for investors. Engagement puts stewardship into action—it is purposeful dialogue with a specific objective, promoting disclosure and accountability. CA works on stewardship and engagement in three ways:
• We assess how investment managers engage with their underlying portfolio companies.
• We engage with asset managers to promote transparency and disclosure as well as improvements in corporate governance and decision making.
• We support interested clients in direct engagements with their investment managers and help them participate in collaborative groups of their choosing.

Satisfying Regulatory Requirements

• We research current and forthcoming regulation so that both we and our clients can meet our compliance commitments regarding sustainability and ESG in relevant jurisdictions.

Collaboration with External Groups

• Where appropriate we seek to exercise industry leadership on our clients’ behalf. We selectively collaborate with investor groups, trade associations or the academic community to support evolution of industry practices that benefit our clients and ensure our thinking remains leading edge.

Summary Statement

We embed sustainability into our investment practices because we believe it makes us better stewards of capital over the long term and helps us manage systemic and sustainability risk that can manifest at any time. ESG analysis can identify financially material information that is not covered by conventional reporting, and we believe is additive to investment returns. Based on our business model, our approach to sustainable investing and the most impactful and relevant implementation can be tailored to each client’s needs and impact objectives.