Philosophy: ESG risk management to protect the value of our investments
As value equity investors, the Cundill team manages money by purchasing what it believes are undervalued, out-of-favour, or misunderstood businesses that they believe have the potential to re-price and generate competitive long-term returns. Key to the team’s investment strategy is identifying companies that are priced below their estimate of fair value. Cundill acknowledges that environmental, social and governance (ESG) risks can negatively impact the value of a company. Therefore, the team integrates ESG risks into their bottom-up security selection process. Companies with significant ESG risks are often seen as lower quality and require a larger discount to fair value to be included in the portfolio. Cundill believes that engaging with investee companies to seek improvement in the management of their ESG risks can improve the overall quality rating of the company and reduce the risk of investment.
Case study
Credit Suisse
In 2021, we made a sell decision in relation to our investment in Credit Suisse due to deteriorating governance issues. Credit Suisse was hit by several scandals and unsound credit risk management. We were also concerned with talent leaving the firm. The team assessed these developments as risks that could impact the fair value of the company materially going forward. The team engaged with company representatives four times throughout 2021 to get updates on management’s plans and progress to improve risk and compliance at the firm. However, the team was disappointed by the slow pace of progress. We believed both ESG risks and financial risks had been increasing which could substantially lower the quality score of Credit Suisse going forward. Hence, the team sold its shares. After the sell decision, the Chairman of Credit Suisse resigned, which further validated the identified governance concerns.