When we talk about sustainability at NN IP, we often do so from a responsible investing angle. As asset owners and stewards of capital, we play an important role in guiding the companies we engage with towards creating a more sustainable economy for the future.
This interpretation of “sustainability” is embedded throughout our organizational culture, as might be expected of an investment manager that was one of the earliest signatories to the UN’s Principles for Responsible Investment.
But sustainability has other meanings too. In another context it features alongside responsible investing as a core principle in some of our earliest equity strategies. Our first dividend fund was launched in 1999 in recognition of the fact that an equity investor derives income from both capital growth and the cash payout element that companies return to shareholders. In Europe’s mature equity markets, it is clear that over time these dividends rather than capital appreciation account for the greater proportion of shareholder returns. It’s the market’s version of the fable of the tortoise and the hare. For a long-term investor in European equities wishing to avoid the dark arts of market timing, a focus on dividends is one of the best ways to generate consistent performance.
To succeed as an equity income investor, you have to be able to effectively assess the sustainability of dividends. While the market usually rewards companies that maintain or grow their cash payouts, it quickly punishes those who cut their dividends when their fortunes take a turn for the worse. This means that a detailed analysis of sustainability – whether it relates to dividends, cash flows, margins or revenues – is central to the investment process of our European dividend fund range.
Returning to the way we more commonly use the term “sustainability”, our long history of applying responsible investing principles means that NN IP’s Environmental, Social and Governance (ESG) investment processes are continuously evolving and improving. Some of the advantages we have in the quality of our ESG integration is simply due to that fact that we have been doing it for a very long time. It is not something that can just be quickly bolted on to existing investment frameworks. ESG factors are now integrated into all stages of our investment process and this provides materially valuable input at each stage: security analysis, portfolio construction, risk management and reporting. This is true even for funds that do not have an explicit “Sustainable” label, such as our European dividend funds.
At security analysis level, we believe that ESG factors have a financially material impact and therefore affect the returns of the companies we invest in. This is more than just a “hunch” – our work with our academic research partner ECCE proves it. It is a two-way process, so our size and influence as an investor can also be used to engage with the companies in our portfolios, encouraging them to adopt good corporate governance policies and practices. Our ambition is for this dialogue to benefit all parties, generating better results for society at the same time as higher returns for our clients. Specifically, in our European dividend funds we have found that adding ESG criteria to the investment process improves our ability to forecast future dividend payments, reducing the risk of unexpected dividend cuts because of, for example, regulatory fines for poor corporate governance or other ESG-related risks. This lowers the risk profile of the fund, increasing risk-adjusted returns.
The concept of being able to translate our ESG analysis into quantifiable financial risks and opportunities is key. Our experience and proprietary academic research demonstrate that integrating these factors enhances risk-adjusted returns and fulfils our role as responsible asset owners, while using sustainable investing processes can help us to determine the sustainability of dividend payouts. These overlapping and yet different concepts of ‘sustainable’ complement and strengthen each other. Sustainability squared.