KENNOX THOUGHTS ON ESG

June 10, 2021

Intractable societal problems are complex, and any solution will involve painful trade-offs with no easy answers. “Ethical” issues such as diversity, climate change, inequality across groups or genders are especially complicated – if simple and easy answers existed, surely the problems would have been solved by now.

To make it more complicated, ethics are inherently subjective. Individuals can and do hold enormously differing views to each other. Which one should prevail? Groups across geographies, religions, and societies actively disagree with each other’s ethical views. And society’s ethics regularly evolve or change outright (ie opium used to be legal, US’s prohibition of alcohol, the legality of homosexuality, euthanasia).

Any solution therefore must consider a multi-ethical framework, ie there are no universally-accepted ethical absolutes.

Even in ambiguity, Kennox can have a sensible and logical framework. We lay out our thinking as follows:

Kennox & Sustainability

Sustainability lies at the heart of all Kennox investment decisions and we are signatories to the UN supported Principles for Responsible Investment.

The basis of our entire investment process is analysing the core issues for a company, both strengths and weaknesses, to best understand the sustainability of its earnings and its franchise. As long-term investors, ESG-related factors are a key ingredient in this assessment, affecting as they do the future sustainability of the company.

Start with the big picture/Is the whole industry investible or not: We will invest only in companies that bring overall benefit to society. Aligned to the 17 UN Sustainable Development Goals, if we assess that a company or an industry causes significant net harm to society at large, we will not invest at any price. This assessment is viewed as the widest balance of all its activities and interactions with stakeholders, including employees, customers, suppliers, the environment, and other aspects of society at large. For example, under this framework we will not invest in gambling, tobacco, pornography or armament companies.

Kennox must be willing to take contrarian positions: Kennox is willing to take a stance against views in the marketplace if we assess that consensus to be misguided. For instance, if we assess that a company or industry provides a service that is suboptimal on one measure in the view of the market, but overall necessary to the smooth functioning of our society at large, Kennox will judge this industry to be investible. The case for fossil fuels falls into this at present – exclusion on ethical grounds is inconsistent with absolute dependence today.

Any assessment is complex and subjective: In essence, our assessment is to consider the strategic issues that a responsible and sensible company director faces to ensure the sustainability of the business franchise, as measured over decades, not quarters. By its nature this is a complex, often qualitative assessment, and always involves trade-offs and balancing a wide range of interests. In this area, Kennox’s view is that pragmatism is worth more than idealism.

Once we assess an industry to be investible, it is important that our investee companies be responsible and progressive, especially in the difficult areas (ie fossil fuels): Once Kennox assesses an industry to be investible, Kennox will seek out the leaders and engage with them to improve as much as possible, encouraging them to be progressive.

ESG should be fully integrated into the investment process: Our investment team is fully responsible for both the Kennox ESG policy and its implementation – there is no better way to ensure that ESG is fully integrated in all aspects of our investment discussion and decision-making.

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