Quality and Values-Based Investment Analysis: More Similarities than Differences?

05.13.2021 - Alex Chown, Research Analyst

ESG’s Role in Quality Investing

Over the past decade, environmental, social, and governance (ESG) analysis has become more broadly accepted as a useful part of assessing the quality, sustainability, and competitiveness of a given business model.

While many investors continue to associate ESG investing with incorporating social values into investment decisions, at its core, ESG analysis provides additional perspective for uncovering positive and negative externalities that may not be apparent from traditional financial analysis. Such externalities can alternatively be classified as business risks or opportunities and carry potential to destroy or create shareholder value.

While quantifying the financial impact remains the more challenging part of ESG analysis, investors are becoming increasingly receptive to the idea that an emphasis on sustainability can be a critical factor in mitigating risk and driving value.

Uncovering Risks and Opportunities

The use of ESG analysis to augment traditional fundamental analysis was highlighted when members of our Research team met with two ESG-focused investment managers, RBC International Opportunities and Generation Investment Management. During these meetings, we were particularly struck by the similarities between their respective ESG framework and analysis performed by traditional quality managers.

While the terminology used by ESG and quality investors differs, they share the common objective of finding companies that can sustain and grow their competitive positions. As an example of how an ESG lens can reveal hidden business risks, RBC highlighted a global beverage company that derives most of its revenue from selling a highly caffeinated, sugary drink to a predominately teenage customer base. Although the company possesses attributes associated with a quality investment (dominant market share, high free cash flow, etc.), its competitive sustainability could be compromised by increased regulation.

RBC classifies this negative externality as a “contingent liability,” and cites the rise in “sugar taxes”1 and the clampdown on “candy flavored”2 tobacco products as examples of how this risk could lead to adverse financial consequences. While a traditional financial analysis framework may have prioritized the growth and cash flow generation over the long-term potential regulatory risks, the RBC team chose not to initiate an investment after considering the threats to the company’s financial sustainability.

As an example of how an ESG lens can reveal hidden business opportunities, Generation Investment Management reviewed the sustainable growth model of a global pharmaceutical company with a “patient first” emphasis. This company operates in an industry in which pharmaceutical companies are frequently criticized for increasing the price of medication for rare, life-threatening diseases affecting small populations. However, despite the negative headlines and related regulatory initiatives that pressure the industry,3 this company has decoupled from peers and focused on driving revenue via volume increases.

Since a business model based on aggressive price increases conflicts with this company’s “patient first” mission, it has emphasized treatments for the untreated and inadequately treated, as the potential volume growth presents a tremendous opportunity. The company applied this approach to the treatment of hemophilia, a disease in which 75 percent of global cases fall into the untreated or inadequately treated category. This presented a long runway of continued growth4 and has resulted in the achievement of an attractive market share. In summary, while the company’s “patient first” priorities have allowed it to establish a sustainable and growing competitive position, the use of an ESG framework allowed Generation to identify this opportunity in an industry where its competitors are pursuing more challenged business models.

ESG Integration is Quality Investing

As illustrated by these examples, integrating ESG analysis into the diligence process provides insight into how traditionally overlooked externalities can influence the quality, sustainability, and competitiveness of a given business model. While quantifying the financial impact remains the more challenging aspect of ESG analysis, asset managers are increasingly receptive to ESG considerations given the potential for uncovering a broader range of risks and opportunities.

At Fiduciary Trust International, we use an integrated research process that blends traditional financial analysis with the evaluation of ESG factors. We believe firms that can identify and adapt to material ESG risks and opportunities improve their chances of generating superior financial performance over the long-term. We continue to explore the commonalities between “quality” and “values-based” investing to develop a universe of investments for clients seeking market-rate returns or better risk-adjusted returns.

1. Lester Wan, Elaine Watson, and Rachel Arthur, “Sugar taxes: The global picture in 2017,”, December 20, 2017, Food and Drug Administration, “Regulations of Flavors in Tobacco Products,” Federal Register, March 21, 2018, 3. Robert Langreth, “Drug Prices,” Bloomberg, May 11, 2018, [4] “Fast Facts: About Bleeding Disorders,” National Hemophilia Foundation,
4. “Fast Facts: About Bleeding Disorders,” National Hemophilia Foundation,

This article is for illustrative purposes only. It is not intended to be an endorsement.

This communication is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

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