Morningstar - Q3 2021 - 77

that are material to a company's success.
What's good for society and good for
the environment is often good for business-
and for stock prices, too.
Chakrabortty: Even before the recent focus
on climate change, ESG has been an integral part
of our process in terms of identifying risks
and pockets to avoid from a long-term point of
view. There are also opportunities. China
is targeting net carbon neutrality by 2060. It is
the world's largest consumer of energy, and it's
among the largest contributors to carbon
emissions, so this has big implications for green
technology, not just in China but globally
as well. Today, 72% of power generation in China
is coal-based, and that is transforming into
wind and solar. Solar in China is now largely at
cost parity with coal, so the economic case
for generating power from coal is disappearing.
The energy transition will be an important
element for the global economy ...
Elizabeth Desmond
starts, the general trajectory of economic
performance has been positive in recent years.
More broadly, on a 20-year view, there's
a large pool of consumers that will increasingly be
entering the middle class and can unleash
a consumption boom in India. That's definitely
a country to watch.
Daniels: How important is climate change-as well as
other ESG issues-when you're assessing risk?
Weiss: It's both a risk and an opportunity. I'm
actively looking for ideas consistent with my
investment process that are going to be long-term
beneficiaries from the general trend towards
alternative energy. On the flip side, if you're
a legacy producer of products that may be on the
opposing side of the move towards climate
awareness, you've got to be careful. Take property
and casualty insurers: If you look at actuary
analysis over the last 50 years, there are certain
risks that are happening with more regularity than
they did before, so you have to incorporate
that in your company-specific analysis. And what
are the implications if the electric vehicle
transition occurs more rapidly than we think for
companies that are making products that are only
sold into ICE [internal combustion engine]
vehicles? They may still be OK investments,
depending on valuation, but you have to be aware.
I'm fortunate that Fidelity has dedicated research
teams focused on stewardship and ESG factors
Desmond: ESG is part of the long-term evaluation
of risk. All of us have spent a lot of time
looking at governance of companies to ensure that
as long-term investors, we're going to benefit
from the returns that a company earns
over time. Governance will always remain a very
important factor. If a company is engaged
in socially disruptive activities, that's unlikely to
be a sustainable long-term business model,
so you need to think about that as an investor, as
well. This presents opportunities as well
as risks, and we factor these issues into our
long-term investment thesis.
Ultimately, at Mondrian we're driven by valuation,
and we're going to invest in companies that
we think are fundamentally undervalued and have
the opportunity to offer attractive returns.
To achieve this over the long term, we need to
understand the companies we invest in
and the sustainability of their business model.
Daniels: Thank you all for your insights.
K
Andrew Daniels is an associate director, U.S. equity
strategies, at Morningstar Research Services LLC.
Photography by Christopher Lane, Matthew Lomanno,
and David Woolfall.
morningstar.com/lp/magazine
77
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Morningstar - Q3 2021

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