Funk calls this process the SBA: Sustainable Business Advantage. She developed it working with David Powell, her co-portfolio manager for the Brown Advisory Large-Cap Sustainable Growth strategy. She offers this simple example to illustrate how it works:
Company A takes on the R&D expense to make the most energy-efficient water heater on the market. Company B manufactures a widely available standard water heater. Which company is a better long-term investment for advisors and their clients?
If other competitive factors are equal Company A has what Funk terms a sustainable business advantage. This SBA generates more future value because Company A’s products grow revenues faster since they’re selling a product that pays for itself (based on energy savings).
How does Funk monitor for SBAs? By judging companies’ business practices against 3 criteria:
1. Faster revenue growth: According to Funk, a company with a product or service that drives efficiencies and saves money for customers can drive faster revenue growth.
2. Cost improvements: A company with meticulous attention to operating efficiently drives cost improvements. “You can see how companies have a long margin improvement trajectory if they can save on energy, water and resource usage that saves them money over time,” clarifies Funk.
3. Enhanced franchise value: A company that works sustainability and ethics into an elevated customer experience may improve the value of their franchise, by capturing more market share.
Simply put, when a company manages its environmental, social and governance (ESG) risks—such as managing labor relations and maintaining a solid governance structure—that’s table stakes for a high-quality investment. “The fundamentally strong companies that manage their ESG risks and are also capitalizing on SBAs, these are the companies that are poised to outperform over long periods of time,” emphasizes Funk. They are also candidates for investment in Funk and Powell’s Large-Cap Sustainable Growth strategy.
Leading By Performance And Values Alignment
All work done at Brown Advisory under Karina Funk’s watch does not originate from an ESG focus on sustainability. The team’s investment process starts with thorough fundamental due diligence. “To be competitive, and get returns, an investor has to understand both risks and opportunities. Finding fundamentally strong companies that are going after sustainability opportunities is how we find our best ideas,” states Funk. “Whether it’s called sustainability or not, people can find opportunities everywhere.” Employees at Brown Advisory adhere to a value system that prioritizes doing something better, whether it’s something better for the clients they serve, or better for the global community. Funk believes it’s the firm-wide value system that allows its employees to continuously improve. The company maintains very consistent and repeatable processes when applying this lens to their investments. “Everyone has a different definition of sustainability,” says Funk. “At Brown Advisory, we’re building our internal expertise around sustainability to become better investors and help our clients achieve their goals.”