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For several years, investors, from institutional to retail, couldn’t get enough of the tech stocks with all their promises of future growth. But now the market has spoken and it’s saying precisely this – valuations matter again.
Harnessing the power of improvement on the ESG continuum
Grace Su’s entry into investing began, as she candidly recalled, with the overconfidence of a successful early trade and the humbling margin calls early in her career. That formative experience taught her two enduring lessons: the primacy of risk management, and the importance of humility. “Return of capital is more important than return on capital,” she said, citing Buffett. It also sparked her attraction to value investing, where downside protection and prudent pricing are foundational. ESG, as integrated at ClearBridge, complements this risk-aware framework, offering another dimension through which to assess opportunity and long-term sustainability.
At ClearBridge, ESG isn’t a separate silo – it’s woven into the investment process regardless of the mandate. But Su is quick to clarify that ClearBridge’s Global Value Improvers Strategy is distinct from the more exclusionary, best-in-class approaches that have defined the genre in the past. “Returns are what we’re focused on,” she said. “We use ESG as a conduit to achieve those returns.” The core idea, she explained, is to identify “improvers” – companies not necessarily scoring top marks on ESG today, but showing a credible and measurable commitment to getting better.
Su divides these improvers into three categories. The first are “enablers”: companies whose products or services help others achieve their ESG goals – think industrial firms supplying components for decarbonisation technologies or firms supporting financial inclusion. These companies tend to benefit from secular demand tailwinds, driving both earnings growth and a re-rating of their stock. The second group are “sinners” looking to reform: think legacy energy or automotive firms actively transitioning to a more sustainable model. Markets may severely discount these firms’ terminal value, presenting opportunities for significant upside if the transition story is credible. The third, broader group includes companies pushing ESG within their own operations – especially in under-appreciated areas like social impact and employee wellbeing.
One of the strongest themes in Su’s remarks was the long-term nature of ESG improvement. Financial improvements often precede ESG progress, but that doesn’t mean the latter isn’t valuable. ClearBridge’s approach includes both a financial thesis and an ESG thesis for each stock, with three to five measurable ESG metrics tracked over time. These targets – typically set for 2028 to 2030 – require patience, discipline, and a differentiated mindset. “It makes for a portfolio that is more concentrated, higher conviction, and long-term,” she said.
That time horizon and dual hurdle for inclusion – strong valuation and credible ESG trajectory – create a unique portfolio structure. Enablers reinvest in growth, while deep-value names generate near-term cash and reward patient shareholders through dividends and buybacks. The third category provides ballast during volatility, with strong yield and social alignment. This unintended but welcome outcome is a diversified portfolio not just across sectors and geographies, but also across market regimes – something that helps it weather exogenous shocks.
Recent criticism and outflows from ESG funds don’t rattle Su. “A lot of that is performance-related,” she noted. In the pre-COVID decade, ESG funds – skewed to growth and low-carbon sectors – rode a powerful macro cycle. More recently, the underperformance of these sectors, combined with political backlash in the United States has cooled interest. But Su insists the underlying drivers remain intact, especially outside the US. “Europe is still committed to decarbonisation,” she observed. Corporates may be quieter about ESG goals today, but their strategies remain unchanged.
The key challenge now, Su argues, is to demonstrate alpha through ESG, rather than assuming ESG credentials are enough. “If ESG can show that it can generate alpha, the flows will come back.” This has long been ClearBridge’s conviction: ESG is a means, not an end. And improvers – those companies with something to prove and a path to get there – offer a particularly rich hunting ground for alpha generation.
When valuation screens out obvious ESG winners, Su encourages creativity. Look for value up the supply chain, she advises. If ‘green’ steel producers are too expensive, investigate the suppliers of capex equipment or raw materials. Expand the investment universe, broaden the thematic lens, and uncover undervalued opportunities that still participate in the transition.
As reflected in ClearBridge’s February commentary on the Global Value Improvers Strategy, the emphasis is not on purity but progress. The team remains “constructively positioned” amid macro uncertainty, with holdings in names like Siemens Energy and Sumitomo Electric exemplifying the intersection of value, improvement, and long-term ESG positioning. These are not climate darlings or governance poster children: they are imperfect companies with tangible plans, measurable targets, and mispriced stocks.
In the end, Su’s philosophy is as rigorous as it is pragmatic. Markets, like companies, are dynamic. ESG is not dead, but it is evolving – from a badge of honour to a differentiating investment tool. For Su, the ultimate question isn’t “Is this company ESG-compliant?” but “Is this company improving – and is the market recognising that?” It’s a quietly radical way to think about sustainability: not as a label, but as a lever for unlocking value.
