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Portfolio insight - WEG research case study

We recently added WEG to the Global Emerging Market portfolio. In this article we provide a snapshot of our research on the company, including our fundamental assessment, ESG assessment and outlook.

Date published
1 Sep 2022
Tag

ESG Assessment

Sustainability overview

The fundamental sustainability characteristics of WEG are strong, and several sustainability themes are driving our investment thesis for WEG. The global focus on electrification and renewable energy are important tailwinds for WEG through the products it offers. WEG is also a clear contributor to several UN SDGs.

We believe there are areas for improvement on both the social and environmental points, however we believe that the company displays willingness to embrace an ESG agenda. The company has appointed a chief sustainability officer and committee to actively pursue better ESG practices, as its characteristics thus far have been more a by-product of its natural success as opposed to specifically targeting an outcome.

Sustainability rating: 2.3

Governance overview

WEG has a clear culture which is part of the competitive advantage of the company. A key ingredient to this has been the influence of the three original founders, who are today represented by their surviving family members. However, we would like to see more independence on the board and higher remuneration hurdle rates. Historic capital allocation has been of the highest quality, having maintained industry leading returns despite the increasing internationalisation of the business.

The management team follows a clear pattern of internal promotions and longevity at the company which speaks to the internal culture and quality of training/development. The current CEO started as a trainee in 1981.

Information disclosure for both financial and qualitative information is strong, and the company has produced an integrated annual report since 2013.

Governance rating: 2.3

Areas for improvement

300

Social

The roughly 80/203 gender split (male/female) is in line with industry peers, but women are under-represented at a senior level. On a positive note, the company recently appointed a female to the Board of Directors.

300

Environmental

We are in discussions with the company regarding net zero commitments. We understand this is the top priority of the Sustainability Committee and they are currently working with a consulting company to help form their approach. The company already discloses Scope 1, 2 and 3 Emissions which have been validated by a third party.

The future of WEG in the global transition to a low-carbon economy

As the world transitions to an ever-increasing electrified society, the importance of electric motors continues to increase. Electric motors represent around 70% of industrial electricity consumption and electricity consumption is by far the largest component of the total cost of ownership of electric motors. With this backdrop, there is a clear regulatory trend towards higher efficiency electric motors. As a leading player in this industry, WEG is set to benefit from this multi decade trend.

Renewable energy is obviously key to driving lower emissions and the technology is economically viable. WEG has been strategically positioning itself for years in this market and has developed key solutions as part of its Energy Generation, Transmission and Distribution business segment. The introduction of wind turbines and solar systems in particular will be future growth drivers for the business.