Environmental, Social and Governance

Assessing Risk, Enhancing Value

Whilst the management of the Company’s investments is not undertaken with any specific instructions to exclude certain asset types or classes, the consideration of ESG factors is a fundamental part of the Investment Manager’s process and has been so for over 30 years. It is one of the key criteria on which the Investment Manager assesses the investment case for any company in which it invests for three key reasons as set out below.

Financial Returns: ESG factors can be financially material – the level of consideration they are given in a company will ultimately have an impact on corporate performance, either positively or negatively. Those companies that take their ESG responsibilities seriously tend to outperform those that do not. 

Fuller Insight: Systematically assessing a company’s ESG risks and opportunities alongside other financial metrics allows the Investment Manager to make better investment decisions. 

Corporate Advancement: Informed and constructive engagement helps foster better companies, protecting and enhancing the value of the Company’s investments.
We believe that the market systematically undervalues the importance of ESG factors. We believe that in-depth ESG analysis is part of both fundamental company research and portfolio construction and will lead to better client outcomes.

Please see pages 31 to 35 of the annual report for more information.

The Investment Manager conducts extensive and high-quality fundamental and first-hand research to fully understand the investment case for every company in its global universe. A key part of the Investment Manager’s research involves focusing its extensive resources on analysis of ESG issues. As set out below, the Investment Manager’s portfolio managers, ESG equity analysts and central ESG Investment Team collaborate to generate a deep understanding of the ESG risks and opportunities associated with each company. Stewardship and active engagement with every company are also fundamental to the investment process, helping to produce positive outcomes that lead to better risk-adjusted returns.

Portfolio Managers: All of the Investment Manager’s equity portfolio managers seek to engage actively with companies to gain insight into their specific risks and provide a positive ongoing influence on their corporate strategy for governance, environmental and social impact. 

ESG Equity Analysts: The Investment Manager has dedicated and highly experienced ESG equity analysts located across the UK, US, Asia and Australia. Working as part of individual investment teams, rather than as a separate department, these specialists are integral to pre-investment due diligence and post investment ongoing company engagement. They are also responsible for taking thematic research produced by the central ESG Investment Team (see below), interpreting and translating it into actionable insights and engagement programmes for its regional investment strategies. 

Global ESG Infrastructure: The Investment Manager has around 150 equity professionals globally. Each systematically analyses ESG risks and opportunities as part of the research output for each company. Its central team and ESG equity analysts support the Investment Manager’s first-hand company analysis, producing research into specific themes (e.g. labour relations or climate change), sectors (e.g. forestry) and ESG topics to understand and highlight best practice. Examples of thematic and sector research can be found on the Manager’s website.

Please see pages 31 to 35 of the annual report for more information.

Climate change is one of the biggest challenges of the 21st century and has significant implications for investors. Although a great deal needs to be done to avert the worst effects of climate change, the energy transition is underway in many parts of the world, and policy changes, falling costs of renewable energy, and a change in public perception are happening at a rapid pace. Assessing the risks and opportunities of climate change is a core part of the investment process. In particular, the Investment Manager considers: 

• Transition risks and opportunities: Governments could take robust climate change mitigation actions to reduce emissions and transition to a low-carbon economy. This is reflected in targets, policies and regulation and can have a considerable impact on high carbon-emitting companies. 

• Physical risks and opportunities: Insufficient climate change mitigation action will lead to more severe and frequent physical damage. This results in financial implications, including damage to crops and infrastructure, and the need for physical adaptation such as flood defences.

The Investment Manager has aligned its approach with that advocated by the investor agenda of the Principles for Responsible Investment (“PRI”) – a United Nations supported initiative to promote responsible investment as a way of enhancing returns and better managing risk.

Please see pages 31 to 35 of the annual report for more information.

A systematic and globally-applied approach to evaluating stocks allows the Investment Manager to compare companies consistently with regard to their ESG credentials – both regionally and against their peer group. The Investment Manager captures the findings from its research and company engagement meetings in formal research notes. Some of the key questions include: 

• Which ESG issues are relevant for this company, how material are they, and how are they being addressed? 
• What is the assessment of the quality of this company’s governance, ownership structure and management? 
• Are incentives and key performance indicators aligned with the company’s strategy and the interests of shareholders? 

Having considered the regional universe and peer group in which the company operates, the Investment Manager’s equity team then allocates it an ESG rating between one and five (see below). This is applied across every stock that the Investment Manager covers globally. 

The Investment Manager also uses a combination of external and proprietary in-house quantitative scoring techniques to complement and cross-check analyst-driven ESG assessments. ESG analysis is peer-reviewed within the equities team, and ESG factors impacting both sectors and stocks are discussed as part of the formal sector reviews. To be considered ‘best in class’, the management of ESG factors must be a material part of the company’s core business strategy. It must provide excellent disclosure of data on key risks. It must also have clear policies and strong governance structures, among other criteria.

1. Best in class
• ESG considerations are a material part of the company’s core business strategy 
• The company provides excellent disclosure on ESG issues 
• The company provides opportunities from strong ESG management.

2. Leader
• ESG considerations are good but not market-leading
• Disclosure is good but not best in class
• Governance is generally very good.

3. Average
• ESG risks are considered as a part of the principal business
• Disclosure is in line with regulatory requirements
• Governance is generally good but with some minor concerns

4. Below average
• There is evidence of some financially material controversies
• There is poor governance or limited oversight of key ESG issues
• There are some issues in treating minority shareholders poorly.

5. Laggard
• Many financially material controversies
• Severe governance concerns
• Poor treatment of minority shareholders.

Please see pages 31 to 35 of the annual report for more information.

Once the Investment Manager invests in a company, it is committed to helping that company maintain or raise its ESG standards further, using the Investment Manager’s position as a shareholder to press for action as needed. The Investment Manager actively engages with the companies in which it invests to maintain ESG focus and encourage improvement. 

The Investment Manager views this programme of regular engagement as a necessary fulfilment of its duty as a responsible steward of clients’ assets. It is also an opportunity to share examples of best practice seen in other companies and to use its influence to effect positive change. The Investment Manager’s engagement is not limited to the company’s management team. It can include many other stakeholders such as nongovernment agencies, industry and regulatory bodies, as well as activists and the company’s clients. What gets measured gets managed, so the Investment Manager strongly encourages companies to set clear targets or key performance indicators on all material ESG risks. The investment process consists of four interconnected and equally important stages, laid out below.

During the year ended 31 March 2022, the Investment Manager had 111 separate meetings with portfolio companies where ESG topics were raised. By topic, Corporate Governance was the area most discussed, but there was also significant focus on Climate and Environment and, increasingly, on Social Issues.

Please see pages 31 to 35 of the annual report for more information.