4. Investment ESG Strategy
We include an assessment of ESG in the evaluation of all of our investments.
a) Investment Analysis
We include an assessment of ESG in the evaluation of all of our investments. We have minimum requirements for ESG rankings for each holding, plus an overall ranking for each fund as a whole. Our goal is to increase this rank over time.
We use Refinitiv ESG scores, which are designed to transparently and objectively measure a company’s relative ESG performance, commitment and effectiveness across 10 main themes based on publicly reported data:
The scores are based on relative performance of ESG factors with the company’s sector (for E and S) and country of incorporation (for G). As the importance of ESG factors differs across industries, each metric’s materiality for each industry is mapped on a scale of 1 to 10. Company disclosure is at the core of the methodology. With applied weighting, not reporting “immaterial” data points does not greatly affect a company’s score, whereas not reporting on “highly material” data points will negatively affect a company’s score.
The overall ESG Combined score is discounted for significant ESG controversies. Companies’ actions are verified against commitments and to magnify the impact of significant controversies on the overall ESG scoring.
Ranks are scored either numerically (0-100) or in letter grades (D- to A+):
ESG aspects are addressed during the discussion of a company in the weekly research meetings. This includes a detailed discussion of the ranks compared to the peer group and over time, implications of these values for the portfolio and the risk profile of the values. If the ranking prevents us from investing in the company it will not be discussed in the portfolio construction process as it won’t go into the portfolio.
If the ranking is acceptable but elevated it will have an influence on position size, just like any other risk outcome of the research meeting. We might therefore have a smaller position in a company with higher ESG risk.
In general, we are most interested in companies that can improve their ESG score over time with better disclosure and revised practices as we think this will contribute to a better performance and can lead to a rerating of the shares. We have an overall score for the portfolio which is monitored as well. It is a weighted average of the underlying holdings’ ranks. For the overall portfolio,
we would expect the overall risk to decline as we try to either avoid or minimise exposure to negative ESG factors.
b) Company Engagement
As active investment managers we take our stewardship role very seriously. This means that we actively engage with our investment companies.
We recognise that governance and stewardship risks can be material to the performance and valuation of companies. Actively considering proxy votes for client holdings is therefore vital. We vote on all resolutions of our holding companies through Broadridge ProxyEdge.
Active engagement with companies on governance issues is an important adjunct to voting activities. We raise ESG issues when we meet and/or have conference calls with management of companies. The issues raised depend on the company in question. Examples for environmental questions include sustainable sourcing of raw materials (esp. in food and chemical companies), pollution (chemicals, mining, oil & gas, cruise companies), energy efficiencies (industrials, chemicals). Social and Governance issues are raised with all managements where applicable. If we feel strongly about an issue we contact the chairman of the board in writing.