Environmental, Social and Governance

The Board is very conscious of the risks emanating from increased ESG challenges. The recent scrutiny by western governments of human rights violations in Xinjiang is an example of the need for continued vigilance regarding the supply chain exposure of investee companies and the fair and humane treatment of workers. Likewise, as climate change pressures mount, the Board continues to monitor, through its Investment Manager, the potential risk that investee companies may fail to keep pace with the appropriate rates of change and adaption.  

Whilst the management of the Company’s investments is not undertaken with any specific instructions to exclude certain asset types or classes, the Investment Manager embeds ESG into the research of each asset class as part of the investment process. ESG investment is about active engagement, in the belief that the performance of assets held around the world can be improved over the longer term. 

Environmental, social and governance (ESG) considerations have been an integral part of the Investment Manager’s decisionmaking process for almost 30 years. The Investment Manager believes that ESG factors are financially material and can meaningfully affect a company’s performance. Hence, a company’s ability to sustainably generate returns for investors depends on the management of its environmental impact, its consideration of the interests of society and stakeholders, and on the way it is governed. By putting ESG factors at the heart of its investment process, the Investment Manager aims to generate better outcomes for the Company’s shareholders.  
The three factors can be considered as follows:  

Environmental factors relate to how a company conducts itself with regard to environmental conservation and sustainability. Types of environmental risks and opportunities include a company’s energy consumption, waste disposal, land development and carbon footprint, among others. 

Social factors pertain to a company’s relationship with its employees and vendors. Risks and opportunities can include (but are not limited to) a company’s initiatives on employee health and well-being, and how supplier relationships align with corporate values.  

Corporate governance factors can include the corporate decision-making structure, independence of board members, the treatment of minority shareholders, executive compensation and political contributions, among others. At the investment stage, ESG factors and analysis help to frame where best to invest by considering material risks and opportunities alongside other financial metrics. Due diligence can ascertain whether such risks are being adequately managed, and whether the market has understood and priced them accordingly.  

 

The Investment Manager is an active owner, voting at shareholder meetings in a deliberate manner, working with companies to drive positive change, and engaging with policymakers on ESG and stewardship matters.  very conscious of the risks emanating from increased ESG challenges. The recent scrutiny by western governments of human rights violations in Xinjiang is an example of the need for continued vigilance regarding the supply chain exposure of investee companies and the fair and humane treatment of workers. Likewise, as climate change pressures mount, the Board continues to monitor, through its Investment Manager, the potential risk that investee companies may fail to keep pace with the appropriate rates of change and adaption.

There are elements of ESG that can be quantified, for example the diversity of a board, the carbon footprint of a company, and the level of employee turnover. While diversity can be monitored, measuring inclusion is more of a challenge. Although it is possible to measure the level of staff turnover, it is more challenging to quantify corporate culture. Relying on calculable metrics alone would potentially lead to misleading insights. As active managers, quantitative and qualitative assessments are blended to better understand the ESG performance of a company.  

The Investment Manager’s analysts consider such factors in a systematic and globally-applied approach to assess and compare companies consistently on their ESG credentials, both regionally and against their peer group. Some of the key questions asked of companies include:  

How material are ESG issues for this company, and how are they being addressed?

What is 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?

The questions asked differ from company to company; the type of questions poised to a bank would be quite different from those of a semiconductor manufacturing firm. Having considered the regional universe and peer group in which the company operates, an ESG score is assigned ranging from 1 to 5. This proprietary ESG score is applied to every stock within the Investment Manager’s investment universe.

For further details pertaining to ESG and also climate change, please see pages 42 to 49 of the annual report for more information. 

Having considered the regional universe and peer group in which a company operates, the Investment Manager allocates it an ESG score between one and five. This is applied across every stock covered globally. Examples of each category and a small sample of the criteria used are detailed below: 

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.

For further details pertaining to ESG and also climate change, please see pages 42 to 49 of the annual report for more information. 

Climate change is one of the most significant challenges of the 21st century and has big implications for investors. 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-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. 

For further details pertaining to ESG and also climate change, please see pages 42 to 49 of the annual report for more information. 

The Investment Manager is committed to regular, ongoing engagement with the companies in which it invests, to help to maintain and enhance their ESG standards into the future. 

 As part of the investment process, the Investment Manager undertakes a significant number of company meetings each year on behalf of the Company. Your Company is supported by ondesk ESG analysts, as well as a well-resourced specialist ESG Investment team. These meetings provide an opportunity to discuss various relevant ESG issues including board composition, remuneration, audit, climate change, labour issues, human rights, bribery and corruption. Companies are strongly encouraged to set clear targets or key performance indicators on all material ESG risks. 

ESG engagements are conducted with consideration of the 10 principles of the United Nations Global Compact, and companies are expected to meet fundamental responsibilities in the areas of human rights, labour, the environment and anti-corruption. This engagement is not limited to a 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 customers and clients.

For further details pertaining to ESG and also climate change, please see pages 42 to 49 of the annual report for more information.