Environmental, Social and Governance

We consider environmental, social and governance factors as part of our investment process

How we invest responsibly 

Although Environment, Social and Governance (“ESG”) factors are not the over-riding criteria in relation to the investment decisions taken by the Investment Manager, significant prominence is placed on ESG and climate related factors throughout the investment process. The following pages highlight the way that ESG and climate change are considered by the Investment Manager. These processes are reviewed regularly and liable to change and the latest information will be available for download on the Company’s website.

More details on the Manager’s approach to ESG are set out on pages 31 to 35 of the annual report.

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Our investment process has five stages:  

1. Idea Generation: The Investment Manager’s teams of investment analysts generate investment ideas from their comprehensive coverage of the UK and European equity markets. This involves them considering the merits of over 1,000 listed businesses across the market cap spectrum.  

2. Sustainability: Companies with excessive ESG risks are excluded through a combination of pre-set screens and quantitative and fundamental analysis. This removes around a quarter of the companies monitored from the Investment Manager’s consideration.  

3. Quality: Businesses that don’t meet the analysts’ quality criteria are then filtered out. Only around 20% of companies will meet this hurdle and the Investment Manager particularly emphasises allocation to companies that are considered to be sustainable leaders.  

4. Total Returns: Focus is then placed on those companies that the analysts identify as having the most attractive total return potential as well as those that have compelling income generation characteristics.  

5. Portfolio Construction: The Investment Manager then builds a concentrated portfolio that can deliver the income and total return requirements while matching the style and risk profile and meeting the sustainable and responsible investing principles.  

Please see pages 26 to 33 of the annual report for more information. 

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The Investment Manager believes that effective analysis of, and engagement with, the ESG risks and opportunities that companies face will enhance investors’ risk adjusted returns. While sustainable and responsible investing principles were formally incorporated into the Company’s investment objective in 2021, a focus on ESG factors has been a long standing part of the Investment Manager’s process, making the transition a relatively straightforward one. Those sustainable and responsible investment principles are integrated into the investment process through a combination of exclusions, positive allocation and ongoing corporate engagement. To deliver this, the Investment Manager utilises binary screens, qualitative analytical assessment, proprietary quantitative tools and ongoing corporate access and voting policy. The Investment Manager draws upon three resources to assist it with the integration of ESG into the investment process; the team of approximately 30 equity analysts, on desk ESG analysts and the central ESG team. Each plays an important yet distinct role in implementation. 

Exclusions: The Investment Manager uses three different forms of exclusions. These are complimentary in form with binary exclusions providing assurance to shareholders that companies with certain types of business activities will not be invested in. Additionally, the Investment Manager utilises both the judgement of its investment analysts and its own proprietary quantitative tools to exclude companies with poorly managed ESG risks.  

1. Binary exclusions: these screens focus on areas where the Investment Manager sees long-term risks arising from ESG factors to companies’ business models and, as a result, it chooses not to invest. These will be subject to ongoing review to ensure that they are consistent with industry best practice. 

2. ESG House Score: this is a proprietary quantitative tool that scores the companies in the investment universe on operational and governance risks. The Investment Manager excludes the bottom 10% of companies from consideration for the portfolio.  

3. ESG Quality Score: every company under research coverage is judged by the analysts on the quality of its management of ESG risks. Companies deemed to be below average are excluded from consideration for the portfolio. 

The number of investible companies is reduced by 23% due to the effect of the three screens. 

Carbon Intensity: The Company also commits to having a carbon intensity of less than 80% of the FTSE All-Share Index, which constrains investment in high carbon emitting companies. 

The Company’s portfolio currently has a Carbon Intensity on Scope 1 and 2 emissions of 64%, and 76% on Scope 1 to 3 emissions. On a total emissions basis, the portfolio sits at 34% of the benchmark on Scope 1 and 2 emissions and 44% on Scope 1 to 3 emissions. 

Positive Allocation: Companies that investment analysts score highly on the quality of their ESG risk management are designated as sustainable leaders. Those sustainable leaders that have a high alignment of revenues or investment with the UN sustainable development goals will additionally be designated as solutions providers. The majority of the Company’s portfolio will be invested into sustainable leaders and the Investment Manager will actively search for opportunities where it believes these attributes to be undervalued. 

Please see pages 26 to 33 of the annual report for more information. 

Companies that are scored as average in ESG risk management are designated as improvers. Clearly defined opportunities for improvement are identified by the team of investment analysts in conjunction with the Investment Manager’s on-desk ESG analysts and central ESG team, and these are closely monitored from initiation through to completion. The Investment Manager believes that effective engagement presents a significant opportunity to add shareholder value over time.  

During the year ended 31 January 2022, the Investment Manager had 72 separate meetings with portfolio companies where ESG topics were raised, covering 37 of the 39 holdings. 12 of these were dedicated priority engagement meetings, addressing areas of material improvement. 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 26 to 33 of the annual report for more information. 

SSE – Corporate Governance/Environment  

The Investment Manager engaged with the Chairman of SSE, one of Europe’s largest utilities companies and a leader in offshore wind power, following demands from activist investors to sell its renewables activities. It was important for the Investment Manager to better understand the logic behind the company’s decision to reject the proposals and instead continue to pursue an integrated approach, balanced by creating financial headroom to fund its ambitious expansion plans. From an environmental perspective, the Investment Manager remains very supportive of the company’s “Just Transition” plans and the corporate strategy adopted aligns with that. Overall, the Investment Manager remains supportive of the business’ current trajectory, although will continue to provide both support and challenge to management’s capital allocation choices.  

Persimmon – Human Rights & Stakeholders/Corporate Behaviour  

Given the significant issues caused by faulty exterior cladding on new build homes, the Investment Manager engaged with the Persimmon management team to obtain a stronger insight into the risks that this poses for its business on both a financial and reputational level, and the company’s efforts at remediation. Persimmon’s historic mix of new home construction, with a heavy weighting towards houses and low rise flats, leaves it with relatively little exposure to troubled assets. The company has conducted a detailed review of its last 20 years of construction and set aside significant financial provisions to manage the remediation process. Importantly, there was a recognition that the company needs to manage the reputational risks as well as its social responsibilities. From an industry perspective, cladding remains a very significant problem for many homeowners and the Investment Manager has been a vocal advocate as a firm for housebuilders to be pro-active in tackling this major social issue and to go beyond strict legal obligations in offering solutions.  

Chesnara – Corporate Governance  

The Investment Manager has been in discussions with the company over improving the diversity of its board of directors and moving more in line with industry best practice. The Investment Manager is a strong believer that more diverse boards make for greater challenge, debate and ultimately better decision making. Following engagement with the Chairman, the Investment Manager was pleased that the company made two new non-executive director appointments in early 2022, better balancing the composition of the board and bringing additional insights and skills to the table that should help support the company’s corporate strategy under the new CEO. 

Please see pages 26 to 33 of the annual report for more information. 

Voting policy forms an important part of the Investment Manager’s corporate engagement approach. Every proxy is voted and, where needed, input sought from the investment and ESG analysts in conjunction with the expertise of the central voting team. Where direct engagement has not proven effective, the Investment Manager is very prepared to vote against companies.

The Investment Manager voted against management recommendations in 27% of the general meetings held by portfolio companies during the year, which it thinks is the most useful metric for measuring the level of its constructive engagement. The overall number of votes against was 2.3%. It is important to bear in mind that the Investment Manager typically begins from a position of support for the select group of companies it invests in.  

There is an extensive ongoing programme which allows the Investment Manager to actively engage with investee companies throughout the year beyond the voting season. 

Please see pages 26 to 33 of the annual report for more information.