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Veritas Asset Management LLP

PRI reporting framework 2019

You are in Direct - Listed Equity Incorporation » ESG incorporation in actively managed listed equities

ESG incorporation in actively managed listed equities

Implementation processes

LEI 01. Percentage of each incorporation strategy

01.1. Indicate (1) which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities and (2) the breakdown of your actively managed listed equities by strategy or combination of strategies (+/- 5%)

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied
100 %
Total actively managed listed equities 100%

01.2. Describe your organisation’s approach to incorporation and the reasons for choosing the particular ESG incorporation strategy/strategies.

We view ESG as a source of investment risk when assessing a company.  Much of the value of a company comes from intangible assets like intellectual property and reputation. It is vital that our analysts have a good understanding of those risks that could damage the company value, many of which are within the ESG sphere such as poor working conditions or safety standards which could potentially undermine a business as can reputational damage from bribing customers, poor data protection or environmental damages. 

Once a company has been selected for our Universe List, it remains there until the right entry point can be achieved.‎ We essentially capitalise cash generated 5 years out to put a price on the business, compare it with today's price and seek an investment rate of return (IRR) of 15% p.a. Sustainability factors are also considered at this stage of the process. The Universe List consists of approximately 250 companies. Companies with a 1 rating have the greatest predictability and better corporate governance. For these businesses we only seek a 12.5% IRR i.e. we will accept a lower margin of safety due to lower risk factors being present. The majority of companies are rated 2 and a 15% IRR will be targeted. Companies with a 3 rating are those whose corporate governance may leave some concerns e.g. Cayman Islands holding company and as a consequence we look for a 20% IRR. If we have an issue with safety standards, working conditions etc., we would probably not hold the company unless this was being addressed (in which case we would rate it a 3 and look for the higher IRR).

The portfolio will be constructed with the lowest ‎risk possible. Given the choice of buying a position offering a 12.5% IRR vs one with a 20% IRR, we would select the former.

01.3. If assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]

Not applicable.


LEI 02. Type of ESG information used in investment decision

02.1. Indicate what ESG information you use in your ESG incorporation strategies and who provides this information.

Type of ESG information

Indicate who provides this information  

Indicate who provides this information 

Indicate who provides this information 

          We think ESG is an integral part of the bottom up company analysis, therefore we do not rely on external ratings.
        

Indicate who provides this information 

02.2. Indicate if you incentivise brokers to provide ESG research.

02.4. Additional information.[Optional]


LEI 03. Information from engagement and/or voting used in investment decision-making

03.1. Indicate if your organisation has a process through which information derived from ESG engagement and/or (proxy) voting activities is made available for use in investment decision-making.

03.2. Additional information. [Optional]

Engagement and proxy voting are both conducted by the research analysts who are involved with the decision making process.


(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the ESG factors you systematically research as part of your investment analysis and the proportion of actively managed listed equity portfolios that is impacted by this analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]

One of our core beliefs as long term equity holders is alignment. A pension fund with a 25-year view is not best served by management on LTIPs of 2-3 years. If management is rewarded over a longer term, they will be forced to take issues like climate change more seriously. Governance is at the route of all ESG.


LEI 09. Processes to ensure integration is based on robust analysis

09.1. Indicate which processes your organisation uses to ensure ESG integration is based on a robust analysis.

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.5. Describe how ESG information is held and used by your portfolio managers.

09.6. Additional information.[Optional]


LEI 10. Aspects of analysis ESG information is integrated into

New selection options have been added to this indicator. Please review your prefilled responses carefully.

10.1. Indicate which aspects of investment analysis you integrate material ESG information into.

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

10.2. Indicate which methods are part of your process to integrate ESG information into fair value/fundamental analysis and/or portfolio construction.

          Governance rating.
        

10.4. Describe the methods you have used to adjust the income forecast / valuation tool

We initially seek an investment rate of return (IRR) of 15% p.a. Sustainability factors are also considered at this stage of the process. The Universe List consists of approximately 250 companies of which the majority we seek a 15% p.a IRR. Companies with a 1 rating have the greatest predictability and better corporate governance. For these businesses we only seek a 12.5% IRR i.e. we will accept a lower margin of safety due to lower risk factors being present. The majority of companies are rated 2 and a 15% IRR will be targeted. Companies with a 3 rating are those whose corporate governance may leave some concerns e.g. Cayman Islands holding company and as a consequence we look for a 20% IRR. If we have an issue with safety standards, working conditions etc., we would probably not hold the company unless this was being addressed (in which case we would rate it a 3 and look for the higher IRR). The portfolio will be constructed with the lowest ‎risk possible. Given the choice of buying a position offering a 12.5% IRR vs one with a 20% IRR, we would select the former.

 

10.6. Additional information. [OPTIONAL]

We will also use engagement to adjust the intrinsic value of a company. If we believe management has not acted in the best interest of shareholders and we have failed to change their course of action, we may retain the stock and continue to engage but with a lower exit price.


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