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Veritas Asset Management LLP

PRI reporting framework 2019

You are in Direct - Listed Equity Incorporation » Outputs and outcomes

Outputs and outcomes

LEI 12. How ESG incorporation has influenced portfolio composition

12.1. Indicate how your ESG incorporation strategies have influenced the composition of your portfolio(s) or investment universe.

Select which of these effects followed your ESG integration:

12.2. Additional information.[Optional]

The investment process can be simply described as first identifying good quality companies and placing on a Universe List and secondly remaining patient to buy shares in the company and place into client portfolios at the right entry point. In quality, we look for companies that generate cash, have high barriers to entry and management are predictable with what they do with the cash. As such sustainability is key and any risk factor that jeopardises the predictability of a business going forward needs to be taken seriously. Some companies will be rejected despite at first sight appearing to be of good enough quality. Once a company is placed on the Universe List it is ascribed a rating (1-3) which is partly driven by corporate governance of the company. A company with a 1 rating we need a lower rate of return to be purchased than a 3 rated company.

ESG integration takes two main forms when assessing/ buying a company and one when holding/selling a company:


1) As part of the research process we will assess ESG risk factors along with other forms of risk (e.g. business disruption) when forming an opinion on the sustainability and predictability of a business e.g. Nestle is a highly predictable business with a number of growth drivers but is it addressing the potential reputation risk from use of plastic packaging and the effect on its business if consumers start to increasingly move away from plastic wrapped goods. If the answer is No it would not be added to the Universe List.

2) The number of shares bought and the price paid (margin of safety) depends on the rating allocated to the company on the Universe List which in turn relates to the corporate governance of the business.


Once a company is held we will engage with management should any risk emerge that could affect the sustainability of the business. This can range from poor use of shareholders funds to addressing working conditions, data protection etc. We will additionally raise an issue with a company if one of our clients sends in an independent report suggesting a company is behaving inappropriately. This has been done a number of times where clients that use e.g. MSCI ESG, Hermes, GES etc have sent in concerns/ copies of reports. In the past we raised an issue with MSCI ESG about the classification of Lockheed Martin as a cluster munitions manufacturer. The information was incorrect and misleading, and as a result MSCI agreed to lighten the classification. Last year a report has been sent showing that Charter Communications scored poorly for carbon emissions. It was an outlier in a portfolio that scored very well for carbon foot printing. According to the report the MSCI ACWI average is 132 Tco2e/$m whereas the Veritas portfolio is 12.9. Despite this we were confused why Charter Communications scored low given they are in a low carbon producing industry and raised the issue with the company. It appears by not having a carbon committee and not reporting carbon emissions, the company attracts a low score (Comcast is classified as a ‘leader’ and in the same industry). Charter Communications is working on more energy efficient set top boxes and needs to fall in line with Carbon reporting. It's not a reason to sell the company but we have written formally to them.

LEI 13. Examples of ESG issues that affected your investment view / performance

13.1. Provide examples of ESG issues that affected your investment view and/or performance during the reporting year.

ESG factor and explanation

Alibaba Group (Information Technology) China

We looked at a number of Chinese technology companies, Tencent and Baidu made it on to the Universe List but Alibaba failed due to its corporate governance. In Alibaba, control is locked in the hands of a group of insiders known as the Alibaba Partnership. These are all managers in the Alibaba Group or related companies. The Partnership has the exclusive right to nominate candidates for a majority of the board seats. Furthermore, if the Partnership fails to obtain shareholder approval for its candidates, it will be entitled “in its sole discretion and without the need for any additional shareholder approval”, to appoint directors unilaterally, thus ensuring that its chosen directors always have a majority of board seats. Many public companies around the world, especially in emerging economies, have a large shareholder with a lock on control. Such controlling shareholders, however, often own a substantial portion of the equity capital that provides them with beneficial incentives. In the case of Alibaba, investors need to consider the relatively small stake held by the members of the controlling Alibaba Partnership.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

Alibaba was not approved for inclusion on the Universe List.

ESG factor and explanation

LG Chem Ltd (Materials) Korea 

The company is a Korean based company and a leading supplier of the lithium ion battery. It’s a beneficiary of the drive towards electric/ autonomous driving. Whilst the company fits many of the quality characteristics sort, and since 2006 has produced a comprehensive sustainability report, we cannot get comfortable with the fact that 60% of the worlds cobalt is still derived from the Democratic Republic of the Congo (DRC) where child labour is rife and working conditions poor. The company has recently signed a JV deal with Zhejiang Huayoo in China to ensure future supplies of cobalt. Zhejiang Huayoo is well known for its role in buying up much of the cobalt supply and refining back in China. This makes the ethical sourcing of the cobalt more difficult to police for anyone buying it. Whilst LG Chem has signed up to many initiatives to tackle the issues in DRC and working on reducing the amount of cobalt in its batteries, there remains reputational risk especially given the issue has spread from Cobalt to other materials used.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

LG Chem Ltd was not approved for inclusion on the Universe List.

13.2. Additional information.[Optional]