Cardano takes a Responsible Investment approach to investing across all of its portfolios and client mandates. Every investment decision is made on a risk-adjusted return basis. We view environmental, social and governmental risk and return drivers as a critical part in making decisions on risk-adjusted return.
While we factor in ESG factors into every investment decision that is made to some degree, we acknowledge that these factors may have more of a material impact on financial return in some circumstances and strategies than others. As such, we deliberately structure our process around decision making to ensure that we focus the most time on these more highly effected areas.
To assist in this process, all invested strategies are given a specific ESG rating based on Cardano's proprietary methodology, to help provide context to how ESG should be taken into account in buy / sell / hold decisions throughout the life-cycle of an investment.
Timing of when strategies are rated:
1. Prior to investment: investment proposals for all new investments tabled at the manager review committee (MRC) must contain a dedicated section setting out (i) the ESG rating; and (ii) a summary of the rationale used to get to that rating.
2. Post-Investment: (i) all strategies' ESG ratings are formally re-underwritten on an annual basis by the relevant coverage team; and (ii) ESG ratings are updated on an ad-hoc basis: coverage teams speak to all invested managers regularly as part of the overall monitoring process - this will include discussing ESG where relevant.
Our rating methodology is designed to allow quick triage to ensure the Coverage Teams focus resource and effort on engagement in those strategies that represent the highest risk. As such, High Focus strategies with low ESG Ratings are given the most attention and are periodically reviewed at the Manager Review Committee to check in on progress.
Where, either before investment or as part of our monitoring process ESG integration within the manager fails to meet the required standard such that it would affect the overall risk-return we would either pass on the relevant strategy or consider redeeming or re-sizing the exposure.
Each ESG Rating has three parts:
Part 1 | High or Low Focus
Strategies are designated either (i) High Focus (strategies where ESG factors are deemed to potentially materially impact financial risk return); and (ii) Low Focus (strategies where ESG factors are deemed to have less potential to materially impact financial risk return).
This is based on an internal methodology in order to seek to ensure consistency of approach.
Part 2 | Overall Rating (Strong, Good, Standard or Weak)
Strategies are assigned an overall rating.
The rating is calculating by aggregating scores from four specifically assessed categories: (i) People and policy; (ii) Process integration; (iii) Monitoring, Stewardship & Engagement; and (iv) Reporting.
Each category score carries with it certain weightings, to reflect areas we deem to be most appropriate in the assessment of ESG within the particular type of strategy.
Part 3 | Momentum Score (Up, Down, No Change)
Each strategy is assigned a momentum score to reflect whether coverage teams are seeing the manager make (or are implementing) changes to enhance their approach to ESG integration.
Note: our ESG rating methodology is constantly under review. We acknowledge that this is an extremely fast moving space and we are constantly looking to improve our methodology to help better assess ESG as part of our overall assessment of risk-return in decision making. We, therefore, expect to make changes to this methodology as our thinking progresses.
The above ratings are assigned by the investment coverage team with day-to-day responsibility for that investment. We feel this encourages accountability and fully integrates ESG thinking into our investment process.
The information on which ratings are based are as follows:
1. An ESG questionnaire which is circulated to managers annually, this questionnaire is tailored to reflect the differences in our core manager strategies (e.g. equity, fixed income, multi-asset, private equity etc.)
2. All information provided by managers (and which managers make available online)
3. Ad-hoc information gathered by coverage teams as part of the formal day-to-day investment monitoring (involving regular contact, calls and discussions with managers).
ESG is fully integrated within Cardano's manager research and investment process and is reflected in the 4 tier governance structure:
Tier 1 | Coverage Teams & Lead Analysts are responsible for the day-to-day ESG ratings, monitoring and engagement
Tier 2 | Manager Review Committee, Chaired by the Head of Manager Research and includes Senior Investment Managers and the Group CIO - has overall responsibility for investment decision making, buy & sell decisions. Coverage Teams will escalate ESG issues to this Committee for discussion. All new investment ESG Ratings are debated by this committee.
Tier 3 | ESG Steering Committee (Participants: Head of Clients, CIO, General Counsel, Chief Compliance Officer and members from the client team and investment team) - has overall responsibility for establishing and co-ordinating Cardano's ESG processes within the business to ensure integration and consistency of approach. This body will periodically review and lead on updating the ESG processes and procedures within the business.
Tier 4 | Group Management Board - has overall responsibility for Group policy