This report shows public data only. Is this your organisation? If so, login here to view your full report.

Solaris Investment Management Limited

PRI reporting framework 2020

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 which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities; and the breakdown of your actively managed listed equities by strategy or combination of strategies.

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
100 %
Total actively managed listed equities 100.5%

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

Our primary reason for choosing screening and integration strategies in relation to ESG factors is that it complements our process and is not seen as an add on, but simply part of our every day process.

Solaris utilises material ESG factors in the same way that our analysts will utilise any material information relevant to a company's operations and therefore valuation.

In the same way that certain factors may render a stock non-investment grade, so too may ESG factors.  In some instances we may screen stocks from our investable universe at our initial risk screening stage due to ESG impacts.

As we treat ESG factors as additional pieces of a company's profile, it follows that our analysts also consider ESG factors within our Qualitative assessment stage. 

The evaluation of ESG issues is undertaken by the analyst responsible for the company. Analyst empowerment is an important feature of the Solaris investment process. Every company in the S&P/ASX200 is covered by a dedicated analyst and the decision to include or exclude that company in Solaris’ investment portfolios is predominantly the decision of that analyst. ESG evaluation forms part of the analysts’ overall assessment of that company. It is important to emphasize that this is not a new aspect of the analyst role. All current analysts have, in their past, had to make ESG evaluations. Solaris also employ an ESG Analyst who provides the analysts with additional information and research capacity where required.

ESG factors are considered at two stages within the Solaris Investment process:

  • The initial risk screening stage where Liquidity, Financial, Geo-political, ESG and Litigation risks are assessed. Stocks that fail to pass any of these risk screens are considered non-investment grade and are not included in the Solaris universe.
  • Qualitative assessment stage – The criteria examined by our analysts include:
    1. Management
    2. Business Model
    3. ESG factors
    4. Balance Sheet
    5. Cash Flow profile
    6. Trend in Return on Equity

The conclusions drawn by analysts from their qualitative assessment feeds into the appropriate rating applied to each company’s valuation. For the most commonly used valuation technique: DCF, this involves adjusting the beta to incorporate positive or negative factors discovered in the qualitative assessment. Accordingly, conclusions drawn from the assessment of a company’s ESG activities may affect that company’s rating and its valuation.

The main portfolio construction technique that Solaris use is based on expected return. Simply put, if a company has a high expected return that company will, prima facie, be included in the portfolio and equally a low expected return (or negative excess return) will see a company not held in the Solaris portfolios. It follows, therefore, that a poor ESG evaluation may result in the company’s valuation being marked down and reducing the company’s chances of being included in a Solaris portfolio.  Conversely a positive ESG evaluation may result in the company’s valuation being upgraded and increase its chances of being included in the portfolio.

In addition Solaris manages three negatively screened portfolios under Individual Mandate agreements (IMAs) where the clients require certain stocks that derive a percentage of their revenues from certain activities to be excluded from consideration for investment.  In practicality, these exclusions are considered in the Initial Risk Screening stage and the stocks are excluded from the client's investable universe.

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


LEI 02. Type of ESG information used in investment decision (Private)


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


(A) Implementation: Screening

LEI 04. Types of screening applied

04.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

Solaris commenced management of one negatively screened client portfolio during 2016, another negatively screened portfolio in 2017 and another in 2019.  Those mandates require that stocks are screened based on products, activities and sectors.

All portfolios participate in the Solaris process where active discussion is held around country / geopolitical risks.  Where Solaris feels that these risks are too great we may choose to avoid (or screen out) companies with material exposure to those countries.  Similarly companies may exhibit behaviours that are assessed as untenable in terms of investment risk.  For example (this list is not exhaustive):

  • legacy issues relating to pollution or remediation issues
  • inappropriate labour use within the supply chain.
  • insufficient governance controls or evidence of poor governance leading to other concerns within the company - eg safety failures, exposure to corrupt practices

Companies are assessed on a case by case basis and to date we have excluded a number of stocks on the basis of these concerns.

 

Screened by

Description

Companies that operate in countries or geographic regions that exhibit greater levels of transparency and good governance are typically exposed to less operational risk.

Companies that exhibit leading corporate governance procedures typically have exhibited better risk management strategies and have demonstrated a greater understanding of the challenges and opportunities facing the company. 

These companies are typically afforded a governance premium within our valuation assessments.

04.2. Describe how you notify clients and/or beneficiaries when changes are made to your screening criteria.

The Solaris screening criteria was formulated as part of our Initial Risk Screening Stage which has been in place for over 16 years.  The Initial Risk Screening Stage (of which the ESG screen forms part) is under constant review as an integral part of our investment process.

It is important to Solaris that this remains a fluid process as we review and reflect on the relevance of screens in a rapidly changing world.  This process is an internal one and as such has not been communicated to the public to date.

The screening criteria for the negatively screened portfolios is determined by the clients' Individual Mandate Agreements (IMAs).  The data for the negatively screened portfolio is reviewed and reflected in the database at least quarterly.  A dialogue is required to occur between Solaris management and the clients' representatives to make any alterations to the IMAs.


LEI 05. Processes to ensure screening is based on robust analysis

05.1. Indicate which processes your organisation uses to ensure ESG screening is based on robust analysis.

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

05.3. Indicate how frequently third party ESG ratings are updated for screening purposes.

05.4. Indicate how frequently you review internal research that builds your ESG screens.

05.5. Additional information. [Optional]


LEI 06. Processes to ensure fund criteria are not breached (Private)


(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the proportion of actively managed listed equity portfolios where E, S and G factors are systematically researched as part of your investment analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]


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 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.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

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 (Private)


Top