Vision Super's equity managers assess and consider a range of certain ESG factors with respect to integration and screening as part of their investment process as these issues can impact the value of underlying companies/issuers and are generally long-term in nature from a risk / return perspective. Our managers believe that good governance is essential to ensuring effective responsible investing. What they mean by that on the other hand varies widely.
Sands Capital who are mandated to menage our emerging markets portfolio view engagement as a valuable tool to better understand management's long-term strategic vision and discuss how they manage ESG risks and opportunities, among other issues. They meet frequently with the management teams of portfolio companies, and when merited, they proactively express their views regarding business strategy, governance, financial reporting, executive compensation, and other stakeholder considerations that are relevant to our investment case. Sands capital may also seek commitments for improved disclosure of actual policy changes and reserve the options to sell their shares if management is unable to address their concerns, which could reduce their conviction in the company's fit with their investment criteria.
Sands Capital engages with businesses to advance the following primary objectives: (1) to inform their investment cases, enabling them to build conviction in great businesses and add value for their clients; (2) to exchange perspectives on matters that are relevant to the interests of long-term shareholders; and (3) to discuss ballot proposals and inform our proxy voting decisions.
In voting proxies, Sands Capital is neither an activist in corporate governance nor an automatic supporter of management. One of the primary factors considered when determining whether to invest in a particular company is the quality and depth of its management. Consequently, the firm believes management’s recommendation on any issue should be given substantial weight in determining how proxy issues are resolved.
SSgA who manage our global passive low carbon mandate, includes an ESG signal in their Active Quantitative Equity (AQE) as part of their stock selection. The investment process consists of (1) Research, (2) Stock Selection, (3) Portfolio Construction, and (4) Portfolio Review and Risk Management. As such, ESG is a component in the assessment of quality, and quality is a component of the expected return of each eligible stock (whether held or not held in the portfolio). Given the number of additional themes considered, i.e. the model considers ESG alongside other expected return (alpha) drivers, it would be typical for a stock to be bought/sold only due to ESG considerations.
However, there are occasional instances where ESG-related developments may lead to individual security exposures being trimmed, sold completely, or increased. For example, any news related to financial scandal, environmental or social liabilities, or accounting discrepancies, would lead AQE to consider selling and/or halting additional purchase of affected securities due to ESG-triggered changes which may impact expected returns and risk. Given the large number of stocks SSgA evaluates as potential opportunities, such instances are periodic and handled within their investment process.
The Australian low carbon passive mandate manged through IFM is constructed through a process that produces a bias to low carbon stock selection with minimal tracking error.
Managers are also actively engaged with companies in order to maximize long-term capitalization and shareholder returns with a good proportion of these managers accepting and adopting specific Stewardship Codes.
Fund managers are generally looking to have a better understanding of governance related issues and this is best evaluated through their research and one on one company meetings.
Our voting guidelines address common issues related to boards of directors, auditors, equity-based compensation plans and shareholder rights, among other factors. When we have concerns about a company in relation to a particular resolution, we may choose not to support the proposal. We do not have a history of frequently proposing shareholder resolutions, but we may opt to support proposals from other investors. To fulfill our stewardship responsibilities, we have engaged ACSI who uses CGI Glass Lewis, an independent proxy voting service provider, to assist in voting proxies internationally, as previously mentioned.
A company’s approach to ESG issues is often a proxy for its quality in other areas, for example, franchise quality is impacted by operational efficiency and the environmental efficiency provided by its products. ESG issues are identified through a bottom-up company research process.
We also specifically ask our managers to include in such evaluations a reasonable estimate of the impact of phasing out fossil fuel usage consistent with limiting global warming to no more than 1.5 degrees centigrade above pre-industrial global mean temperature.
Amundi who manage our passive and inflation linked bond portfolios has developed a proprietary ESG analysis and rating methodology which is applicable to all asset classes. Amundi ESG Rating scale is based on a 7 level alphanumeric scale, ranging from A to G, where A is the best rating and G is the worst rating. The ESG Ratings measure the ESG performance of a company, e.g. the ability of a company to anticipate and manage the E, S and G risks and opportunities inherent to its industry and to its individual situation. It also assess the ability of the management team to handle severe controversies. Their rating is a relative rating, reflecting the ESG performance of a company compared to the average performance of its industry.
Furthermore,depending on the investment strategy and the level of ESG integration of the portfolio, the portfolio manager can focus on:
- The overall ESG rating of the issuer. For example, Portfolio Managers for Responsible Investment portfolios take both financial analysis and ESG analysis of an issuer into consideration before making a buy or sell decision. In most cases, this translates into a Financial/ESG factors matrix for decision-making. The lower the ESG rating, the higher weighting in the decision-making of the Portfolio Managers.
- The rating of specific criteria. For example, in a Green bond strategy Amundi focus on the Environmental and Energy Transition sub-criteria in order to assess the issuer capability to embrace the Energy transition theme.