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Ninety One

PRI reporting framework 2020

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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%
99.9 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
0.1 %
Total actively managed listed equities 168%

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

 

​We have developed an internal framework for assessing the relevance of ESG integration through the varying stages of the investment process. This framework enables us to apply a consistent approach to integration analysis and allows our investment teams to develop their own unique approach to ESG. We have outlined below how we integrate ESG considerations into the investment processes of our main Equity investment teams.

4Factor

The investment framework follows an active bottom-up strategy which, we believe, marries the best from traditional financial analysis along with behavioural factors. Understanding ESG concerns is an important component of 4Factor’s bottom-up analysis as we believe it helps us gain a better understanding of a company’s strategy, one of the four key attributes of our investment philosophy.

On an ongoing basis we are working to enhance the integration of ESG considerations at various stages of the process. Arguably the most important stage of integration within the 4Factor investment process is in fundamental analysis; where many of the most subjective aspects of ESG understanding can be appraised and incorporated into the fundamental investment case. Each of our research notes includes a formal section that allows for discussion of ESG issues. Our external ESG research provider, MSCI, helps these discussions by providing us with products such as ESG ratings, controversy scores and business activities screens

Beyond the research and investment stages of the process, another area we feel is key to our ESG efforts is that of engagement; acting as responsible shareholders on behalf of our clients. The investment team initiates engagements based on their investment research and priorities. We also have a dedicated team of ESG professionals split between our offices in the UK and South Africa. The ESG team work closely with the investment team to provide a supporting engagement strategy which targets specific holdings and material ESG themes that are significant to the firm, the investment team, and our clients.

Quality

‘Quality’ can be described as an investment approach that assesses the qualitative attributes of a company such as management credibility, business strategy, governance standards, as well as quantifiable characteristics such as balance sheet stability and persistently high levels of profitability. We favour companies with exceptional financial strength and which have a leading market position in an industry that offers sustained growth potential.

Our rigorous research process enables us to understand the impact of the company on its various internal and external stakeholders, which inherently highlights issues of an ESG nature that can then be factored into the decision-making process.

We assess the ESG risks and opportunities that can affect the sustainability of a company’s business model; we assess the quality of accounting policies when considering a company’s financial model; and we assess governance issues such as risk management, board balance, audit, remuneration and shareholder rights, that can affect a management team’s ability to allocate capital in line with shareholders’ interests. We use third party ESG/IVA ratings, ESG Controversy Flags and Governance Ratings as appropriate to help with our analysis. Our assessment of these factors is reflected in the valuation we ascribe to a stock, and the risk/reward trade-off of a stock that determines inclusion in the portfolio and position sizing. Ninety One’s dedicated global ESG team provides additional support in terms of ESG integration, ESG research and engagement efforts.

Value

The Value investment team employs a disciplined investment process seeking to make long-term investments in cheap, out-of-favour companies with appropriate balance sheets. It is an inherent characteristic of value investing to look at any upside, including ESG considerations, which could benefit a company to bring it up from its current low valuation. Many times, this would involve some issue related to governance or management.

We use the ESG research available from various external providers to identify any material issues identified for a specific sector and/or company. We can then take a view to determine to what degree we agree with that research and also whether we have any additional concerns. Any material ESG issues identified will be incorporated into our final analysis, and any impact that these issues may have on valuation will be considered. These material issues will also be considered on an ongoing basis as we continue to monitor stocks which we currently own or are considering purchasing in the future. However, ESG issues themselves do not inform our screening process or portfolio construction.

Natural Resources

As leading active managers in a carbon-intensive sector, we are acutely aware of our responsibility around ESG and sustainability considerations. We believe that bad ESG practice in the natural resources sector clearly damages corporate performance and also the physical environment.

ESG is integrated throughout the investment process, from screening for investment ideas through to engagement with companies.

In the initial stage of the process, we screen for ideas based on a number of valuation, returns and ESG/Sustainability metrics.

In the fundamental analysis section of the process, we undertake deep analysis of the most material ESG issues, such as carbon emissions, water usage and safety. We also adjust the Weighted Average Cost of Capital (WACC) of the company under analysis based on the Natural Resources Sustainability score. The WACC is decreased for the top scorers and increased for the bottom scorers. In this way, companies with poor ESG performance will have reduced upside in the equity model.

Our engagement work with companies is often focussed on ESG issues. We believe that through systematic engagement with resources companies we can enable positive change.  We engage in two different ways. We meet our portfolio companies on a regular basis and use a systematic programme of engagement goals to ensure that progress can be measured and monitored. We also believe that there is strength in collaborating with other leading shareholders.

We believe that this combination of quantitative scoring, qualitative analysis and judgment based on deep knowledge of the companies under review, and systematic engagement can not only improve our investment performance but can also enable positive change in the sector.

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

Screening and integration

In short, the majority of our equity AUM falls into this category for the following reasons:

  1. We integrate ESG across all of our equity strategies
  2. We have a firm-wide controversial weapons exclusion policy, which excludes companies involved in the manufacture and production of anti-personnel landmines, cluster munitions and biological and chemical weapons.
  3. We manage two dedicated sustainability solutions that use screening methods. Our UK Sustainable Equity Strategy excludes the following sectors: Alcohol, gambling, tobacco, controversial weapons, adult entertainment and heavy extractive industries. Our Global Environment Strategy has a negative and positive screening element, but we’d also class this as a thematic fund and have included this under “all three strategies combined’.
  4. We also manage a number of bespoke segregated ‘ESG mandates’ for clients who have additional detailed ESG policies.

All three combined

Our Global Environment Strategy seeks to invest in companies which are considered to be the ‘winners’ from the transition to a lower-carbon economy and contributing to positive environmental change. The Strategy will favour companies operating in services, infrastructure, technologies and resources related to environmental sustainability. Companies which have revenues that would be significantly eroded by the carbon transition are excluded.


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 

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

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

02.3. Describe how you incentivise brokers.

Analysts vote brokers in a biannual review that determines research budget allocations.

02.4. Additional information. [Optional]

We use a number of data sources both internal and external sources, utilising both proprietary and market research within the broader house investment process. These include: MSCI ESG, Carbon Disclosure Project, ISS Proxy Exchange, Bloomberg and RepRisk.

We also use our own internal data whereby we have developed an internal ESG rating tool to assess companies where there is limited coverage by service providers. The output ratings are stored and available on our Portfolio ESG Profiler tool. Each assessment is accompanied by a report.


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

03.1. Indicate whether 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]

Our proxy voting decisions are circulated on a daily basis to the investment team heads and Investment Governance Committee.

Ninety One's ESG team engages daily with the relevant portfolio managers on proxy issues as well as other corporate actions and/or governance related matters.

All engagements are logged in house, and a quarterly review conducted. Of course, reviews are also conducted on a company by company basis as AGMs approach, themes emerge and as the business builds particular ESG views.

The ESG team save all the voting and engagement details in our internal research library (Tamale), making it easy for analysts to access the information. 


(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

Ninety One has an exclusion policy for manufacturers of cluster munitions, anti-personnel mines, chemical and biological weapons.

We recognise that some clients have strong positions on investing in particular sectors and/or individual companies based on broad social issues, and we are able to apply screening to prevent investment in these areas. We are able to exclude specific stocks or sectors, based on a set of business activities, in line with client requirements. These portfolios are managed following the same process as similar mandates without ethical considerations; specific exclusions are loaded on to our trade order and deal management system thinkFolio. This prevents any excluded stocks being purchased for the portfolio.

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

Most often any changes are client driven and if not, clients would be informed via fund reporting or regular investment report backs.


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]

We use a number of data sources, both internal and external, to support integration of ESG into the investment processes. The selection process and reviews of these service providers is managed by the ESG team and approved with the investment teams and the CIO office. The providers are evaluated for their research quality and its relevance to our integration processes. The team also considers other factors such as coverage of research across regions and asset classes, suitability for client’s mandates, and applicability for ESG products.


LEI 06. Processes to ensure fund criteria are not breached

06.1. Indicate which processes your organisation uses to ensure fund criteria are not breached.

          For our dedicated sustainability solutions we have sustainable investment advisory committee which is responsible for ensuring that the impact and sustainability mandate is met.
        

06.2. If breaches of fund screening criteria are identified, describe the process followed to correct those breaches.

Automated restriction monitoring is a key part of the risk control framework and is monitored Ninety One’s Investment Guideline Management (IGM) whose members are experienced operations staff (therefore they are independent of the investment teams). Portfolio guidelines and clients’ investment restrictions (for discretionary mandates) are recorded by IGM on the trade order management system, thinkFolio. ThinkFolio allows portfolio investment restrictions, where possible, to be ‘coded’ into the system and aims to ensure that, before any deals are completed, portfolio limits are identified and breaches avoided. Investment restrictions are checked automatically both pre and post trade execution. 

Pre-trade messages warn portfolio managers of potential breaches. According to the nature of the rule that has been coded into thinkFolio (e.g. absolute prohibition of a particular security, or limit as to how much of a security may be held in relation to total portfolio market value), the portfolio manager is then either prevented from taking the transaction any further, or asked to annotate a reason for proceeding with the trade. Post-trade reports are monitored daily by IGM.

Any breaches that do occur are forwarded to the Compliance and Operational Risk teams for review and a decision on the action required to rectify and also for inclusion in the central breach register. The IGM, Compliance and Operational Risk teams liaise closely to ensure any breaches and errors are resolved as soon as possible. They will also liaise with relevant key individuals from other teams (e.g. client relationship individuals). It is Ninety One’s policy to ensure that clients are not disadvantaged as a direct result of an error or omission on Ninety One’s part.

Our investment teams also attend Structured Report Back which is a quarterly forum whereby senior management (including the Co-Chief Executive Officers, Co-Chief Investment Officers and Head of Investment Risk & Performance) meet with the investment teams to discuss and challenge on the investment process, focusing on performance, portfolio construction, investment philosophy and process.

06.3. Additional information. [Optional]


(B) Implementation: Thematic

LEI 07. Types of sustainability thematic funds/mandates

07.1. Indicate the type of sustainability thematic funds or mandates your organisation manages.

07.2. Describe your organisation’s processes relating to sustainability themed funds. [Optional]

Global Environment

The Global Environment Strategy invests in companies driving decarbonisation and that are helping the world’s economy transition to a more sustainable, lower emissions model. This global equity strategy invests in a focused portfolio of businesses across many different industries that are key enablers of the energy transition.

Key features:

  • Gives investors exposure to an area of long-term structural growth, and offers the potential to offset carbon risk elsewhere in a portfolio.
  • Makes a positive environmental impact by investing in businesses that are reducing the world’s carbon footprint.
  • Uses proprietary models to comprehensively quantify the carbon emissions saved by decarbonisation companies versus traditional businesses.
  • Focuses on companies with three key attributes: structural growth potential, sustainable returns and competitive advantages.

(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]

Our internal ESG integration framework enables us to apply a consistent approach to integration analysis, and allows our investment teams to develop their own unique approach to ESG.

  1. Universe screening: We use a number of external ESG screening tools from a third party provider to help us define the investment universe, where appropriate. These tools provide the option to include specific ESG options for strategies that invest in a restricted universe.
  2. Fundamental analysis: Investment teams more frequently consider ESG issues at this stage, by using a combination of external ESG ratings and controversy assessments, as well as internally developed ESG toolkits.Active ownership:
  3. Active ownership: including engagement and proxy voting (where relevant), is key to our investment process. It is a powerful tool, particularly for long-term holdings. Outcomes are factored into the investment research.

  4. Portfolio construction and monitoring: This stage depends on how the investment team implement risk management and monitor for ESG developments. Some strategies may limit exposure to poorly rated companies whilst others may consider ESG risks relative to a benchmark.


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.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

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

          In some investment teams, there is a systematic process in place for using and storing ESG ratings and other information.
        

09.6. Additional information. [Optional]

The implementation of ESG is monitored in a number of ways:

Integration programme

We have developed an integration programme whereby the ESG team work closely with each of the investment team heads to establish outcomes and goals for development. The programme is based around six important topics which are thought to be significantly beneficial to improving awareness and understanding of ESG issues. The six focus areas are:

  • Leadership and team awareness
  • Training and education
  • Effective use of research and data
  • Research efforts
  • Participation in external initiatives
  • Active ownership responsibilities

Best practice framework

The ESG team have developed a best practice framework for ESG integration. An assessment in line with this framework allows us to understand how the investment teams are currently positioned, the quality and consistency of integration, and any gaps that need to be addressed. The aim of this approach is to understand the stages of the investment process that need to improve, allowing teams to focus on areas that will add the most value.

Leadership oversight

Alongside the ESG team, the co-Chief Investment Officers also keep a close check on progress on integration.The Investment Governance Committee (IGC) meets quarterly to review activities related to stewardship.


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.

          Assessment of ESG risk and footprint.
        

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

This varies by investment team and strategy. For example, the portfolio manager/analyst understanding of the companies' governance, including the management of material environmental and social risks, may lead to an adjustment of the discount rate applied for valuation purposes. Where the E, S or G financial /earnings impact is known, or can reasonably be estimated, the analyst will consider the impact on the valuation of the company. Where there is no or limited information available to help the consideration and implications of company, there is a materiality framework available to focus research.

10.6. Additional information. [OPTIONAL]


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