At SBIFMPL, we integrate ESG factors into our research and investment decision making process. ESG research focuses on the critical environmental, social and governance factors which can have a material impact on the long-term sustainable performance of the company. We firmly believe companies with improved management of ESG practices, can optimise their business models thereby increasing productivity, creating a distinct competitive advantage and increasing consumers’ brand trust to deliver sustainable shareholder value. It also presents an avenue to effectively manage risks as well as take advantage of opportunities. This will not only unlock greater value for the company and its shareholders, but also contribute to the desirable social and environmental outcomes we believe in.
We have a fundamental, bottom-up investment framework to evaluate companies on ESG for its equity investments. ESG analysis is a mandatory component of our equity initiation reports. The first step involves a thorough financial analysis through our coverage. This is followed by an in-depth ESG analysis to determine final investment recommendations. We have a two-pronged approach for integrating ESG considerations in our equity portfolio:
Internal Framework for ESG integration: We have formulated an internal framework to score the ESG performance of every company in our coverage. Our ESG analysis is based on a Best-in-Class approach. The methodology consists of scoring companies on their ESG practices on over 40 parameters related to a firm’s disclosures on environmental, social and governance initiatives and aims at assessing its compliance as well as pro-active readiness for ESG issues on a scale of 1-100. The scores are assigned based on data available through primary and secondary sources. Material issues like carbon emissions, air emissions, waste management, water consumption, afforestation, effluent management and energy efficiency etc. are covered under the environment segment. The social aspect is assessed on the disclosures related to their relations with community, and workforce, especially with reference to diversity, wage, health and safety issues. We also have a firm belief that good governance is the key to a sustainable organisation, and therefore, we evaluate the board composition, accounting and audit quality and disclosures, anti-corruption policies etc. to assess their governance practices. Though overall ESG integration is the “best in class approach”, we also apply an exclusion methodology for certain specific funds. The framework is still evolving, and we endeavour to ensure robustness of our ESG assessment.
External Agency rating on ESG performance: We have partnered with both domestic and international service providers that rate companies on the basis of their ESG risk profiles and management initiatives. Risk profiles are determined on the basis of their business and geographic locations. The rating takes into account all environmental, social and governance issues material to the company. This provides us in depth data to assess a company’s performance year-on-year and across its sectoral peer groups.
Engagement and voting at listed companies have been core RI activities at SBIFMPL. As an institutional investor that takes its fiduciary duty and stewardship obligations seriously, SBIFMPL is an active owner and considers the effective management and board oversight of ESG issues to be integral to long-term performance. SBIFMPL monitors investee assets and actively encourages good corporate governance practices and responsible corporate behaviour.
The investment team monitors and engages with the investee companies on ESG matters. Engagement can take many forms, such as sending letters to individual investee companies, participating in collaborative engagements or one-to-one meetings with the investee companies’ management team.
The aims of individual engagements can also vary, including for example:
Stewardship engagement to monitor assets and ensure appropriate ESG standards are being applied.
Relationship engagement to ensure that SBIFMPL develops a strong relationship with management, as a long-term investor.
Active engagement to encourage change in order to see material value enhancement or ESG risk reduction. Some of the issues that we focus during such dialogues are:
- Improvement in ESG standards and disclosures
- Importance of sustainability initiatives and transparency, with relevance to their business
- Peer comparison and global/national positioning with respect to sectors
- Evolving regulatory frameworks with an increased focus towards ESG
SBIFMPL undertakes all the above forms of engagement on a continuous basis and as appropriate. The engagements may be proactive or reactive. Engagements may be event driven or undertaken in response to specific opportunities such as collaborative initiatives led by other investors. SBIFMPL also prepares and provides compendiums of relevant global as well as domestic best practices to encourage learning and knowledge sharing.
Engagement priorities are determined by the investment team considering our stakes in the companies as well as their weights in various benchmark indices. For example, the engagement is much more intense with companies where the cumulative shareholdings of portfolios managed by SBIFMPL is above 3% of the company’s equity.
At SBIFMPL, we consider shareholder voting to be an important shareholder right and a valuable tool in the engagement process and endeavour to vote on all board resolutions of investee companies which are critical for protecting and enhancing the investor’s interests. While we use proxy voting advisory services from reputed service providers to help analyse company proxy materials and statements, all votes are confirmed in house by the analyst team, in discussion with the portfolio manager/s. We aim to vote in an informed and pragmatic manner, taking into consideration a company’s unique circumstances. We take into consideration any additional information we may receive from the company before making a final decision.
Public Policy & Market-wide Initiatives
At SBIFMPL, we seek to influence and address thematic, sector and market related issues that could impact the performance of its investments. We actively engage with the regulators and other stakeholders on policy advocacy matters. We also actively contribute to consultations and participate in industry debates on these topics. We also participate in various forums regarding our experience of ESG integration and the roadmap ahead as a means to share knowledge as well as create awareness.