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Somerset Capital Management LLP

PRI reporting framework 2020

You are in Direct - Listed Equity Incorporation » ESG incorporation in actively managed listed equities » Implementation processes

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%

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

The cornerstone of our research process is a risk framework centered around 4 key stock specific risks, against which we assess all prospective and existing investments: Business Risk, Financial Risk, Corporate Governance Risk, Valuation Risk. It is by ensuring that our investments are not excessively exposed to these four risks collectively that we are able to get comfortable with their suitability for our portfolios. Corporate governance in emerging markets has such an explicit bearing on stock price performance that it is a mature and standalone category of analysis in our research process. 

After an extensive period of study we concluded that the following three sustainability factors encompass many of the other non-financial factors that can have an equally material impact on core business profitability and long-term investment returns: 

 The environmental impact of production
 The treatment of human labour
 Product responsibility

We consider these factors components of Business Risk on the basis that they can have a material impact on underlying business profitability from a loss of sales, financial censure or reputation. These factors, and particularly their sub-components, are relevant to companies in varying degrees (e.g. emissions are more of a concern for a chemicals manufacturer than a retail bank) but at least one of these factors is applicable to every company in our universe. We are also able to demonstrate how a deterioration in each of these factors can have a material impact on a company’s profitability and share price performance. We do not expect these factors to encompass all relevant social and environmental issues. We do however think that they provide a more refined framework than the more widely adopted but looser ‘ESG’ perspective.

As components of Business Risk, the environmental impact of production, the treatment of human labour and product responsibility are assessed as part of our core due diligence on companies. Findings are recorded in our initiation notes and in annual updates thereafter. As with any new piece of information, assessing materiality is essential. The team are required to make an explicit assessment of the materiality (low, medium or high) of each of the three sustainability factors when conducting due diligence on a company. If a risk is considered elevated, further information is sought in the same manner as other potential threats to core business profitability. If a sustainability factor is thought to pose an intolerably high threat to core profitability, the company in question would be discarded. For less extreme cases, the sustainability analysis may impact the future rates of growth in demand, operating or capital costs assumed in our financial modelling. A key challenge is designing methods to elicit valuable information from companies beyond their statutory CSR reports or prepared ESG responses. We have developed a bank of questions that are continually field tested and refined by our investment team to help uncover valuable information over boilerplate answers.

Sustainability analysis training, the evolution of our process and the incorporation of ESG principles into our investment activities is overseen by our Partner, Anthony Linehan, with the support of the other senior members of our investment team. However, by design, the learning process is iterative and requires committed contribution from the wider investment team using real world experiences. 

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)


(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]

We have embedded analysis of environmental and social factors into the assessment of core BUSINESS RISK for each stock under consideration for our portfolios. 

This is addition to GOVERNANCE RISK that has been a core part of our approach to investing in Emerging Markets for many years.   

It is up to the writing analyst to explicit consider materiality of these factors to BUSINESS RISK and to assess tangible impacts (financial) of the risk deteriorating.  

 

 


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.

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

09.6. Additional information. [Optional]

The ESG work is presented as an integral part of our individual research notes.   

Our interactions with companies on ESG matters is recorded in our bespoke ESG database, as are our formal engagements with companies on matters we deem highly material and posing a high risk to core BUSINESS RISK.  

We also conduct an extensive annual sustainability review of holdings in the portfolio.  Each analyst has to update portfolio managers with the ESG risk in every stock in the fund under their coverage.  


LEI 10. Aspects of analysis ESG information is integrated into (Private)


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