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Prosperity Capital Management

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 200%

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

Prosperity Capital Management seeks to consider all factors, including ESG issues, into its investment analysis and investment management. Within reason we employ all available methods to build a holistic and detailed view of the companies within our investment universe.

Screening

Negative: Prosperity excludes cluster munitions companies and those that are on relevant sanctions lists.

Positive: Prosperity believes that the quality of management is very variable in our investment universe and that this qualitative metric has a very significant impact on shareholder value. This is true anywhere, but it is our view that the variance and impact of management quality is greater in Russia than in many other markets. As a result, Prosperity places a considerable emphasis and importance on meetings with company management and core shareholders throughout the investment process in order to evaluate their quality. As such, Prosperity positively screens on corporate governance quality and E and S factors.

Norms-based: Prosperity conducts peer analysis of the companies in our investment universe and portfolios against equivalent and leading businesses around the world. We engage in such analysis not only to identify the strengths and weakness of our portfolio companies and of the companies in the broader investment universe, but also to assess the opportunities available to them to improve their operations and businesses – which we actively promote through our engagement with stakeholders.

Integration

Prosperity specifically includes the consideration of ESG factors, alongside other factors, to develop a holistic and detailed understanding of the businesses in our investment universe.

PCM believes that ESG monitoring, engagements and improvements reduce respective investment risks and provide for better returns. PCM also believes that good corporate governance, high environmental standards, responsible social policies and respective adequate risk-management are indicative of efficient and sustainable management. And, in the contrary, cases or risks of governance abuses, environmental or social disregard are signals of inefficient and non-sustainable management and should be taken into consideration during investment process and as a subject for engagements.

Thus, in particular, our investment decisions take into account governance factors, and our financial models include, when applicable, material effects of any industrial accidents/downtimes including staff costs, current and expected environmental regulations, environmental fines, environmental capital expenditure, social costs related to local communities etc.

 

 

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

Prosperity’s investment decisions are underpinned by highly-detailed, proprietary investment analysis conducted by the Moscow-based sector-specialist analysts that form the Prosperity investment advisory team. Prosperity seeks to develop a thorough and robust understanding of the businesses in our investment universe and portfolios. ESG considerations are just one factor of far broader ranging investment analysis criteria. In the consideration of ESG factors, the various incorporation strategies detailed previously are blended to produce a holistic and compressive understanding of the company in question's operations and activities. No implementation strategy carries a higher weight than the other by rote; instead our approach is tailored to the individual company and prevailing situation in a dynamic fashion.


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.

02.4. Additional information. [Optional]

Prosperity seeks management teams with a sound understanding of the business and the competitive environment in which they operate, with a clear focus and strategy for the successful execution of the company’s development plans. It is also considered important that the management and their incentive structures are strongly aligned with shareholders’ interests.

Triangulation (i.e. speaking with a company’s external stakeholders, such as suppliers, distributors, competitors, etc.) is considered an important part of the process, allowing Prosperity to build strong convictions in our views and to take significantly contrarian stances to the general market and sell-side analysts with considered and monitored comfort.

We regularly meet with management (members of Prosperity’s investment team conduct over 500 company meetings and engagements each year), appoint Independent Directors and monitor external data on Bloomberg, etc. to follow the development of financial and ESG related factors. We monitor 100% of corporate actions. As to ’E’ and ’S’ criteria, we have started to monitor certain data from company's annual reports, websites etc. in relation to the top-50 positions in our portfolio. Where there is no such disclosure, we engage with the companies regading insufficient dosclosure issue.


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]

Prosperity Capital Management's active and pro-active approach is an integral part of the investment function. Out of the ten strong Prosperity investment team members, two are devoted to Corporate Governance affairs, including, but not limited to engagement and voting activities. The Corporate Governance members of the investment team do not operate in isolation, however, and all such actions are considered as part of the investment process, which is operated in a collegial and collective manner with all investment team members participating in all decisions.


(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

With the exception of cluster munitions and relevant sanctioned entities, Prosperity Capital Management does not seek to exclude any potential investment. The core belief of Prosperity is that positive results for environmental, social and governance work comes from active involvement in companies rather than from exclusion of certain investments.

Broadly speaking, we seek to invest into fundamentally sound and well-managed businesses. In this way, those companies that have poor corporate governance practices tend to be unattractive.

As a value investor with an active and pro-active investment approach, it should however be noted that such decisions are made on case-by-case basis with many influencing factors, not least the price and the ability to engage with the owners, management, shareholders and other stakeholders to promote positive changes in a business.

Also, we have formalised the incorporation of other non-financial data in our investment process, including the monitoring of carbon-related matters and the reporting thereof. Where relevant, we will also actively seek to engage with companies on these issues.

At the same time, generally, PCM does not include in its investment universe companies with poor corporate governance, environmental and social records.

Screened by

Description

Prosperity believes that the quality of management is very variable in our investment universe and that this qualitative metric has a very significant impact on shareholder value. This is true anywhere, but it is our view that the variance and impact of management quality is greater in Russia than in many other markets. As a result, Prosperity places a considerable emphasis and importance on meetings with company’s management and core shareholders throughout the investment process in order to evaluate their quality.

The rapid rate of change in Russia also necessitates constant monitoring, as the market for corporate control is quite active and both core shareholders and management may change. These changes may sometimes work to dramatically increase the efficiency of a company and its shareholder value. Our long-standing participation in the market allows us to often form a well-researched view of incoming shareholders and management based on their respective previous track records. It also gives us the opportunity to efficiently reach the management to discuss strategy and plans for operational improvements.

 

Screened by

          Where appropriate, Prosperity employs a proprietary benchmarking analysis against global industry peers to ascertain global industry best practices as part of our investment process.
        

Description

Where appropriate, Prosperity employs a proprietary benchmarking analysis against global industry peers to ascertain global industry best practices to seek to identify areas of strength and of opportunity for our portfolio companies. Where we see opportunities for improvement for our portfolio companies, we will actively engage with them to demonstrate and discuss those, promoting positive changes and seeking to add value over time.

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

Prosperity's screening criteria are an integrated part of the investment process. As such, they are reviewed and evolved on an ongoing basis, as we continue to learn from our decisions and to seek to ever-enhance our processes. At the very least, a formal review is conducted once per annum.

Where significant changes are made to our screening criteria, which is not anticipated, Prosperity would communicate these to the relevant stakeholders, with reverence and consideration to the due process and our general communication approach.


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.

          Prosperity's investment team, comprised of sector-specialist analysts, works in a collaborative fashion before seeking to reach a consensus agreement on a company.
        

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.

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

05.5. Additional information. [Optional]

Prosperity believes that accessing high-quality management is extremely important in achieving investment success in Russia and the FSU. There are substantial opportunities in these dynamic and quickly evolving markets and it is Prosperity’s view that strong and capable management teams are most able to benefit from these characteristics, whilst also minimising the risk of corporate governance malfeasance and breaches.

As such, Prosperity places considerable emphasis and importance on meetings with the company’s management, executives, majority shareholders and other stakeholders throughout the investment consideration, inception, monitoring and exit process.

Triangulation (i.e. speaking with company’s external stakeholders, such as suppliers, distributors, competitors, etc.) is considered an important part of the process, allowing Prosperity – in conjunction with our considerable experience of investing in Russia and the FSU since 1996 and our long historical knowledge of many companies – to build strong convictions in our views and to take significantly contrarian stances to the general market and sell-side analysts with considered and monitored comfort.

Members of Prosperity’s investment team conduct over 500 company meetings and engagements each year. It is considered that on average:

65% of such meetings take place at Prosperity’s or the respective company’s offices
20% “on-site”
10% at conferences
5% by tele/videophone.

Access to senior corporate personnel and management is generally considered to be very good in Russia and the Former Soviet Union and provides us with the opportunity to develop a robust understanding of the company and its practices, in conjunction with other investment research work.


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.

          Prosperity's investment team, comprised of sector-specialist analysts, works in a collaborative fashion before seeking to reach a consensus agreement on a company.
        

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

The Group Compliance Officer conducts monitoring exercises in order to ascertain that the Company adheres to rules, regulation and internal policies. If a breach is discovered in the investment process, then this would immediately be escalated to the Risk Committee. The Committee will discuss the matter with all relevant stakeholders and ensure that the breach is rectified, whilst also considering additional enhancements to Prosperity's processes.

06.3. Additional information. [Optional]


(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]

Prosperity Capital Management seeks to consider all factors, including ESG issues, in its investment analysis and investment management. We seek to employ all available methods of doing so to build a holistic and detailed view of the companies within our investment universe.

We regularly meet with the management, appoint Independent Directors and monitor external data on Bloomberg, etc. to follow the development of financial and ESG related factors. We cover 100% of portfolio with ’G’ analysis. We are currently expanding our ’E’ and ’S’ analysis to the firm’s top-50 positions, which is around 90% of our portfolios. Where there is no such in a company’s annual report, website etc., we engage respective company to find relevant data and regarding insufficient disclosure issue. In 2019, "E" and "S" monitoring and engagements covered 63 % of our portfolio.


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.

          Prosperity's investment team, comprised of sector-specialist analysts, works in a collaborative fashion before seeking to reach a consensus agreement on a company.
        

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

09.4. 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.

          Prosperity's investment team, comprised of sector-specialist analysts, works in a collaborative fashion before seeking to reach a consensus agreement on a company.
        

09.6. Additional information. [Optional]

Prosperity Capital Management seeks to consider all factors, including ESG issues, into its investment analysis and investment management. We seek to employ all available methods of doing so to build a holistic and detailed view of the companies within our investment universe.

Our active ownership approach can be expressed in three ways. We monitor ESG factors (incluging 100 % of corporate actions) and engage with the corporate management and core shareholders of the business to discuss issues of corporate governance, corporate finance and "E" and "S" matters, and realize our corporate rights. Another form is where good corporate governance practices have been or are at risk of being breached. In such cases, we take action to resolve a potential conflict or to minimise the damage where a conflict has already arisen. This activity can take many forms from negotiations, appeals to the regulatory authorities or, in some cases, legal action. The third avenue of our active approach is working with the government, regulators and legislators to improve the overall investment climate, including in relation to ESG issues.

 


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


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