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Coronation Fund Managers

PRI reporting framework 2020

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Investment process

HF 06. ESG data, research and other resources used

Please describe the ESG resources and tools used in your investment decision-making process.
Category of ESG
Reason for use
          We source information from all publicly available sources including, but not limited to, the annual reports the sustainability reports, CDP (formerly the Carbon Disclosure Project) submissions, articles published in various news sources; third party research conducted by sell side brokers and market specialists; etc We also research outside the conventional channels. We spend a lot of time talking to customers, suppliers, regulators, competitors (local and global), ex management etc. The team reads widely, engages with relevant industry executives, research organisations and analyst to understand the risks of companies we analyse. We engage companies directly about disclosure and risk mitigation strategies etc We  subscribe to MSCI ESG ratings module for access to their independent ESG reports on companies for consideration by the analyst covering each respective stock. We are also able to upload portfolios and provided summary reports that detail ESG quality scores, ESG ratings as well as exposure to carbon intensive companies (carbon risk). We don’t place much value on ESG ratings, we review to ensure we have considered all risks and opportunities. 

Measuring footprint is useful but is limited in what it can tell you about a portfolio’s exposure to carbon risks.  We view this as a blunt tool which does not provide appropriate insight into risks and challenges. More in-depth analysis and context is essential to inform actual decision making. Our policy is not to divest, rather to engage and drive the change we’d like to see.
        
          Third-party research accounts for approximately 10% of research material utilized. We use broker research in instances where we would like to get a broad understanding of a specific industry or sector and to perform channel checks in the different countries and industries.  Where we have commissioned bespoke research, it is subject to a period of exclusivity to Coronation.
        
          
        
          
        
Select and explain how these resources are incorporated into the investment and risk management process?
Category of ESG
Investment/risk management process
Additional text (optional)
ESG data (proprietary, 3rd party, etc.)
          There is a spectrum of opinion concerning materiality of ESG issues. These differences can be magnified with cultural or regional differences. Frameworks such as the materiality maps provided by the Sustainability Accounting Standards Board (SASB) are helpful in providing some guidance. We have developed our own view on what is most material.  For environmental and social issues, our focus centers around areas related to climate change, resource scarcity, waste management, general environmental impact; social controversies, health and safety standards, matters relating to labour policies and practices; approach to data security and privacy and in countries like South Africa, the company’s approach to and status of Black economic Empowerment. We aim to understand exposure levels and management strategies relative to best practice. We identify priority areas and track progress. We seek to understand the plan to avoid (wherever possible), mitigate and / or manage and monitor the risks. We assess companies’ alignment with international standards, distilling and thinking about it in the context of local markets and regulations. We support transparency. Companies can only manage what they measure, reporting encourages consideration. The responsibility to identify and evaluate the impact on the stock valuation resides with the analyst covering the particular stock. All our research analysts’ coverage reports on companies include a distinct section on the assessment of ESG factors that is circulated to the broader investment team. This peer review mechanism adds to the rigour of the investment case. We believe our investment strategy benefits from a culture that encourages individuals to challenge one another and a wide range of biases and assumptions, every day. In addition, we subscribe to MSCI for access to their independent ESG reports on companies as additional reference material for consideration by our analysts in interrogating their ESG assumptions and assessments.
        
ESG research (broker, etc.)
          Our own team of in-house analysts conducts their own deep-dive, comprehensive proprietary research on each of the stocks they respectively cover. While we make use of external and broker research reports, it is primarily for background and qualitative purposes. This is very much based on the quality of research provided by brokers. We have an in-house economist who provides valuable insight on macro events both locally and internationally.
        

HF 07. ESG incorporation into quantitative and fundamental analysis

07.1. Does your organisation uses quantitative analysis?

07.2. Does your organisation uses fundamental analysis?

Please indicate at which level ESG is incorporated into the analysis.
Fundamental approach
ESG incorporation
Outcomes and assessment/review
          In valuing businesses, allowance for ESG-related factors are taken into account, either explicitly or by adjusting the discount rate applied to their normalised earnings. We thus build in the risks and opportunities relating to material environmental, social and governance considerations in the ratings of the businesses we analyse. Where we can, we explicitly allow for ESG costs in the modelling of the company earnings.
        

07.3. Additional information [OPTIONAL]

We produce both quantitative and qualitative analysis of all significant exposure to ESG issues as part of the fundamental assessment 


HF 08. Changes to the RI incorporation process over the past 12 months

08.1. Could you please indicate whether there have been any changes to your RI incorporation process over the past 12 months (e.g. additional resources, information sources)?

08.2. If yes, please describe them.

          We appointed a dedicated resource 'ESG analyst' who supports the company analysts in researching relevant material for each company's own ESG challenges.We embarked on a detailed refresh of the ESG risks and opportunities for all stocks. We have developed our own view on what is most material ito ESG issues.  For environmental and social issues, our focus centers around areas related to climate change, resource scarcity, waste management, general environmental impact; social controversies, health and safety standards, matters relating to labour policies and practices; approach to data security and privacy and in countries like South Africa, the company’s approach to and status of Black economic Empowerment. We focus on those companies for which the externalities are large and known. We engaged management to understand there risk mitigation strategies and how the opportunities and challenges are reflected in the business's strategic thinking. A key part of our thrust was improving company disclosure so that we can make better informed decisions.
        

HF 09. Integration of Active Ownership

09.1. Please select and explain how active ownership practices are integrated into investment decisions.

          Proxy voting is important and a core part of our stewardship responsibilities. Coronation’s voting policy outlines the broad principles which determine how we will vote on company resolutions.  Coronation will timeously raise its concerns with management to provide them with the opportunity to address any concerns before the vote. Our overriding principle is that constructive pre-emptive engagement and resolution is preferable to formulaic voting at general meetings without such prior engagement.
        
          Our large and experienced team maintains constructive relationships with the boards and senior management teams of companies. We develop specific engagement strategies for each company, which are informed by our deep understanding of industries and asset classes across multiple geographies. Our dialogue is objectives-driven and continuous, influencing outcomes for the long term. When we engage with investee companies, we have an informed dialogue about ESG disclosure and practices. This ensures the process is meaningful. 

Given the focus on preserving and enhancing long-term value on behalf of asset owners, engagement can encompass the full range of issues that affect the long-term value of a business, including strategy, capital structure, operational performance and delivery, risk management, pay and corporate governance. ESG factors are clearly integral to this. Opportunities and challenges offered by ESG developments need to be reflected in the business’s strategic thinking. Equally, a full assessment of operational performance must encompass not only financials but also vital operational areas, highlighting the long-term health of the business such as the relations with the workforce; the creation of a culture that favours long-term value creation; dealing openly and fairly with suppliers and customers; and having proper and effective environmental controls in place. Stewardship and engagement are beneficial because they enhance shareholder value and support investors in the execution of their fiduciary duty. Stewardship and engagement encourage enhanced information flows between investors and investees, enhancing knowledge and building relationships. Developing these dynamics requires that investors go beyond the use of data derived from box-ticking. We will collaborate with industry bodies and like-minded organisations to advocate better policies and promote a financial system that works in the interests of all stakeholders. Collective engagement can give more traction to ESG issues within companies, adding weight and emphasis to concerns.
        
          We will consider shareholder proposals, and we will support those that are likely to enhance long-term company performance, reduce risk to long-term performance or improve disclosure reasonably necessary to enable shareholders to assess their investment.
        

HF 10. Examples of ESG risks/opportunities in investment decisions

10.1. Please provide examples of where ESG risks and opportunities were incorporated into the investment decisions over the past 12 months.

Hedge Funds Strategy
Equity Hedge
ESG factors
Governance
ESG risks/opportunities
          On governance the company falls well short, largely due to the structure of its board and its voting pool arrangements. We rate them as a global leader on Environmental and Social matters and on these two areas alone would probably have rated it at a premium to the average company.
        
Financial risks
          Equity price risk.
        
Scope and process
          Our fundamental analysis reveals that while this is a serious matter and one that justifies a governance discount to the market, interaction with the company has indicated that the structure is cast in stone and there is no hope for a change.
        
Outcomes
          We mark down the exit PE rating to reflect ESG concerns. The valuation is attractive on a risk adjusted basis and we are long the exposure.
        
Hedge Funds Strategy
Equity Hedge
ESG factors
Governance
ESG risks/opportunities
          The company’ exposure to potential regulatory action or operational disruptions due to accusations of unfair dealings is determined to be high.
        
Financial risks
          Equity price risk.
        
Scope and process
          The company operates in highly regulated industry so profits are deemed constrained. Also, there’s risk governments try to extract cash when needed as they have in the past.
        
Outcomes
          We are short the exposure.
        

10.2. Based on your example(s) provided above, please specify whether the incorporation of ESG factors affected the risk-adjusted returns of your hedge funds.


HF 11. Derivatives products and ESG impact

11.1. Do you use derivatives instruments as part of your hedge funds strategies and/or Funds of Hedge Funds?

Please select all the applicable categories of derivatives used.
Listed/OTC
Category of derivatives

11.3. Please explain whether and how these derivatives impacted the risk-adjusted returns of your hedge funds investments?

Impact

Outcomes

          Put protection or selling futures to reduce overall market exposure in declining markets results in positive outcome.
        

11.4. Please indicate whether the use of derivatives triggered ESG risks/opportunities at the fund level?

11.5. Additional information [OPTIONAL]

          Reducing market exposure using derivatives while going long physical stocks on appropriately valued assets, with consideration of ESG risks and opportunities where these asset prices exceed market performance creates positive value.
        

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