Fundsmith Sustainable Equity I Acc (OEIC/Unit Trust)
SRI / Ethical Overview
We believe that for a company to be truly sustainable it must firstly be a good enough business that we would wish to own it forever before we then look at whether the investment proposition justifies its net negative impacts. We have a long definition of what we mean by good business, but the main thing we look for are business that can generate a higher return on capital than their cost of capital across their business cycle, have clear opportunities to reinvest capital at those high rates of return and have some “moat” that will stop those excess returns being competed away. Given this, we define sustainable companies as those which are “good businesses” and hence within our flagship Fundsmith Sustainable investable universe, don’t depend on a finite resource and are aware and looking to reduce their net negative impacts on the world. By the world we talk a holistic view to include the environment, society and minority shareholders through corporate governance. We also include innovation in our sustainability assessment as we believe that this includes a lot of the positive impacts that a company has. In practice, this means we take the Fundsmith Equity Fund investable universe and remove the alcohol and tobacco companies and then remove companies whose investment proposition doesn’t justify its net negative impacts. So far we have found 2 companies that don’t meet this criteria (Facebook and Walmart).
SRI / themed / ethical assets under management – overview
- Fund Size (GBP): £120.1m (as at 31 May 2018)
- Total value of SRI/ethical/environmental/ social/ environmental or sustainability themed funds: £120.1m
- Total value of assets covered by any additional ESG or responsible ownership policy: £16bn
- Total assets under management: £16bn
SRI Policies (Primary strategy in bold)
- Sustainability policy Find fund options that consider issues relating to the sustainability agenda (e.g. resource management, environmental impact, climate change and/or social issues such as equal opportunities, human rights and adherence to recognised codes). This will include funds from all of the different SRI Styles. See fund information for explanations of the different strategies.
- Tobacco production avoided Find fund options that exclude manufacturers of tobacco (or related) products. This typically relates to ethical funds however funds from other SRI Styles commonly avoid this area also. Strategies vary and funds may invest in retailers of such products (e.g. supermarkets or hotels.) See fund information for further information.
- Armaments manufacturers avoided Find ethical fund (and other SRI) options that avoid avoids companies that manufacture products intended specifically for military use. Fund strategies vary - particularly with regard to non strategic military products. Read fund literature for specific details.
- Limits exposure to carbon intensive industries Find environmental, sustainable investment, ethical fund and other options that aim to significantly reduce or limit exposure to carbon intensive industries (ie sectors which are major contributors to climate change). Funds vary - strategies may involve excluding sectors such as coal, oil & gas, mining or airlines - or may indicate a 'best in sector' approach is taken. See fund literature for details.
- Coal, oil &/or gas majors excluded Find sustainable investment and ethical fund options that avoid significant involvement in coal, oil and/or gas producing companies. Funds vary. See individual fund literature to confirm details.
- Alcohol production excluded This filter helps you to find ethical funds - and other options - that avoid investment in alcohol production. See fund literature for further information.
- Gambling avoidance policy Find ethical fund options (and other options) that avoid companies with significant involvement in the gambling industry. See fund policy for details.
- Pornography avoidance policy Find ethical fund option - and in some cases other options - that avoid companies that derive significant income from pornography. See fund details for further information.
- Responsible supply chain policy or theme (new) Find funds that have policies or a themed that considers the responsible management of supply chain related issues (these may relate to employment, product sourcing, sustainability or other issues)
- Positive selection bias Find funds where their main 'ethical approach' is to invest in companies that are considered to be positive/good or useful to people and/or the environment. The fund may also have negative avoidance criteria - see fund details to read more about fund strategies.
- Balances company 'pros and cons'/best in sector Find ethical funds and other options that consider both the 'positive' things companies do and the 'negative' things they do in order to make balanced, often complex decisions about where they might invest. Such funds often invest in the best/most ethical companies across most industries ('best in sector'), rather than excluding entire sectors. The fund manager may combine this with 'responsible engagement' activity to encourage better business practices. See fund literature for specific policy explanations.
- Over 50% large cap Find funds that invests more than half of their money into what are commonly regarded as 'large companies'. This will typically mean that the market capitalisation (or value) of the companies they hold is in excess of £5 to £10 billion.
- Sustainability themed Find funds where there is a significant emphasis on sustainability issues either as its primary strategy or as a core strategy that compliments other criteria. (This may apply to a number of different SRI Styles). Such funds will consider environmental and social issues when making stock selection decisions. Read fund literature for further information.
- Favours cleaner, greener companies Find funds that aim to nvest in companies with strong environmental policies and practices. This may mean it invests in smaller companies offering market leading environmental services or products and/or larger companies that are working towards the improved management of their negative impacts. Read fund literature for further information.
- Favours companies with strong social policies Find funds that invest in line with positive strategies that relate to 'people' issues - such as having strong human rights, labour standards and equal opportunities practices. Such funds are likely to invest in companies that have market leading standards with regard to employee and supplier practices. Read fund literature for further information.
- Strictly screened ethical fund Find funds that have a high level of negative ethical avoidance. These funds are likely to exclude more companies than other ethical (and SRI) fund options. Read fund literature for further information.
- Limited/few ethical exclusions* Funds with this label tend to avoid fewer companies than other ethical funds or other options with avoidance criteria. Strategies vary. The fund may only avoid companies in one or two areas (eg only exclude tobacco or armaments companies) or they may exclude only the very worst companies when measured against internationally accepted standards (across potentially a range of areas). Read fund literature for further information.
- Responsible ownership / stewardship policy (new) Find funds that have a policy that sets out what they do with regard to responsible investment ownership - also known as 'stewardship'. This typically relates to issues such as dialogue with companies and shareholder voting.
- ESG integration strategy (new) Find funds that factor in 'environmental, social and governance' issues as part of their investment decision making process. (These typically relate to improved risk management.)
- Combines ESG strategy with other SRI criteria (new) Find funds that have an ESG strategy (which is typically focuses on avoiding companies that post environmental, social or governance related risks) with additional criteria such as positive and/or negative screens or engagement/stewardship strategies.
- Invests mostly in large cap companies (new) Find funds that have SRI strategies and focus their investment stock selection on larger companies (eg over £1bn)
- ESG/SRI engagement Find funds and fund management companies that actively encourages higher 'environmental, social and governance' and/or 'sustainable and responsible investment' practices amongst investee companies - when positive change is aligned with the best interest of investors. This may apply to a single fund or a group of funds. Read fund literature for further information.
- Responsible Ownership policy for non SRI funds Find funds run by fund managers that apply Responsible Ownership or 'Stewardship' policies to all or most of their investment assets. This means that active involvement (e.g. voting, dialogue) with the companies they invest in across funds (not normally limited to ethical or SRI options.) Read fund literature for further information.
- Integrates ESG factors into all/most fund research Find fund management companies that research environmental, social and governance (ESG) issues when deciding whether or not to invest in a company. This typically applies to all funds, not only those which are promoted as being 'ethical' or 'SRI themed'. This is increasingly often used as a risk management tool.
- Vote all* shares at AGMs/EGMs This fund manager votes or aims to vote all* the shares they own at Annual General Meetings and Extraordinary General Meetings. A commitment to voting shares is a key indicator of 'responsible share ownership' - where fund managers consider - and express their views on - the key business issues effecting the companies they part own. (*Allowance is made for exceptional situations such as when shares are in the process of being sold.)
- In house responsible ownership/voting expertise Find fund / fund management companies where there is in-house expertise that enables the fund manager to make their own decisions on issues such as shareholder voting, setting of in-house guidelines - for example - particularly with regard to environmental, social and governance (ESG) issues.
- Responsible Ownership/ESG a key differentiator The fund managers have said they consider this area to be a key differentiator for their business
- PRI signatory Find fund management companies that have signed up to the UN backed 'Principles of Responsible Investment' initiative.
- Boutique/specialist fund manager Find options offered by smaller, more specialist fund management companies with a significant (or entire) emphasis on sustainable, responsible, ethical, ESG or responsible ownership related investment strategies. Note - strategies vary significantly. Check fund manager supplied links for further information.
- Encourage carbon / GHG reduction (new) The fund management company is working with the companies it invests in to encourage reductions of carbon dioxide and other greenhouse gas emissions.
- Employ specialist ESG/SRI/sustainability researchers (new) The fund management company directly employs specialist ESG/SRI/sustainability researchers or analysts
- Use specialist ESG/SRI/sustainability research companies (new) The company makes use of expert external research
- Full SRI policy information available on request (new) Information on all selected filter options will be supplied by the fund manager if you ask them to do so
SRI / Ethical Policy
We explicitly exclude, in our prospectus, any company that is classified as being in the following GICS sectors:
• Aerospace and Defence
• Brewers, Distillers and Vintners
• Casinos and Gaming
• Gas and Electric Utilities
• Metals and Mining
• Oil, Gas and Consumable Fuels
In addition to the explicit negative screen we also then look to exclude companies from our “good company” investable universe, where their investment proposition doesn’t justify their net negative impacts.
Resources, Affiliations & Corporate Strategies
Given we are long-term investors, all of our analysts do an element of ESG/SRI work as they are looking for companies that are truly sustainable. The Head of Sustainability is Thomas Boles.
To assess the difficult tradeoff between a company’s investment proposition and its net negative impacts, we use 3 main sources that provide us with qualitative and quantitative information. The 3 sources that we use to asses a company’s impact are:
- We maintain a dynamic database of all the qualitative information a company has provided on its own sustainability efforts from their sustainability report, annual reports and/or their website. These pieces of information are tagged and categorised under approximately 60 different topic ‘tags’ (see below), under the main headings of environmental, social, governance and innovation. These tags are updated periodically to reflect current perceptions of what is considered sustainable and to incorporate new factors that the companies might introduce into their reports on sustainability. This allows us to look across the entire portfolio or investible universe to see the company’s response or policy towards specific topics. This database also includes any comments from Fundsmith analysts on a company’s performance at mitigating its negative impacts. This is what is used in the monthly commentary on the factsheet that we publish every month. This database currently has over 2k pages of information and has been built up over the past 3 years.
- We collate the data on environmental emissions, diversity, corporate governance and innovation provided by Bloomberg, which we use to provide a look-through of the portfolio compared to the S&P 500 Index, which we publish on a monthly factsheet. The environmental stats are reported per £m of free cash flow as we are looking for companies that are getting more free cash flow for a given level of environmental impact.
- Finally, we also utilise an independent assessment of negative reputational risk from environmental, social and governance issues provided by RepRisk. RepRisk scans 30k news sources from around the world in a number of different languages, which provides 2 services for us. 1) We use this as a proxy for overall sustainability as it provides us with a way to absolutely rank companies within our investible universe, rather than relying on other ESG data providers, which would only allow us to rank companies intra industry. 2) it acts as a catchall for any negative news on a company that our usual news filtering services may miss.
We have recently signed the UN PRI and as recent members we are looking to get more involved in collaborative engagement projects where we feel that we can add value.