Sustainable, Responsible &/or ESG Policy:
The Sarasin Climate Active Endowments Fund operates a screening policy as follows:
- No investment in companies with 5% or more of their turnover involved in the mining of thermal coal or tar sands
- Following engagement, no investment in companies that needlessly emit significant quantities of carbon into the atmosphere, or which do not take seriously the transition to a low carbon economy
- Qualitative judgments to be considered on a regular basis by the Climate Active Advisory Panel
- Zero tolerance on tobacco production and manufacturing of tobacco related products
- No investment in companies that generate significant turnover from the manufacture of arms, alcohol, gambling and pornography
In terms of implementation, the Fund excludes a limited set of companies that derive the bulk of their revenues from the most carbon-intensive fossil fuels (either in the form of reserves or emissions) where we believe long-term prospects for value creation are poor. In the first instance, the Fund will not invest in companies that have more than 5% of their revenue from carbon-intensive oil sands or thermal coal, but then undertakes a more detailed climate stress test to determine how companies would fare as decarbonisation accelerates in line with the ‘well below 2C’ goal.
The Fund emphasises active engagement with companies that may be negatively exposed to decarbonisation (and physical risks where this is measurable), but where we believe there is an opportunity to build resilience such that the investment proposition is protected. In other words, the Fund invests in companies with attractive prospects for long-term value creation, and understands that management teams often have significant opportunities to respond to climate risks such that the company’s prospects are enhanced.
Sustainable, Responsible &/or ESG Process:
Equities
Our aim is to deliver enduring value for our clients across market cycles. When we invest on behalf of our clients, we look to the long-term prospects of a company. We purchase shares where there is a case for enduring value creation, and where this is currently underappreciated by the market.
We also believe that responsible companies will tend to create more durable economic value. Specifically, we favour businesses that articulate compelling long-term strategies, and take seriously their responsibilities to their customers, supply chain, staff, local communities, the environment, and their shareholders.
Once we become shareholders on behalf of our clients, we believe it is important to build lines of communications with the executives and the Board of Directors. Stewardship is as much about ongoing responsible ownership as to the considered approach to selecting investee companies. We also believe that our clients’ long-term interests are not best served by a narrow focus on relative performance against a market index. The service we offer goes beyond beating a benchmark: first and foremost, we start with our clients’ needs and take a holistic approach. We would not, for instance, deploy capital in a company whose success involves causing significant harm elsewhere, which could damage our clients’ interests. Where we believe we can play a positive role in boosting broader market returns through improved government policies or market practices we will seek to catalyse change.
We aim to invest in companies that benefit from our ‘global themes’, or societal trends such as digitalisation, automation, ageing, emerging consumers and climate change. Further, we seek companies that are able to drive long-term performance through credible strategies to transform these strengths into enduring value, and demonstrating robust governance structures that will protect shareholders’ and creditors’ interests.
Environmental, governance and social factors are considered alongside other value drivers in determining a company’s ‘investment case’ and ‘risks to investment’. Companies’ long-term success depends on strategies that sustainably deliver goods or services valued by customers, such that companies earn an attractive return, maintain their license to operate and prosper. A company’s relations with core stakeholders, from employees, to suppliers, to regulators, to local communities to other groups that are impacted by (and may impact) the company’s operations, as well as its environmental performance, are important considerations.
ESG is, therefore, a required part of our analysis, and where we identify potential material impacts, this must be reflected within our valuation and modelling. This therefore has an impact on portfolio construction as it is part of the fair value and fundamental assessment of a company, which is considered in the investment decision and position sizing.
Once we have bought a stake in a company, we stay close to it. We monitor the business’ strategic outlook and performance, its critical value drivers to ensure their persistence, and our conviction in the stock’s long-term value proposition. Engagement and voting are key considerations throughout our research process in order to communicate with management on ESG and other issues and press where we see a need for change. A considered approach to voting is vital not just because it is a key avenue through which we can express our views, but also because it supports our relationships with the company’s Board of Directors and executives.
Fixed Income
Our fixed income investment process contains both top-down and bottom-up elements. It uses a macro-economic research foundation, drawing upon the expertise of the in-house economists with particular emphasis on longer-term structural considerations. This feeds into interest rate exposure management, but may also influence fixed income sector disposition and credit structure preferences. In parallel, and underpinning credit portfolio construction and management, is thorough analysis of each credit using a consistent research process.
Environmental, Social and Governance analysis is integral to our credit review process. Analysts review the ESG risks pertaining to an obligor from a creditor’s perspective. The factors considered vary by sector. However, there are some common elements, such as the commitment to a financial profile that supports the interests of the investor.
- Environmental – climate change, resource input, waste output, indirect exposures, indirect effects
- Social – labour relations, supply chain labour standards, product safety, regulatory scrutiny, political environment, data breach risk
- Governance – ownership structure, the board, internal controls, external controls, attitude to bondholders, ratings policy and history, litigation risk and overhang
A score from zero to ten for each of the three ESG considerations is allocated. The zero to ten scores indicate:
10: No impact on Probability of Default or Severity of Loss. The factor will have no impact on credit rating or bond price.
7: May affect Probability of Default or Severity of Loss. The factor would not trigger a credit rating event but may induce temporary adverse price action.
5: Somewhat affects Probability of Default or Severity of Loss. The factor would trigger a credit rating event and modest permanent spread widening.
3: Major impact on Probability of Default or Severity of Loss. The factor would trigger a multi-notch downgrade and major permanent spread widening.
0: Potential event of default. The factor would trigger default with a low expected recovery rate.
Next, the relative importance of E, S & G risks is assessed:
- Sector norms are established for the E, S and G weights
- Individual obligor weightings differ from the norm if their profile diverges from the sector average. For example, the ‘Banks’ ESG ratio is used as a starting point for Building Societies, but adjusted to reflect their mutual status
- As creditors, Governance is often the dominant consideration for a bond investor
- These weighting allow us to establish the Average ESG Factor Score and Indicated ESG Rating for a security.
If the borrower has an Investment Grade ESG rating and all individual ESG scores exceed three out of ten, the security will be eligible for the portfolio (from an ESG perspective). Those that fail this test could still be eligible for selection, but only if they pass our Stewardship Team’s “Red Flag” Deep Dive Process, offer satisfactory engagement, and if they have an improving ESG trend.
Data sources
The vast majority of our ESG analysis is proprietary analysis. We do use a range of providers to supplement this proprietary work, including MSCI, ISS as well as various ESG networks like ICGN, ACGA, alongside sell-side brokers and independent research input. All external data provided assists with our overall research process but in no way replaces or precludes the need for proprietary ESG and stewardship research. Our process is founded on the robustness and soundness of our own research prior to reliance on the data of third parties. For ethical screening, we use MSCI data. We also initiate, sponsor and participate in academic work and discussion to identify and investigate early opportunities, themes and trends.
We also utilise a company’s disclosures, external experts, non-governmental organisations, government publications and discussions. We also have access to the proprietary Sustainability Matrix®, developed and maintained by our parent company, Bank J. Safra Sarasin. The matrix aggregates sustainability data from MSCI ESG, GMI, RepRisk and VigeoEiris. It is maintained by the Bank J Safra Sarasin sustainability team of 12 dedicated analysts, assessing and analysing the data that goes in and out of the matrix.
Resources, Affiliations & Corporate Strategies
Internal Resources
All of our analysts and portfolio managers consider ESG factors when discussing stock ideas and building an investment case. Thus, we consider the entire team an ESG resource.
The stewardship specialists are directly responsible for engagement efforts, and work with the analysts to help them develop their ESG analysis and ratings for stocks.
Whilst the analysts own their ratings, this must be approved by the stewardship team to ensure joint accountability. It is important to note that our stewardship specialists are part of the global equity team, and are involved in team discussions and decisions.
We utilise our own framework and ratings systems to represent our proprietary ESG analysis. This analysis is bottom-up and driven by extensive primary research carried out by our analysts, supplemented with ESG data from MSCI, ISS and other sources.
Affiliations and Memberships
In addition to the UN PRI, we are signatories to the 2020 UK Stewardship Code – and passed the Financial Reporting Council’s assessment for this in September 2021s. Other memberships / initiatives including those listed below, are often the forum in which we work to improve ESG standards and taxonomy:
ENVIRONMENTAL
- IIGCC Paris-aligned accounting and audit working group (Chair)
- IIGCC Net Zero Banking initiative (co-Chair)
- Net Zero Asset Managers Initiative (NZAM)
- Taskforce for Climate-related Financial Reporting
- Climate Action 100+
- “Say on Climate” Initiative
- Carbon Accounting Project (PRI)
- Ellen MacArthur Foundation Plastics Initiative
- Plastic Solutions Investor Alliance (PSIA)
- Finance for Biodiversity Initiative (F4B)
SOCIAL
- 30% Club
- Find It, Fix It, Prevent It initiative (FFP) – Modern Slavery
- Workforce Disclosure Initiative (WDI)
- International Accord for Health and Safety in the Textile and Garment Industry
- Investor Statement of Solidarity to Address Systemic Racism and Call to Action
- World Benchmarking Alliance Digital Inclusion Collective Impact Coalition
GOVERNANCE
- International Corporate Governance Network (ICGN)
- UK Corporate Reporting and Auditing Group (CRAG)
- Advisory Group for International Audit & Assurance Standards Board
We also support The Local Authority Pension Fund Forum (LAPFF).
Many of these commitments provide us with a network of peers and supporters for key ESG related issues. It is important for us to remain engaged with group advocacy work, collaborative endeavours, such as engagements, but also to keep aware of best practice.
Often, we find these networks to be useful sources of data and information either on a broad ESG related issue or on company specific metrics that may not be found in other sources.
While the majority of our company engagements are pursued on our own, as outlined in later responses, we will collaborate with other investors where we are seeking to escalate due to resistance from the board or executives. Often having a larger shareholding united on a matter of concern can be more impactful. Wherever we explore collaboration, we ensure the steps we take are consistent with local laws and regulations. In certain cases, these collaborations link into broader initiatives that we support, such as ICCR Covid-19 engagement; the Workforce Disclosure Initiative; the Ellen MacArthur global commitment on recycling; or Climate Action 100+.
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