Page 37 - DIY Investor Magazine - Issue 26
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Also, clear regulation to define and enforce sustainable practices wasn’t always in evidence. Some of these factors persist, however, because the concept of duration has always been built into the Trust’s investment framework, the team has a well-defined approach to evaluating all three factors for EM stocks:
Environmental: Better reporting is making environmental performance easier to measure, with many companies
now publishing sustainability reports as a matter of course. However, the team still seeks to understand if companies are actively working to mitigate risks and improve environmental performance.
As well as forming part of the strategic classification assessment, this is addressed by specific questions in the risk profile.
Social: Expectations regarding social responsibility must take into account the local context, including existing social norms, legal systems and stages of development. However, firms have a responsibility to be proactive and not hide behind these mitigating factors.
Governance: When considering governance, the team focuses on two areas: firstly, whether a company shows proper regard for the interests of all shareholders; and secondly, whether it can demonstrate proper stewardship of assets and value over time. One slightly surprising example of where companies tend to fail that first test is in South Korea, where the complicated chaebol system of family ownership often results in little regard being given to minority investors.
While third party information is useful, the team conducts
its own research and makes its own decisions about the sustainability of businesses before investing in them. They engage directly with companies both before and after investing, through the 5,000 meetings they conduct annually with businesses as well as through proxy voting. When sizing positions, both strategic classification and risk profile are considered.
The pandemic has brought to the fore the ‘S’ and ‘G’ in ESG and accelerated a trend which the team had already identified. ‘We’ve noticed it through company meetings over the last couple of years anyway,’ says Whiting. ‘Businesses recognise its increasing importance in how they’re perceived in the
marketplace, so they want to talk to us about their governance committee and what they’re doing from a social standpoint.’ The impact of COVID-19 has perhaps been most significant on social responsibility, particularly with those firms which already have a sustainable approach embedded in their corporate culture, recognising their responsibilities not only to their customers and their staff but to wider society.
‘You’ve got Chinese noodle companies providing meals for community hospitals, a Brazilian bank that’s set up a fund to help people in poverty and so on,’ says Whiting. Overall, the team’s view is that ESG is integral to the long-term performance of companies and so should be integral to the research process. Ultimately, ESG is not just about ‘doing good’, it’s about ‘being good’ — and that benefits everyone, including investors.
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