Read more about forward-looking ESG

RESPONSIBLE
INVESTMENT
AT ALQUITY
At Alquity, Responsible Investment powered by forward-looking Environmental, Social,
and Governance (ESG) analysis sits at the core of our investment decision-making,
delivering long-term value creation for investors and society as a whole.
WHAT IS RESPONSIBLE
INVESTMENT?
Responsible investment is an approach that integrates long-term, forward-looking ESG criteria into
fundamental analysis and portfolio management,
in order to produce superior risk-adjusted financial
returns. This differentiates it from ‘sustainable investing’, ‘impact investing’ or ‘socially responsible
investing’, which may set financial returns as a secondary consideration, subordinate to social or environmental goals.
WHY DO WE USE FORWARDLOOKING ESG ANALYSIS?
Focusing on responsible investment powered by
forward-looking ESG as a core part of our analysis
provides both better returns to investors, as well as
reducing portfolio risks and volatility.
ESG issues have the potential to create and destroy long-term shareholder value, presenting risks
across a company’s entire value chain, from supply
disruptions and labour disputes, to large scale industrial accidents and product safety concerns, so
understanding these issues is essential. Moreover,
these insights offer an alternative, often less-scrutinised insight into management behaviour and efficiency.
Returns
We believe that companies that focus on corporate
governance and minority shareholders tend to be
better managed, more efficient, and adapt more
successfully to economic, environmental and technological changes. Therefore we expect them to
trade at higher multiples and create greater value
for all shareholders and stakeholders over the longterm. Conversely, those companies that pollute or
pillage their environment do not have long-term
sustainable business models, and thus are more
likely to destroy shareholder value over time.
Even more importantly, we believe that detailed,
forward-looking ESG analysis will enable us to identify early signs of internal changes in a company,
ahead of the subsequent impact on earnings and
the identification of this trend by other non-ESG investors, and thus ahead of a share price re-rating
or de-rating. Therefore it is the momentum in these
factors, as well as the absolute levels, which drives
our analysis.
Risks
MSCI describes ESG issues as ‘quiet storms that
reconfigure the financial landscape when they hit
landfall’. This is a very accurate premise; detailed
analysis of ESG factors enables us to discover potential problems that may be submerged for many
years, before suddenly erupting and destroying significant value.
By successfully avoiding companies with high ESG
risks, we target lower volatility (and again, better
returns) over the long term for investors. This is
because those companies that are demonstrably
prepared for ESG shocks can better mitigate the
downside risks, both short and long-term. This
makes disclosure on how companies manage their
1
ESG risks all the more critical, because it can help
capture investor interest and establish the longterm value of ESG management.
Furthermore, in frontier and emerging markets,
where issues of corruption and labour troubles often rear their heads, ESG investing is even more
valuable. By looking at a company’s environmental,
social and governance record you can invest wisely early on, with fewer concerns about the macro
issues facing the country. The screening provides
a deeper understanding of the businesses you are
buying into, giving you confidence to invest earlier
than you otherwise might. At a time when investors
are finding growth hard to forecast, ESG provides
a way to ‘do the right thing’ while getting the right
return.
ESG IN THE INVESTMENT
PROCESS
We apply insight and expert judgement throughout our investment process, integrating responsible investment powered by forward-looking ESG
through a 4-stage process.
sectors are excluded from the Alquity investable
universe:
1. Tobacco
2. Gambling
3. Narcotics
4. Adult entertainment
5. Armaments
The underlying criterion for inclusion in this list is
the existence of ‘harm’ to consumers. We will not
invest in any of these areas (or in conglomerates
where these areas comprise over 5% of revenue).
Stage 2: Forward-Looking ESG
Our ESG analysis is centred on the companies rather than countries and sectors, and this is consistent
with our non-benchmarked, bottom-up investment
strategy. We interact extensively with management
to help improve their ESG, and invest in companies
with the expectation of positive change and exit
those that move backwards in this area (depending
on the overall investment analysis).
What we look for in a company…
Transparency
•
•
•
Governance
•
•
•
•
•
•
Treatment
towards
environment
and society
Stage 1: Initial Review
Before a company is selected for inclusion in the
stock pool, we subject it to an initial ESG review to
identify headline issues.
The initial review applies our investment and moral
ethos; companies that cause harm to their various
stakeholders cannot by definition be good longterm, sustainable investments, as they will suffer
from high levels of risk (government policy) and ultimately lower returns.
Companies with over 5% revenues in their most
recent financial report attributed to the following
•
•
•
•
•
•
External
checks
•
•
•
•
Access to management
Disclosure levels on websites and
in accounts
Detailed ESG policies and reporting
Number
of
independent
directors, and the extent of that
independence
Related party transactions
Use of cash and equity raising history
Accounting policies
Reputable auditors
Treatment of minority shareholders
Health and safety policies and
practices
Supply chain labour standards
Environmental
standards
and
practices
Waste management and water
usage
Carbon emissions
Social and anti-discrimination
policies
MSCI reporting
Google search on independent
directors
Reputable awards
Industry commentary
When considering these factors, we also take account of global best practice and ensure our companies are aiming for these standards. In addition,
2
the knowledge and experience of our investment
teams (c20 years per region) gives them an advantage in spotting changes to a company’s behaviour,
and be able to make forward-looking judgements
as necessary.
Following an analysis of these factors, our overall view on the quality of ESG is then summarised
on a scale from A (excellent) to E (fail), on a forward-looking basis.
Alquity
ESG rating
A
B
C
D
Description of company achieving
this rating
High risk industry demonstrating global
best practice performance in ESG.
Lower risk industry demonstrating best
practice in ESG when compared with
regional peers.
High risk industry demonstrating best
practice ESG in relation to regional
peers.
Lower risk industry with ESG performance in line with regional peers or
demonstrating meaningful commitment
to improve to that level.
High risk industry with ESG performance
in line with regional peers, and/or below
regional best practice, but demonstrating a meaningful commitment to improve.
Lower risk industry with poor ESG performance but with a credible intention to
improve communicated to Alquity fund
manager.
High risk industry with poor ESG performance but with a credible intention to
improve ESG performance communicated to Alquity fund manager.
Lower risk industry with poor ESG performance and no intention of improving.
E
High risk industry with poor ESG performance and no intention of improving.
High Risk Industry: those with extractive operations
(mining & energy) and heavy industry (cement, building materials, steel, chemicals).
By undertaking this analysis, the management team
is able to gain a deeper insight into the company’s
long-term prospects and any issues or threats that
may be looming.
Stage 3: On-going Monitoring and Tracking
We continuously track the ESG performance of
companies in the portfolio and engage with companies if circumstances require. We do this to ensure that we continue to be aware of (and manage)
the ESG related risks and opportunities in our longterm portfolios. The sources of information used to
undertake this tracking include company meetings
and conference calls, company reports, media reports, broker research and the United Nations’ Principles of Responsible Investing Clearinghouse.
Our first choice will always be to strike a constructive dialogue with the company with the aim of resolving issues of concern over a reasonable time
period. In cases where the ESG issues are serious
and it is not possible to engage with management
on a constructive basis, we may (as a final option)
divest its holdings in that company.
Stage 4: Strategic Engagement and Advocacy
We are actively involved at a strategic level in encouraging companies to improve their ESG disclosure practices. This includes support for the UN
Principles for Responsible Investment (PRI), the
Global Reporting Initiative (GRI) and the Emerging
Markets Disclosure Project (EMDP). We also track
and maintain dialogue with other key actors.
RESPONSIBLE INVESTMENT
OVERSIGHT
The Alquity Investment Committee includes a Responsible Investment specialist with over a decade
of experience in dedicated ESG analysis. Meeting
quarterly, the Investment Committee oversees the
fundamental ESG process and is able to challenge
portfolio managers on their rating decisions. Any
investee company, which has committed to improving their ESG performance, is regularly reviewed by
this committee for evidence towards that com-
mitment.
Lower Risk Industry: all other industries within the
Alquity investable universe.
Our portfolios only include stocks graded A-C, and
a summary of our ESG analysis is also shown on the
front page of the stock note for the holding.
3
FREQUENTLY ASKED QUESTIONS
How do we look at ESG from the macro/country
level?
Whilst we are primarily bottom up investors, country and macro-economic factors are incorporated
into our overall investment process – both in terms
of our corporate earnings forecasts and our ESG
scoring. Negative governmental influence could
have an impact in any of the categories, but would
most likely appear under governance (for example, if there were a risk of nationalisation of assets).
In addition, country specific issues are factored in
during the portfolio construction.
Why aren’t traditional ‘sin’ sectors such as alcohol
and extractives included on the exclusion list?
Alcohol is not included on this list as we wish to
distinguish between those where there is a clear
underlying harmful intent, versus those that can be
misused. Beer, wine and spirits (in moderation) are
not inherently harmful – whereas tobacco is. Thus,
we will analyse each alcohol company on its own
merits, and will not automatically exclude them.
Similarly, extractive industries (including logging,
palm oil etc.) are not automatically screened out at
this stage either. Emerging and Frontier countries
need to grow their economies to enable their populations to escape poverty, and this is impossible
without the use of natural resources. Furthermore,
whilst pollution and poor operating procedures can
cause significant harm to the environment, this is
not necessarily the case. Many companies behave
responsibly, mitigating environmental damage,
working with local communities and clearing up effectively. Thus, we will again analyse each company on its own merits.
Should companies in emerging and frontier markets be held to the same ESG standards that are
applied to companies from developed markets?
We believe this question is overly simplistic and the
answer not straightforward.
International ESG standards provide a useful and
important benchmark for evaluating companies in
frontier markets but it is not realistic or constructive to apply them in a ‘pass/fail’ mode. We therefore use them ‘intelligently’ as the ESG issues that
may be relevant and material to companies regions
such as Africa (and therefore the standards that
they may be expected to have attained) are likely
to differ from those that are typically relevant and
material to developed market companies in the
same or similar sectors.
We do not expect all of our businesses to be perfect, but we do expect them to meet a minimum
threshold and demonstrate commitment and willingness to further improve their standards. Allowances must therefore be made for companies’ commitment and ability to reach such standards over
an acceptable timescale. In this respect, Alquity
looks on a case-by-case basis at whether a company appears to:
• Be familiar with the international ESG standards that are relevant to its business
• Know where it currently stands in relation to
these standards
• Demonstrate top-level management commitment to address ESG issues
• Any gaps as part of the company’s business
strategy
How long do we give company managements
to improve when we are undertaking our forward-looking analysis?
The latitude we give companies depends on individual circumstances. If the issue is appointing another another independent board member in Vietnam, then we may give them a year or even two
- presuming the overall ESG of the business is OK.
Markets such as Vietnam have virtually no ESG experience, and change is not overnight – but if the
issue was eliminating a pollution concern, we would
allow months rather than years.
What happens when something goes wrong?
When something goes wrong with a company we
engage with management, then if the situation is
not sufficiently rectified then we will sell the holding. This is best demonstrated by an example with
one of our African holdings, Guaranty Trust Bank.
The Circumstances
In August 2013, the UK subsidiary of Guaranty Trust
Bank, one of our Nigerian bank holdings in our Africa Fund, was fined £525,000 by the Financial Conduct Authority in the UK for failures in the banks’
anti- money laundering regulations during the period from May 2008 to June 2010. The specific issue
concerned opening bank accounts for Politically
Exposed Persons (PEPs), defined as senior political
or government figures, which under UK regulations
require to be signed off either by the bank’s CEO or
Head of Risk. During this period GT Bank neglected
to do this, although there was no suggestion that
any money laundering took place.
4
Our Response
We contacted the bank’s senior management in
Nigeria to get more background and reassurance
on the issue, and establish what new controls had
been put in place. Within 24 hours GT Bank’s CEO
contacted us to explain that issue was historic, and
to prevent any reoccurrence the bank no longer
dealt with PEPs. In addition a new Head of Risk and
Head of Compliance in the UK was appointed, and
the bank engaged specialist anti-money laundering
external consultants to ensure that they remain at
the forefront of compliance requirements, not just
in the UK, but throughout all of their operations.
Why do we not have a separate ESG team? Is this
not a conflict of interest?
Having an independent ESG team, as our peers do,
makes the process a box ticking exercise and ruins
the value of the 20 years’ experience in the market that each of our fund manager have, and the
regular engagement that they undertake. Thus the
integrated nature of our process is actually a key
competitive advantage. We also have the Investment Committee, which holds the fund managers
to account and monitors their analysis.
•
•
crimination in respect of employment and occupation. Environment
• Principle 7: Businesses should support a precautionary approach to
environmental challenges;
• Principle 8: undertake initiatives
to promote greater environmental
responsibility; and
• Principle 9: encourage the development and diffusion of environmentally friendly technologies. Anti-Corruption
• Principle 10: Businesses should work
against corruption in all its forms,
including extortion and bribery. What do our stock notes look like?
An extract from the Vinamilk stock note is shown
below, summarising the thoughts of the investment
team on its ESG standards.
What are the 10 Principles of the UN Global Compact?
The UN Global Compact works toward the vision of
a sustainable and inclusive global economy that delivers lasting benefits to people, communities, and
markets. As part of this it has set forward 10 principles for business activities around the world:
• Human Rights
• Principle 1: Businesses should support and respect the protection of
internationally proclaimed human
rights; and
• Principle 2: make sure that they
are not complicit in human rights
abuses. • Labour
• Principle 3: Businesses should uphold the freedom of association and
the effective recognition of the right
to collective bargaining;
• Principle 4: the elimination of all
forms of forced and compulsory
labour;
• Principle 5: the effective abolition of
child labour; and
• Principle 6: the elimination of dis-
What is our approach to green enterprises as investments?
We invest in green enterprises when the fundamentals to do so make sense. Some sustainability funds
specialise exclusively in companies that provide
products or services that are explicitly aimed at
solving global sustainable development challeng5
es, whilst others apportion a specific percentage of
their AUM to such investments.
Examples of ‘green enterprises’ are renewable energy, clean technology, and social housing. In Asia
this trend is widespread due to strong fundamentals and a wide range of businesses competing in
these sectors. However, elsewhere these sectors
are not as strong or as mature and we believe that
focusing on these at present is likely to limit the
size and quality of the potential investment universe and weaken portfolio diversification, as well
as not necessarily criteria for investment we would
consider it as a holding, but we do not specifically
search out these types of business.
This document has been issued and approved by Alquity Investment Management Limited which is authorised and
regulated by the Financial Conduct Authority. This document is a marketing communication and is intended solely for
distribution to investment professionals as defined in Article 19 of the Financial Services and Markets Act 2000 (Financial
Promotion Order) 2005. If you are an individual who would like more information about Alquity’s Funds, please go to
www.alquity.com.
The Alquity Africa Fund, the Alquity Asia Fund, the Alquity Future World Fund, the Alquity Indian Subcontinent Fund
and the Alquity Latin American Fund are all sub-funds of the Alquity SICAV (“the Fund”) which is a UCITS Fund and is a
recognised collective investment scheme for the purposes of the Financial Services and Markets Act 2000 of the United
Kingdom (the “FSMA”). This does not mean the product is suitable for all investors and as the Fund is invested in emerging market equities, investors may not get back the full amount invested.
This document has been provided for information purposes only and does not constitute an offer or solicitation to purchase or sell interests in the Fund. The information contained in this document shall not under any circumstances be construed as an offering of securities in any jurisdiction where such an offer or invitation is unlawful. The Fund is currently
registered for sale in a limited number of countries and the Prospectus should be referred to before promoting a share
class of a sub-fund as promotion of the Fund where it is not registered may constitute a criminal offence. The current
prospectus and simplified prospectus are available free of charge from Alquity Investment Management Limited, 5th
Floor, 9 Kingsway, London, WC2B 6XF or by going to www.alquity.com.
6

Download Report