The Investment Manager’s approach to achieving our sustainable investment objective (as defined under (3) above) is holistic. They do not consider sustainability analysis separate to investment analysis and they assess the risks and opportunities associated with sustainability considerations along the following dimensions:
- Purpose – companies with a purpose aligned to achieving a United Nations Sustainable Development Goal (UNSDG) will usually benefit from long-term structural growth and be exposed to fewer risks.
- Environmental Stewardship – companies should have a minimal environmental footprint whilst serving their purposes.
- Social Stewardship – companies that create more problems for local communities are at risk of losing their social licence to operate, which can have a negative effect on investment returns.
- Good Governance – companies should exhibit alignment between shareholders and management interests over the long term.
- Organisation Culture – companies should demonstrate – through a high level of diversity – a culture of healthy debate and mutual respect, and a leadership team that cares about its employees.
In choosing portfolio companies, the Investment Manager first seeks to understand the true ‘purpose’ of a business. If the business is aligned with one of the UN Sustainable Development Goals (UN SDG), they then assess whether that business achieves its purpose in the most resource-efficient way, with low carbon intensity, and with best-in-class governance. The Investment Manager utilizes it’s proprietary industry-specific sustainability and stewardship models (Sustainability Models) to track progress and compare companies within the same industry.
This is an entirely bottom-up process which leverages the Investment Manager’s long-held relationships and experience in Emerging Market countries and is consistent with the rest of their investment approach. Companies who do not satisfy the Investment Manager’s requirements are considered to have poor sustainability credentials are not considered investable and are not included in the Investment Manager’s investable universe (the Quality List).
The extent to which sustainability issues represent potential or actual material risks to the Fund is considered by the Investment Manager as part of ongoing investment decision making and risk monitoring. Along with other material risks, the Investment Manager will consider Sustainability Risks to seek to maximize long-term risk-adjusted returns for the Fund.
Assessing Sustainability Risks is complex and requires subjective judgements, which may be based on data that is either difficult to obtain, incomplete, estimated, out of date, or otherwise materially inaccurate. Even when identified, there can be no guarantee that the Investment Manager will correctly assess the impact of Sustainability Risks on the Fund’s investments or proposed investments.
If a Sustainability Risk comes to the fore then there could be numerous potential consequences, which naturally vary depending on the specific risk, region, and asset class. In general, where a Sustainability Risk occurs in respect of an asset, there could be a negative impact on, or the entire loss of, its value.
Whilst it is difficult to assess the impact of Sustainability Risks as a whole on the Fund, the Investment Manager would expect the impact of Sustainability Risks to be low to moderate. Not only is the Fund diverse in nature but the Investment Manager is focused on stewardship, which results in a significant portion of the potential investment universe being deemed un-investable because of ESG related risks.
Sustainability Risks can exist in isolation, but it can also materially contribute to other risks relating to markets, operations, liquidity, or counterparties.