ESG Policy

Policy as at:
01/01/2021

What is ESG, and why do we do it?

Environmental, social and governance (ESG) considerations have been an integral part of Aberdeen Standard Investments’(ASI) decision-making process for almost 30 years. ASI believes that ESG factors are financially material and can meaningfully affect a company’s performance. Hence, a company’s ability to sustainably generate returns for investors depends on the management of its environmental impact, its consideration of the interests of society and stakeholders, and on the way it is governed. By putting ESG factors at the heart of its investment process, ASI aims to generate better outcomes for the Company’s shareholders. The three factors are considered as follows:

  • Environmental factors relate to how a company conducts itself with regard to environmental conservation and sustainability. Types of environmental risks and opportunities include a company’s energy consumption, waste disposal, land development and carbon footprint, among others.
  • Social factors pertain to a company’s relationship with its employees and vendors. Risks and opportunities can include (but are not limited to) a company’s initiatives on employee health and well-being, and how supplier relationships align with corporate values.
  • Corporate governance factors can include the corporate decision-making structure, independence of board members, the treatment of minority shareholders, executive compensation and political contributions, among others.

At the investment stage, ESG factors and analysis help to frame where best to invest by considering material risks and opportunities alongside other financial metrics. Due diligence can ascertain whether such risks are being adequately managed, and whether the market has understood and priced them accordingly.

Our investment manager is an active owner, voting at shareholder meetings in a deliberate manner, working with companies to drive positive change, and engaging with policymakers on ESG and stewardship matters. Furthermore, for the Company ASI has actively chosen not to invest in tobacco companies as part of the Company's portfolio and will not invest in companies directly exposed to controversial weapons.

Can we measure it?

There are elements of ESG that can be quantified, for example the diversity of a board, the carbon footprint of a company, and the level of employee turnover. While diversity can be monitored, measuring inclusion is more of a challenge. Although it is possible to measure the level of staff turnover, it is more challenging to quantify corporate culture. Relying on calculable metrics alone would potentially lead to misleading insights. As active managers, quantitative and qualitative assessments are blended to better understand the ESG performance of a company.

Aberdeen Standard Investments' analysts consider such factors in a systematic and globally-applied approach to assess and compare companies consistently on their ESG credentials, both regionally and against their peer group. Some of the key questions asked of companies include:

  • How material are ESG issues for this company, and how are they being addressed?
  • What is the quality of this company’s governance, ownership structure and management?
  • Are incentives and key performance indicators aligned with the company’s strategy and the interests of shareholders?

The questions asked differ from company to company, for example the type of questions poised to a bank would be quite different from those of a semiconductor manufacturing firm.

The ESG Scoring System

Having considered the regional universe and peer group in which an investee company operates, ASI allocates it an ESG score between one and five.This proprietary ESG score is applied to every stock within Aberdeen Standard Investments' investment universe. The scores are as follows, from highest to lowest: -

  1. Best in class
  2. Leader
  3. Average
  4. Below average
  5. Laggard.

Examples of each category and samples of the criteria used to determine an ESG score can be found on the Company's website.

Climate change

Climate change is one of the most significant challenges of the 21st century and has big implications for investors. The energy transition is underway in many parts of the world, and policy changes, falling costs of renewable energy, and a change in public perception are happening at a rapid pace. Assessing the risks and opportunities of climate change is a core part of the investment process. In particular, ASI considers:

  • Transition risks and opportunities Governments could take robust climate change mitigation actions to reduce emissions and transition to a low-carbon economy. This is reflected in targets, policies and regulation and can have a considerable impact on high-emitting companies.
  • Physical risks and opportunities Insufficient climate change mitigation action will lead to more severe and frequent physical damage. This results in financial implications, including damage to crops and infrastructure, and the need for physical adaptation such as flood defences.

Aberdeen Standard Investments has aligned its approach with that advocated by the investor agenda of the Principles for Responsible Investment (PRI) – a United Nations-supported initiative to promote responsible investment as a way of enhancing returns and better managing risk. PRI provides an intellectual framework to steer the massive transition of financial capital towards low-carbon opportunities. It also encourages fund managers to demonstrate climate action across four areas: investments; corporate engagement; investor disclosure; and policy advocacy. Further explanation of these areas can be found on the dedicated pages on the Company's website.

Importance of Engagement

Aberdeen Standard Investments is committed to regular, ongoing engagement with the companies in which it invests, to help to maintain and enhance their ESG standards into the future.

As part of the investment process, Aberdeen Standard Investments undertakes a significant number of company meetings each year on behalf of the Company. Your Company is supported by on-desk ESG analysts, as well as a well-resourced specialist ESG Investment team. These meetings provide an opportunity to discuss various relevant ESG issues including board composition, remuneration, audit, climate change, labour issues, human rights, bribery and corruption.

Companies are strongly encouraged to set clear targets or key performance indicators on all material ESG risks. ESG engagements are conducted with consideration of the 10 principles of the United Nations Global Compact, and companies are expected to meet fundamental responsibilities in the areas of human rights, labour, the environment and anti-corruption. This engagement is not limited to a company’s management team. It can include many other stakeholders such as non-government agencies, industry and regulatory bodies, as well as activists and the company’s customers and clients.

Examples of ASI's engagement with investee companies can be found on the Company's website.