The Board believes that integrating environmental, social and governance (ESG) best practice into the Company’s strategy, operations and Aberdeen Standard Investments’ (ASI) investment processes will help to generate strong, sustainable, returns for its shareholders and investors over the long term. The consideration of ESG factors is a fundamental part of ASI's process and has been so for over 30 years. There is also increasing focus on the risks and opportunities created by climate change. ASI's investment processes are reviewed regularly and as they evolve they are updated on the Company’s website.
Core beliefs: Assessing Risk, Enhancing Value
There are three core principles which underpin ASI’s integrated ESG approach. Firstly, ESG factors can materially impact financial returns and the long term success of the investment strategy. Secondly, by integrating ESG factors into investment decisions ASI generates a better understanding of how well companies are managing ESG risks and opportunities and this insight supports better decision making. Finally, active engagement with company management teams is key to enhancing value and a standard part of ASI’s ongoing stewardship programme
Researching Companies: Deeper Company Insights for Better Investor Outcomes
ASI’s portfolio managers, sector analysts, ESG equity analysts and central ESG Investment Team collaborate to generate a deep understanding of the ESG risks and opportunities associated with each company. The central ESG team also produces research into specific themes (e.g. labour relations or climate change), sectors (e.g. forestry) and ESG topics to understand and highlight best practice.
Global Networks: Working Together on Climate Change
ASI is a signatory to UNPRI and actively collaborates on ESG issues with global asset managers and asset owners. Climate change is a particular area of focus because the physical and transition risks related to climate change have the potential to be financially material for many companies. ASI has been actively involved in initiatives such as Climate Action100+ and Institutional Investors Group on Climate Change Net Zero Framework and also supports the Task Force on Climate Related Disclosures which aims to strengthen climate related reporting globally
ESG Research Process: Introduction
ASI employs around 150 equity professionals globally. A systematic and globally-applied approach to evaluating stocks allows ASI to compare companies consistently on their ESG credentials – both regionally and against their peer group. ASI uses a combination of external and proprietary in-house quantitative scoring techniques to complement and cross-check analyst-driven ESG assessments. ESG analysis is peer-reviewed within the equities team, and ESG factors impacting both sectors and stocks are discussed as part of the formal sector reviews.
More details on the ESG investment team can be found on page 93 of the Annual Report (see the link above).
ESG House Score
The ESG House Score is produced by the ESG Equity Analysts. The ESG House Score framework has two main pillars which include detailed operational and governance metrics. The underlying key performance indicators are weighted according to how material they are for each sector and country and populated from proprietary and external data sources such as MSCI and Trucost. The scores are standardised to allow ASI to see how individual companies rank in a global context. These scores complement the fundamental analysis of the equity analysts and the ranking of companies from Laggards to Best in Class
Equity ESG Quality Score
ASI’s equity sector analysts have a fully integrated approach to ESG analysis. Within the equity investment process, every company is given a proprietary Quality Rating which has five components: industry analysis, business model analysis, analysis of the company’s moat or competitive advantage, consideration of ESG factors, assessment of management and analysis of financials. In considering the ESG Quality Score the analyst considers these key questions:
- Which ESG issues are relevant for this company, how material are they, and how are they being addressed?
- What is the assessment of 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?
Having considered the regional universe and peer group in which the company operates, ASI’s equity team then allocates it an ESG Quality rating between one and five (see below). This is applied across every stock that ASI covers globally. To be considered ‘best in class’, the management of ESG factors must be a material part of the company’s core business strategy; management must provide excellent disclosure of data on key risk; management must also have clear policies and strong governance structures, among other criteria.
Working with Companies: Staying Engaged, Driving Change
ASI continuously monitors and actively engages with the companies in which it invests to maintain ESG focus and improvement. This stewardship of client's assets consists of four interconnected and equally important activities by ASI to monitor, contact, engage and act.
ASI actively and regularly engages with the management teams of companies in which they are invested in order to share examples of best practice seen in other companies and to effect positive change. ASI also actively engages with management teams to explain voting decisions at company annual general meetings.
ASI’s engagement extends beyond the company’s management team and can include many other stakeholders such as non-government agencies, industry and regulatory bodies, as well as activists and the company’s clients.
Priorities for engagement are established by the use of the ESG House Score, in combination with bottom-up research insights from investment teams across asset classes, and areas of thematic focus from our company-level stewardship activities. What gets measured gets managed, so ASI strongly encourages companies to set clear targets or key performance indicators on all material ESG risks.
Further details of ASI's monitor, contact, engage and act approach can be found on page 95 of the Annual Report.