North American Income Trust | ESG

Whilst Environmental, Social and Governance (ESG) factors alone are not the over-riding criteria in relation to the investment decisions taken by the Manager for the Company, ESG is fully integrated across the Manager’s investment process. The Company is not an ESG fund but the Board oversees the Manager's approach to ESG integration and is working with the Manager to understand both developments in the UK, as they apply to the Company, and developments in the US, as they apply to the companies in which the Company invests.

The information below provides an overview of the way that ESG factors are considered by the Manager. 

These processes are reviewed regularly and liable to change. The latest information including the Manager's focus on climate change, is available at abrdn.com/europe/sustainable-investing.

abrdn's Core beliefs: why ESG is essential

Considering and integrating ESG factors can offer informational, analytical and/or behavioural advantages. At abrdn, ESG factors are a component of how we think about and assess ‘quality’. They also help us to identify and determine sustainable competitive advantages. 

Informational advantage

By considering ESG factors, we obtain more information about the risk factors for different companies and gain a deeper understanding of the approach companies take to manage their business. We generate our own ESG assessment for each company, rather than relying on third party data, which we believe gives us differentiated information. 

Analytical advantage

We believe incorporating ESG factors into our company assessments gives us an analytical advantage. By engaging directly with companies and conducting our own ESG research,  we believe we can capture the potential impact of these factors on the future outlook of  the company. 

Behavioural advantage

We believe that ESG factors, and our insights on how companies manage these factors, can give us a better indication of the underlying quality of businesses. Having increased confidence in the quality of companies can give us a behavioural advantage. Deeper conviction in our investment case can make us more resilient to adverse changes in market sentiment and volatility. 

“Material issues are those that are likely to affect the financial condition or operating performance of a company, and therefore are most important to an investor.” Sustainability Accounting Standards Board (SASB) 

Our analysts determine which ESG factors are financially material to form a forward-looking view of how the business will manage risks and capture opportunities. We focus on what we deem to be the most material ESG factors to understand their impact on a company’s future business performance, financial position, and/or market perception.  When identifying material ESG factors, we pay close attention to how they affect a business today (operations, earnings, and current valuation) and in the future (reputation and longer-term valuation). 

We want to fully understand the equities in which we invest. This takes extensive, first-hand research of each company in our research universe. We rank stocks using systematic and globally applied ratings. This helps us compare companies, both regionally and against their peer group. Key questions we ask are:  

• What is our view on the quality of corporate governance, oversight and management? 
• What are the most material ESG and operational governance factors the company must manage and how are they being addressed? 
• How will the most material ESG risks and opportunities affect the company’s operational performance  and valuation? 
• What is our ESG quality rating and how does it factor into the investment conclusion? Does our view differ from external sources? 

As part of our research process, we rate a company’s management of material ESG factors and the relevance to the investment case. This is a key part of our overall research process.

There are five components of Quality assessed by abrdn’s Analysts for all companies in the portfolio, which are assessed to develop an Analyst rating for the company. These are: 

• Industry
• Business Model
• ESG
• Management
• Finanical Strength

Having considered the regional universe and peer group in which the company operates, the Manager’s equity team then allocates it an ESG Quality score (ESG Q Score) between one and five (see below) which will be applied across every stock that the Manager covers globally.

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

The Manager also uses a combination of external and proprietary in-house quantitative scoring techniques to complement and crosscheck 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.

To be considered ‘best in class’, the management of ESG factors must be a material part of the company’s core business strategy. It must provide excellent disclosure of data on key risks. It must also have clear policies and strong governance structures, among other criteria.

ESG integration doesn’t end with the investment research; engagement is a central part of our investment process. We actively engage with the companies in which we invest to understand more about a company’s strategy and performance and to encourage best practice and drive change. We combine information and insights from these meetings with the insights of our investment managers, ESG equity analysts and central ESG resources. As part of our engagement, companies are encouraged to set clear targets or key performance indicators on all material ESG risks to enable performance monitoring.  Engagement consists of four interconnected and equally important stages. 

Monitor: ongoing due diligence

• Business performance
• Company financials
• Corporate governance
• Company’s key risks and opportunities 

Contact: frequent dialogue

• Senior executives
• Board members
• Heads of departments and specialists
• Site visits 

Engage: using our voice

• Attend AGM/EGMs 
• Always vote
• Explain voting decisions
• Maximise influence to drive positive outcomes 

Act: consider all options

• Increase or decrease our shareholding
• Collaborate with other investors
• Take legal action if necessary

ESG factors are a core component of how we view the quality of a business, and they influence our research discussions.

Portfolio meetings are where we review the outcomes of team-based sector reviews and discuss specific companies that meet the fund’s mandate. Peer review provides oversight for all our investment analysis and ESG factors are no different. We have robust debates and challenge each other on our ESG analysis and its relevance to investment cases and decisions. We then construct a portfolio of Quality companies, having considered ESG factors and their impact on our different Quality outcomes.