Responsible Investment and its Role
Troy Income & Growth Trust’s objective is to provide shareholders with an attractive income yield and the prospect of income and capital growth through investing in a portfolio of predominantly UK equities. As part of delivering this objective the manager builds portfolios without reference to the composition of any index and focusses on reducing unrewarded risk with the aim of reducing volatility and improving the long-term risk adjusted returns delivered by the portfolio.
Responsible investment is viewed as the fundamental integration of material ESG factors into investment analysis, decision making and portfolio construction, and into stewardship activities, including voting and engagement in order to improve the risk and return profile of the portfolio. The Trust’s long investment horizon means that social and environmental materiality and financial materiality are largely indivisible. As such, our duty to our investors necessitates that analysis of material ESG risks and opportunities is integrated into our investment process. This is particularly relevant in relation to climate risk which we believe to be both material and systemic.
The Investment Manager defines ‘ESG factors’ as non-financial, environmental, social or governance factors. Troy carries out an analysis of these ESG factors by considering both the positive and negative effect such factors may have on an investment. Within this framework, Troy analyses ‘sustainability risks’, being risks relating to an ESG event or condition that, if they occur, could cause an actual or potential material negative impact on the value of an investment.
Troy also considers the materiality of ESG factors in relation to their outward impact on the environment and society. Troy may seek to deliver environmental or social impact where doing so is aligned with improving the risk and return profile of the investment, or is not contrary to that objective. Troy will not seek environmental or social impact at the expense of returns. In all but rare circumstances, long investment time horizons create alignment between an investment’s risk and return objectives and any impact objective.
Troy does not seek to narrowly define or limit the factor categories but rather appreciates that such analysis must necessarily take place in the context of the wider assessment of risk and reward. An outline of some, but by no means all, of the areas which will be assessed for the impact of ESG factors is as follows:
- Climate change;
- Natural resources;
- Pollution and waste;
- Environmental opportunities;
- Human capital;
- Product liability;
- Stakeholder opposition;
- Social opportunities;
- Corporate governance; and
- Corporate behaviours.
In considering ESG matters, the Investment Manager is increasingly focussing on climate-related risks. Climate change is considered to be one of the most significant and complex systemic risks facing our society, economy and financial markets today.
Time Horizon: The Investment Manager aims to invest in stocks that can be held for the long term (five years or more). This time horizon clearly extends into the time frame over which one can reasonably expect the impact of climate change to be felt. As such the management of climate risk is implemented within the investment process.
Transition Risk: The Investment Manager assesses that the risks associated with a transition to a lower carbon economy fall well with Troy’s investment time horizon of more than 5 years. Whilst Troy’s investment process favours capital-light investments, and the Trust has no material direct exposure to many of the most carbon-intensive sectors, the analysis of transition risk at the individual stock and portfolio level remains an important part of the investment process.
Physical Risk: The risks associated with a warming climate, including from rising sea levels, extreme weather and wildfire events, are extremely difficult to model and are risks that impact almost all companies. The understanding of how physical climate risk might impact financial markets and asset prices is in its infancy but we continue to develop our understanding of this and apply it to the analysis of companies.
TCFD: In recognition of the importance of the influence of climate change on future returns, Troy has committed to implementing the recommendations of the Task Force for Climate-Related Financial Disclosures (TCFD).
Monitoring of, and Engagement with, Investee Companies
Whilst the Trust seeks to invest in companies whose business strength and corporate governance policies mean they generally do not require significant shareholder intervention, the Investment Manager does recognise that engagement is an important aspect of fiduciary duty. Engagement is generally conducted proactively and as part of an investee company’s decision-making process; Troy is also willing to engage reactively where a company has taken a course of action that conflicts with its standpoint. The impetus to engage may stem from a breach by the company of generally accepted business practice norms, Troy’s proxy voting process or integrated ESG analysis. Any engagement would be expected to meet the following criteria:
- There is a clear objective in engaging with a company;
- The matter for engagement must be material; and
- The engagement with the company is constructive.
Voting and Disclosure of Activity
The Trust considers (proxy) voting an important part of its stewardship activities and investment process and aims to use its voting rights to both safeguard the interests of investors and encourage environmental and social sustainability (where these objectives are aligned). The Investment Manager will seek to instruct votes, on behalf of investors, on all resolutions for which it has voting authority.
Troy conducts analysis of each management or shareholder resolution ahead of voting. Votes are then cast in line with what is deemed to be in the best long-term interest of shareholders. Environmental and social sustainability are considered alongside governance factors in this analysis.
Whenever possible, voting on any resolution is incorporated as part of the wider engagement with management. Troy’s preferred course of action would be to have dialogue with any company ahead of casting a vote against management. Where appropriate Troy may also seek to engage with a company following a vote against management.
UN Principles for Responsible Investment
As part of the Investment Manager’s commitment to responsible investing, Troy became a signatory to the United Nations’ Principles for Responsible Investment in September 2016.