Henderson Smaller Companies | ESG

The Board has reviewed and is supportive of the Manager’s team approach which is set out below.

The Fund Manager’s UK Smaller Companies team (the “Team”) uses a combination of bottom-up and top-down approaches to find companies that have undervalued long-term growth potential. ESG issues are identified as part of the Team’s well-established “4Ms” process to analyse investee companies’ model, management, money and momentum. A key part of the philosophy is focused on the sustainability of business models, and the Team’s core belief is that the most successful management teams over time will be those which score well on ESG, have a long-term focus, a good track record of shareholder alignment and an understanding of industry themes. The conviction and focus on the long term are reflected in the Company’s average holding period of approximately six years.

Sustainability themes regularly inform capital allocation decisions. Companies offering goods and services which address issues such as aging populations, urbanisation, cyber-crime and the savings gap have all been attractive propositions from a growth perspective. The Team is also cognisant of the risks accompanying ESG-themed investing: policy instability, uncertainty around customer adoption and technological obsolescence.

ESG factors impact all parts of an investment case often implicitly, not explicitly. The effectiveness of a company’s corporate governance structure and the impact a company has on the environment and society are just as important as more traditional indicators of quality such as cash flow or returns on invested capital.

A company’s ESG characteristics directly impact how it is valued. All these factors influence the price multiples the market is willing to attribute to a company’s earnings or the cost of capital used to discount its cash flows. The Investment Manager’s core belief is that companies that score well on ESG and sustainability factors warrant a premium over time.

The Team’s combined experience in the UK market has created a deep knowledge base. Management analysis is further supplemented by a body of increasingly sophisticated ESG-related data, broker research and company meetings. The Team is wary of the fact that individual ESG data points are not always material to company performance or even comparable between peers. However, the Team is conscious that management’s overall attention to a collection of impactful ESG or sustainability issues can be interpreted as a leading indicator of quality long-term oriented leadership and so impacts the ability to deliver enduring success.

The general level of corporate governance at listed companies in the UK is of a very high standard in terms of best practice principles. The Team makes strong use of this market feature to augment traditional corporate governance and company research. As active managers in the UK marketplace, the Team is committed to the principles of good stewardship and attends in excess of 300 company meetings per year. These opportunities are used to challenge strategy and hold management to account where issues have occurred. In addition to engaging with company management, the Team will often engage with the boards of portfolio companies where they believe concerns need to be escalated. The Team has written letters to the Chair of the board of all portfolio companies setting out key themes and areas of focus regarding ESG matters; both to inform portfolio companies of the Team’s voting policies and to encourage discussion and debate on the matters highlighted. 

The Team collaborates closely with Janus Henderson’s in-house governance and responsible investment (“GRI”) team, as a specialist resource on ESG issues. The GRI team screens portfolios for major ESG issues and highlights important ESG engagement topics ahead of company meetings. In addition, the GRI and UK Smaller Companies teams work together to coordinate a pipeline of proactive engagement with companies on a range of ESG themes.

If the Team does not feel that shareholder concerns are being addressed when engaging with a company, they will be prepared to consider disinvesting.