Keystone Positive Change | ESG

Keystone Positive Change Investment Trust plc has two equally important objectives: 

- To deliver attractive returns (to outperform the MSCI All Country World Index by, for example, two percent per annum net of fees, over rolling five-year periods); and

- To deliver a positive social change by contributing toward a more sustainable and inclusive world.

The Trust is focussed on listed and private companies for whom solving a social or environment challenge is core to their business. It does not negatively screen out investments to avoid the worst companies, but positively and proactively aims to invest in exceptional companies whose products, behaviour and/or services represent a significant improvement to the status quo. Companies held in the portfolio must be making a significant contribution to solving global challenges in one of four impact areas:

- Social Inclusion and Education;

- Environment and Resource Needs;

- Healthcare and Quality of Life; and

- Base of the Pyramid (addressing the needs of the poorest four billion people in the world). 

A. Assessment of Impact of Sustainable Investments

Reflecting that the Trust has two objectives: investment returns and impact, we have two stages to our research process: fundamental company analysis and impact analysis. We look for companies for whom delivering a positive impact is core to their business; whose products and services represent a significant improvement to the status quo; and whose people conduct business with honesty and integrity. 

The Trust invests in listed equities as wells as private companies. Positive Change Team's analysis of private companies' market opportunity, competitive advantages, management and culture, capital allocation, and long-term return prospects from both an investment and impact perspective is very similar to its listed equity investments. More detail on our fundamental company research and impact analysis can be seen in the Keystone Positive Change plc Financial Product Website Disclosure.

B. Monitoring Positive Social Impact of Sustainable Investments

Monitoring and reporting on impact are as equally important as monitoring and reporting financial performance.
The monitoring of positive social impact is ongoing and is interwoven with our monitoring of the investment case for a company. We look at company reports and disclosures, engage with management and monitor significant news, always with a focus on the long term and the key milestones we expect a company to reach in order to deliver impact.
The sell discipline mirrors our buy discipline: it is based on fundamentals. With a long-term investment horizon, portfolio turnover will be low, and we expect it to be below 20 per cent per annum over the long term. The Positive Change Team will carefully monitor the companies in which we invest through ongoing research and engagement with management teams. It is inevitable that companies will have setbacks and we are happy to own companies through periods of short-term operational weakness. However, if longer-term concerns develop that are not addressed by management or, if we detect a deterioration in the fundamental impact (or investment) case we will sell a holding. Similarly, if a company has performed as we expected and the impact (or investment) case has played out over the long term (five years plus), then we will sell the holding.

C. Measurement of Positive Social Impact of Sustainable Investments

No index has been designated as a reference sustainable benchmark against which the Trust can be measured to determine if it is meeting its sustainable investment objective. However, we have developed a robust approach using our in-depth knowledge of both listed and private companies to measure the impact of sustainable investments. We monitor the three metrics below:
1. Company Impact
Consistent with our bottom-up, fundamental investment approach, we identify bespoke metrics for each company that will help us monitor its progress in delivering positive change. We represent this impact through ‘The Positive Chain’, a model which illustrates how each company is contributing to positive outcomes and impacts through their inputs, activities and outputs. We depend primarily on company reported data for both listed and private companies but don’t limit ourselves to current levels of disclosure: where there are gaps we will engage with companies and request more information.
2. Portfolio Contribution to UN SDGs
At an overall portfolio level, we also link the product impact for each company to the United Nations’ Sustainable Development Goals (‘UN SDGs’). The UN developed the UN SDGs in 2015 as part of an ambitious programme which aims to end poverty in all forms, to build peaceful and inclusive societies, to protect human rights and promote gender equality, and to ensure the protection of the planet and its natural resources by the end of 2030. With 17 goals split into 169 specific targets covering a broad range of topics, we don’t intend that the portfolio addresses every single goal. However, mapping the contribution of individual holdings to these goals via the underlying 169 targets allows us to assess the contribution of the portfolio as a whole using an independent framework.
3. Portfolio Level Aggregate Data
We also aggregate metrics to illustrate portfolio impact and produce an impact indicator to help clients understand the impact from their own investment. Experience has taught us that buying and holding exceptional growth companies allows us to add more value for clients in terms of financial returns and impact achieved, than being overly active on resizing positions. We challenge ourselves and each other to retest our hypothesis and if our conviction changes for the impact objective, we will adjust portfolio sizing accordingly. This is considered in conjunction with investment returns as often we see investment and impact go hand in hand.

Limitations to Methodologies and Data

The impact different companies make is not always quantifiable, nor should it be. Furthermore, comparing impact across companies with very different activities is problematic. And, where impact is more easily quantifiable, it is not always measured and disclosed in a uniform way. With private companies, there may be a lack of transparency regarding business practices and data on the impact of the companies’ products and/or services may not be disclosed. The data used to apply the methodology outlined above may be provided by third party sources and is based on backward-looking analysis and the subjective nature of environmental, social and governance (‘ESG’) criteria means a wide variety of outcomes are possible. There is a risk that data provided may not adequately address the underlying detail around material impact or ESG considerations. The analysis is also dependent on both listed and private companies’ disclosing relevant data and the availability of data can be limited. These limitations are mitigated primarily through the investment manager’s own in-house research and active engagement with companies, as well as the use of a variety of data sources, rather than one single data source.

Future Developments

The Regulatory Technical Standards (‘RTS’) to support transparency of sustainable investments on websites have not been adopted by the Commission and scrutinised by the European co-legislators at the time of the publication of this disclosure. As such, no reference is made in this disclosure to the environmental and social principal adverse impact indicators proposed by the Joint European Supervisory Authorities (ESAs). This disclosure will be updated in advance of the effective date of the RTS which we expect to be 1 January 2022.