Whilst environmental, social and governance (ESG) factors are not the over-riding criteria in relation to the investment decisions taken by Aberdeen Standard Investments (ASI) for the Company, significant prominence is placed on ESG and climate related factors throughout its investment process. The following sections highlight the way that ESG and climate change are considered by Aberdeen Standard Investments. These processes are reviewed regularly and liable to change and the latest information will be available for download on the Company’s website.
Core beliefs - Assessing Risk, Enhancing Value
Whilst the management of the Company’s investments is not undertaken with any specific instructions to exclude certain asset types or classes, the consideration of ESG factors is a fundamental part of the investment process and has been for over 30 years. It is one of the key criteria on which Aberdeen Standard Investments assesses the investment case for any company in which it invests for three key reasons:
- Financial Returns - ESG factors can be financially material – the level of consideration they are given in a company will ultimately have an impact on corporate performance, either positively or negatively. Those companies that take their ESG responsibilities tend to outperform those that do not.
- Fuller Insight - systematically assessing a company’s ESG risks and opportunities alongside other financial metrics allows ASI to make better investment decisions.
- Corporate Advancement - informed and constructive engagement helps foster better companies, protecting and enhancing the value of the Company’s investments.
Researching Companies: Deeper Company Insights for Better Investor Outcomes
ASI conducts extensive and high-quality fundamental and first-hand research to fully understand the investment case for every company in its global universe. A key part of the ASI’s research involves focusing its extensive resources on analysis of ESG issues. ASI’s investment managers, ESG Equity Analysts and central ESG Investment Team collaborate to generate a deep understanding of the ESG risks and opportunities associated with each company. Stewardship and active engagement with every company are also fundamental to the investment process helping to produce positive outcomes that lead to better risk-adjusted returns.
ASI’s Global ESG Infrastructure
ASI has around 150 equity professionals globally. Each systematically analyses ESG risks and opportunities as part of the Manager’s research output for each company. Its central team and ESG equity analysts support the investment managers’ first-hand company analysis, producing research into specific themes (e.g. labour relations or climate change), sectors (e.g. forestry) and ESG topics to understand and highlight best practice. Examples of thematic and sector research can be found on ASI’s website.
ASI has a duty to consider all factors that may have a financially material impact on returns. Climate change is such a key factor.
The related physical and transition risks are vast and are becoming increasingly financially material for many of our investments. Not only in the obvious high-emitting sectors, such as energy, utilities and transportation, but also along the supply chain, providers of finance and in those reliant on agricultural outputs and water.
In ASI’s view, companies that successfully manage climate change risks will perform better in the long-term. It is important that ASI assesses the financial implications of material climate change risks across all asset classes, including real assets, to make portfolios more resilient to climate risk.
Adaptation measures are essential to help limit damages from the physical impacts of climate change. Comparable climate-related data is necessary to enable effective decision making, and is something ASI actively sources and incorporates into its process. ASI is supportive of the Task Force on Climate-related Financial Disclosures (TCFD) framework to strengthen climate reporting globally.Regular engagement with high-emitting investee companies allows ASI to better understand its exposure and management of climate change risks and opportunities. In actively managed investments, ownership provides a strong ability to challenge companies where appropriate. ASI can also influence corporate behaviour positively in relation to climate-risk management.
ASI believes that this is more powerful for an effective energy transition than a generic fossil fuel divestment approach. Through active engagement it is possible to steer investee companies towards ambitious targets and more sustainable low-carbon solutions. If there is limited progress in response to the engagement, ASI will consider the ultimate option of selling its holdings.
ASI strongly encourages companies to consider the social dimension of the energy transition to ensure it is inclusive and ‘just’. This means worker and community needs are considered on the path to a low-carbon economy so they are not left stranded. Other social aspects, such as affordability and reliability of energy supply are also important. Influencing through engagement has worked particularly well in collaboration with other asset managers and asset owners as part of their involvement in Climate Action 100+. This is a five-year initiative to engage and influence high-emitting companies collaboratively.
Consideration of climate change risks and opportunities is an integral part of the investment process and corporate engagement is seen as essential to ensuring that portfolio companies manage climate-related risks and support a ‘just’ energy transition. This is an important part of the role of an active investor.
ASI provides climate change insights through research and data to investment decision makers. This helps assess the financial materiality of climate change risks and opportunities. It aims to influence the management of climate-related risks through engagement and voting and is part of Climate Action 100+ having signed the 2018 Just Transition statement.
From Laggards to Best in Class: Rating Company ESG Credentials
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 captures the findings from its research and company engagement meetings in formal research notes.
Some of the key questions include:
- Which ESG issues are relevant for this company, how material are they, and how are they being addressed?
- What is ASI’s 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 rating between one and five:
- Best in class
- Below Average
Further details of ASI's scoring categories can be found on the Company's website.
The scoring is applied across every stock that ASI covers globally. ASI also 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. 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.
Working with Companies: Staying Engaged, Driving Change
Once ASI invests in a company, it is committed to helping that company maintain or raise their ESG standards further, using ASI’s position as a shareholder to press for action as needed. ASI actively engages with the companies in which it invests to maintain ESG focus and encourage improvement.
ASI sees this programme of regular engagement as a necessary fulfilment of its duty as a responsible steward of clients’ assets. It is also an opportunity to share examples of best practice seen in other companies and to use ASI’s influence to effect positive change. ASI’s engagement is not limited to the company’s management team. It can include many other stakeholders such as non-government agencies, industry and regulatory bodies, as well as activists and the company’s clients. What gets measured gets managed, so ASI strongly encourages companies to set clear targets or key performance indicators on all material ESG risks.
The engagement process consists of four interconnected and equally important stages - Monitor, Contact, Engage and Act - these incorporate ongoing due diligence, frequent dialogue with companies (senior execs, board members, specialists etc), exercising rights as shareholders on all aspects of voting and keeping all options under review.