Pacific Assets Trust | ESG

The Board believes that consideration of environmental, social and governance (“ESG”) issues within the Company’s operations is of importance to shareholders and other stakeholders, not least because long-term returns are much more likely to be generated by companies that have embedded corporate governance strengths, and which respect the environment and the society in which they operate. The Board believes that this investment approach is readily applicable in the markets in Asia in which the Company invests.

As the Company delegates the management of the portfolio to Stewart Investors, the Board has chosen to adopt and endorse their approach to integrating sustainability into portfolio construction and investee company engagement. This approach is described in detail in this section. As part of this focus on sustainability, the Board expects ESG concerns to be a key topic of engagement with investee companies. The Company expects to maintain, through its Portfolio Manager, a continuous constructive dialogue with the owners and the managers of the companies where it owns shares. Such a relationship is enhanced by the long-term nature of the investment inherent in the Portfolio Manager’s investment approach, reassuring companies of stability.

In the same way as the Board expects the Portfolio Manager to test investee companies on their ESG adherence, the Board will also assess the Company’s principal service providers. The Board asks for assurances that a service provider has taken the necessary steps to mitigate any negative environmental impact their operations might have, to ensure that their internal governance is compliant with expected high standards, and that they strive to avoid negative social impacts resulting from their activities.

Similarly, the Board itself strives to uphold the highest ESG standards. The Board’s operations mainly consist of governance-related matters, where it is important to the Directors to be at the forefront of best practice. As best practice, regulation and disclosure are evolving rapidly in this area both for the Company and for the companies in which it invests, the Board regularly discusses sustainability, including ESG policy and practice, with the Portfolio Manager, encouraging where possible further enhancements in both the policy and in reporting to shareholders.

Sustainability is core to Stewart Investors’ investment philosophy and integrated into their investment process. They do not have a separate team that looks at sustainability – every investment team member analyses the sustainability positioning of a business, and is also responsible for engaging and voting activities.

Stewart Investors only invest in high-quality companies that contribute to, and benefit from, sustainable development. They define development as sustainable if it furthers human development and has an ecological footprint that respects planetary boundaries. All members of the investment team sign the Stewart Investors, Hippocratic Oath, pledging to uphold the principles of stewardship.

They approach sustainability as a means to mitigate risks and as a driver of investment returns. Integrating sustainability into their analysis is a natural extension of having a long-term investment horizon; the sustainability headwinds and tailwinds that affect companies are different from the shorter-term risks that businesses face.

Their consideration of sustainability is holistic; it includes ESG but is more than ESG. They consider financial sustainability – conservatism around the balance sheet, for example – and stewardship by management – the treatment of all stakeholders through a crisis, for example – to be as essential to the sustainability positioning of a company as the product or service the company sells. When assessing a company’s sustainability they ask themselves the following questions:

> Products and services – Do the products and services make a valuable contribution to sustainable development?

> Context – Can the company benefit from sustainability tailwinds and negative headwinds?

> Company ethos – Do the culture and values embody sustainability and continuous improvement?

> Operational impact – Is the company trying to reduce impacts from its operations?

They avoid companies that do not contribute to sustainable development and engage with companies to improve sustainability outcomes.

Stewart Investors has established a materiality threshold for harmful or controversial activities at 5% of revenues – 0% for tobacco production and controversial weapons.  They explicitly seek to invest in companies that are making a positive contribution to society. Full details of the activities and practices Stewart Investors finds inconsistent with their investment philosophy are available on their website.

Stewart Investors employ the services of an external ESG research provider to provide a quarterly check on the Trust to ensure companies meet global norms for best practices and raise no exceptions against their thresholds for harmful activities. They also receive controversy reporting from RepRisk.

Issues such as climate change, biodiversity and water, human rights and modern slavery, and diversity and inclusion are integrated into Stewart Investors’ investment selection and engagement and voting processes. Their approach to climate change is explained in detail in their climate statement and recently published climate report. Their approach to biodiversity and water is reflected in their selection of companies that mitigate their impact on the natural environment or provide services/products that improve efficiencies. They have engaged on a number of related issues such as palm oil, deforestation, plastic waste and the use of harmful chemicals. Human rights and modern slavery are a risk throughout the supply chain of their investee companies. Their approach is to focus on quality companies that treat their employees well and manage the risks in their supply chain effectively. Where they identify problems they engage. Their recent collaborative engagement on conflict minerals in the semi-conductor supply chain is a good example of this. Their approach to diversity is explained in their statement5 and article about what they have done so far. They will provide updates on these issues, amongst others, in their quarterly shareholder updates.

As part of their focus on improved transparency, Stewart Investors have developed a Portfolio Explorer tool which provides four views of sustainable development for the Trust:

Map: This global view provides detailed company information including investment rationales, risks and engagement priorities.

Sustainable Development Goals (“SDGs”): The 17 SDGs are globally agreed goals that countries have committed to achieving by 2030. The SDGs offer a vision for the future towards which sustainable investment efforts can be directed.

Climate solutions: Companies are mapped to Project Drawdown’s c.90 climate change solutions, which if scaled up, can deliver the Paris Agreement’s 1.5oC temperature goal. Project Drawdown is a non-profit organisation providing analysis of the solutions which can help the world reach ‘drawdown’ – i.e. the future point in time when levels of greenhouse gases in the atmosphere stop climbing and start to decline. The solutions are diverse and cross-cutting, and show the systemic change needed to avoid catastrophic warming. The full set of solutions along with the research that backs them are publicly available on www.drawdown.org.

Human development pillars: Stewart Investors have developed 10 human development pillars inspired by the UN Human Development Index that they believe are essential for lifting people out of poverty and empowering them to achieve their potential.