The Board relies on its Investment Manager Aberdeen Standard Investments (ASI) to apply appropriate Environment, Social and Governance (ESG) principles to how the portfolio is constructed and managed within the confines of its investment objective and policy. Having an income objective means that the Company needs to acquire investments which typically provide a higher than average yield which in some cases means more exposure to older industries such as energy and consumables but, even here, ESG principles are applied in deciding on a specific investment within these more mature industries as it is evident that the possibility of engagement by ASI can lead to radical changes to their business models to account for social and environmental responsibilities, irrespective of government interventions.
Although ESG factors are not the over-riding criteria in relation to the investment decisions taken by ASI, significant prominence is placed on ESG and climate related factors throughout the investment process. The following paragraphs highlight the way that ESG and climate change are considered by ASI. 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 ASI's process and has been so for over 30 years. It is one of the key criteria on which ASI assesses the investment case for any company in which it invests for three key reasons as referred to below.
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 seriously 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 ASI’s research involves focusing its extensive resources on analysis of ESG issues. As set out in more detail in the table below, ASI’s portfolio 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 research output for each company. Its central team and ESG equity analysts support ASI’s firsthand 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 at http://aberdeenstandard.com/en/uk/investor/responsible-investing
Portfolio Managers - All of ASI’s equity portfolio managers seek to engage actively with companies to gain insight into their specific risks and provide a positive ongoing influence on their corporate strategy for governance, environmental and social impact.
ESG Equity Analysts ASI has dedicated and highly experienced ESG equity analysts located across the UK, US, Asia and Australia. Working as part of individual investment teams, rather than as a separate department, these specialists are integral to pre-investment due diligence and post investment ongoing company engagement. They are also responsible for taking thematic research produced by the central ESG Investment Team (see below), interpreting and translating it into actionable insights and engagement programmes for its regional investment strategies.
ESG Investment Team This central team of more than 20 experienced specialists based in Edinburgh and London provides ESG consultancy and insight for all asset classes. Taking a global approach both identifies regions, industries and sectors that are most vulnerable to ESG risks and identifies those that can take advantage of the opportunities presented. Working with portfolio managers, the team is key to ASI’s active stewardship approach of using shareholder voting and corporate engagement to drive positive change.
Climate change is one of the most significant challenges of the 21st century and has big implications for investors. The energy transition is underway in many parts of the world, and policy changes, falling costs of renewable energy, and a change in public perception are happening at a rapid pace. Assessing the risks and opportunities of climate change is a core part of the investment process. In particular, ASI considers:
Transition risks and opportunities
Governments could take robust climate change mitigation actions to reduce emissions and transition to a low-carbon economy. This is reflected in targets, policies and regulation and can have a considerable impact on high-emitting companies.
Physical risks and opportunities
Insufficient climate change mitigation action will lead to more severe and frequent physical damage. This results in financial implications, including damage to crops and infrastructure, and the need for physical adaptation such as flood defences. ASI has aligned its approach with that advocated by the investor agenda of the Principles for Responsible Investment (PRI) – a United Nations-supported initiative to promote responsible investment as a way of enhancing returns and better managing risk. PRI provides an intellectual framework to steer the massive transition of financial capital towards low-carbon opportunities. It also encourages fund managers to demonstrate climate action across four areas: investments; corporate engagement; investor disclosure; and policy advocacy as explained in more detail on page 33 of the Annual Report (see link).
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 the 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 (see below).
This 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.
1. Best in class
- ESG considerations are material part of the company’s core business strategy
- Excellent disclosure
- Makes opportunities from strong ESG risk management
- ESG considerations not market leading
- Disclosure is good, but not best in class
- Governance is generally very good
- ESG risks are considered as a part of principal business
- Disclosure in line with regulatory requirements
- Governance is generally good but some minor concerns
4. Below average
- Evidence of some financially material controversies
- Poor governance or limited oversight of key ESG issues
- Some issues in treating minority shareholders poorly
- Many financially material controversies
- Severe governance concerns
- Poor treatment of minority shareholders
Working with Companies: Staying Engaged, Driving Change
Once ASI invests in a company, it is committed to helping that company maintain or raise its 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 its 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 investment process consists of four interconnected and equally important stages.
Monitor - Ongoing due diligence
- Business performance
- Company financials
- Corporate governance
- Company’s key risks and opportunities
Contact - Frequent dialogue
- Senior executives
- Board members
- Heads of departments and specialists
- Site visits
Engage - Exercise rights
- Attend AGM/EGMs
- Always vote
- Explain voting decisions
- Maximise influence to drive positive outcomes
Act - Consider all options
- Increase or decrease shareholding
- Collaborate with other investors
- Take legal action if necessary