Chelverton UK Dividend Trust | ESG

The Chelverton UK Dividend Trust invests in the equity of small and medium sized UK companies with the aim of providing both high yield and opportunity for capital growth.

The Chelverton UK Dividend Trust’s Board of Directors are responsible for setting the investment policy of the fund.

The Board of Directors delegate implementation of the investment policy to an appointed investment manager, including implementation of the fund’s approach to environmental, social and governance (ESG) issues.

Chelverton Asset Management Ltd (CAM) has acted as the fund’s manager since launch in 1999.

CAM are specialist investors in small and medium sized companies. The fund managers are stock pickers who follow a bottom-up approach to investment selection.

CAM managers are not specialist sustainability-focussed investors but recognise that ESG issues can variably impact the investment performance of individual companies over time.

The managers are committed to delivering the long-term investment objectives of the Company.

This long-term lens involves careful consideration of systemic issues that can present investing opportunities and challenges for investors, such as those relating to climate change and more sustainable business practice.

CAM invest the fund’s assets in line with the investment policy and with the support of a dedicated team of ESG specialists, led by CAM’s Head of Responsible Investment.

Responsible investing and active stewardship lie at the heart of the investing approach and CAM is signatory to both the United-Nations backed Principles of Responsible Investing (PRI) and the UK Stewardship Code 2020.

The manager has committed to reporting details of the investment approach and annual activities to these signatory bodies on an annual basis.

The PRI is the world’s leading proponent of responsible investing which is defined by the PRI as the incorporation of ESG issues into investment decision making processes and stewardship activity with the aim of improving risk management and returns.

Stewardship is defined in the UK Stewardship Code 2020 as the responsible allocation, management, and oversight of capital to create long-term value for clients and beneficiaries, leading to sustainable benefits for the economy, the environment, and society.

The Responsible Investing policies, including stewardship policies, that guide the fund manager’s approach are detailed in CAM’s Responsible Investing Policy Pack, which is available to view on request.

The following disclosures outline how CAM includes ESG issues within their investment decision making process and stewardship on behalf of the Chelverton UK Dividend Trust.

The disclosures may usefully be read in conjunction with the details offered on pages 16 to 22 of the Chelverton UK Dividend Trust Annual Report and Accounts 30th April 2023.

NOTE: These disclosures should be read in conjunction with an important disclaimer relating to retail investors.

The fund’s investment policy does not restrict or exclude investments based on ESG criteria alone.

However, the managers consider that company focus on managing material ESG issues is an important management quality indicator, increasingly relevant to the maintenance of company competitive advantage over the long term.

The investment process therefore includes steps to ensure adequate consideration of material ESG issues.

Adherence to these steps tends to exclude those companies assessed as managing ESG risks and opportunities poorly, or without a credible strategy.

These process steps are outlined in CAM’s Responsible Investing Policy Pack, which is available on request.

The fund’s investment policy does not target investments for inclusion based on ESG criteria alone.

However, the managers recognise that market needs and expectations are increasingly influenced by ESG risks and opportunities, and that these have a bearing on long-term company success.

The manager’s investment process therefore tends to favour the selection of efficient businesses, pursuing more sustainable business practice, and managing material ESG risks and opportunities appropriately.

Further details are outlined in CAM’s Responsible Investing Policy Pack, which is available to view on request.  

CAM are specialist investors in small and medium sized companies, following a bottom-up approach to investment selection.

Investment in this under-researched segment of the market is a granular process and CAM rely on qualitative information (non-financial data) in their assessments, always considering company size and level of maturity as a key component within analyses.

Qualitative information is viewed alongside quantitative information (financial data).

The manager’s ESG Policy sets out the ESG risk control parameters that guide the managers investment decision-making. This policy is contained within CAM’s Responsible Investing Policies Pack which is available on request.

The managers seek to establish committed holdings steadily over time, meeting company management on a regular basis to understand the investment proposition and build investment conviction.

Since 2018 CAM have relied upon the support of a dedicated corporate governance manager advising on matters relating to company governance within the small and medium sized company context.

In 2020 CAM added a responsible investing manager to the team to increase focus on the environmental and social issues within the small and medium sized company context.

This ESG team work alongside the fund managers, providing focussed ESG research and engagement support focussed on the needs of small and medium sized companies.

The ESG team have developed a proprietary information system gathering information via an ESG questionnaire, to address prevalent ESG information gaps.

The questionnaires are tailored to company size and level of maturity and are sent to holdings on an annual basis with an engagement letter that outlines the managers ESG management and reporting expectations, offering support to smaller companies where appropriate.

The managers track company progress against ESG criteria year on year.

Consideration of environmental factors that may have a bearing on company success are considered within the investment process.

CAM subscribe to relevant data from a number of external ESG data services providing information relating to the environmental impacts of companies.

However, research coverage of small and medium sized companies by external ESG data providers is limited and does not consider the impact of company size and maturity within analyses. Therefore, CAM do not rely on this data except for contextual purposes.

Environmental impact disclosures by small and medium sized companies are often poor due to limited reporting resources and may mis-represent management strength.

Consequently, CAM gather supplementary environmental management data via ESG questionnaire.

The questionnaire asks questions relating to the management of greenhouse gas emissions, energy, waste and hazardous materials, water and wastewater, environmental fines, deforestation, and ecological impacts.

Consideration of social factors that may have a bearing on company success are considered within the investment process.

CAM subscribe to social data from a number of external ESG data services providing information relating to the social impacts of companies.

However, the research coverage of small and medium sized companies by external ESG data providers is limited and does not consider the impact of company size and maturity within analyses. Therefore, CAM do not rely on this data except for contextual purposes.

Social impact disclosures by small and medium sized companies are often poor due to limited reporting resources and may mis-represent management strength.

Consequently, CAM gather supplementary social management data via a proprietary ESG questionnaire.

The questionnaire asks questions relating to the management of human rights issues and community relations, diversity and inclusion, customer privacy, data security, customer welfare and satisfaction, product quality and safety, selling practices and product labelling, labour relations, health and safety, commitment to paying the living wage, unfair employment practices, bribery and corruption and whistleblowing policies.

Consideration of governance factors that may have a bearing on company success are considered within the investment process.

CAM pay particular attention to corporate governance believing that purpose driven companies, demonstrating strong and effective governance and a healthy corporate culture, are best placed to succeed.

CAM are supportive of the general principles expressed by the UK Corporate Governance Code and Quoted Companies Alliance (QCA) Code for small and medium sized companies and expect companies to adhere to these standards or explain why they have not done so.

CAM subscribe to governance data from a number of external ESG data services providing information relating to company governance.

However, research coverage of small and medium sized companies by external ESG data providers is limited and does not consider the context of company size and maturity in analyses. Therefore, CAM do not rely on this data except for contextual purposes.

CAM gather supplementary governance data via a proprietary ESG questionnaire.

The questionnaire asks questions relating to board diversity, board independence, a chairperson and CEO role split, audit rotations, long term incentive plans for senior executives, shareholders rights, board oversight of sustainability issues and ethical behaviour, and whether senior executive remuneration is linked to ESG performance.

Since 2021 CAM managers have been monitoring the carbon intensity of the fund using MSCI ESG research services, where data is available.

However, research coverage of small and medium sized companies by external ESG data providers is limited.

Consequently, CAM gather data on the management and reporting of greenhouse gas (GHG) emissions via a proprietary ESG questionnaire.

The manager is committed to using shareholder influence to ensure all investee companies are developing, or have developed, a credible carbon emissions reduction plan.

This factor is highlighted as an expectation in the manager’s annual engagement letter to committed holdings in the fund.

Stewardship is defined in the revised UK Stewardship Code 2020 as the responsible allocation, management, and oversight of capital to create long-term value for clients and beneficiaries, leading to sustainable benefits for the economy, the environment, and society.

Stewardship sits at the heart of the manager’s investment process, which aligns stewardship activity with the best practice principles set out in the UK Stewardship Code 2020.

CAM report their stewardship activities to the Financial Reporting Council (FRC) annually, as required by the FRC to maintain signatory status. These reports are available on request.

Engagement and voting are central tenets of the manager’s stewardship.

The managers vote all company and shareholder resolutions at shareholder meetings.

The CAM Shareholder Engagement and Voting Policy outlines the principles that guide how the managers engage with companies and vote.

Engagement and voting activity are reported on a quarterly basis. Reports are available on request.

The manager is committed to working with investee companies to encourage and enable improved ESG management and reporting with the aim of protecting and enhancing value for investors.

Fund managers follow a structured programme of engagement activity, supported by the ESG team, and outlined in an annual Engagement Plan, which is available on request.

The Chelverton UK Dividend Trust Report and Accounts outlines the Company’s approach to corporate governance.

The Board of the Chelverton UK Dividend Trust retains all responsibility for risk management, but delegates day to day portfolio management to the Investment Manager.

The Board of the Chelverton UK Dividend Trust is committed to maintaining high standards of corporate governance, acting in all material respects in accordance with the principles set out in the UK Corporate Governance Code (2018), except where specified and due to the size and nature of the company.

As an investment trust, the Company also considers the Code of Corporate Governance (2019), produced by the Association of Investment Companies (AIC) as a framework of best practice for AIC member companies (the AIC Code).

The information above is provided for information purposes only and should not be interpreted as investment advice. The information has been prepared by Chelverton Asset Management Ltd (CAM) on behalf of the Chelverton UK Dividend Trust PLC and does not refer to any other service provider’s policies and procedures. If you have any doubts as to the suitability of an investment, please consult a financial adviser. CAM cannot guarantee the accuracy or completeness of the information provided, and therefore no investment decision should be based solely on this data. This information does not represent a recommendation by CAM to purchase shares in this Fund. We recommend private investors seek the services of a Financial Adviser. CAM do not market to retail investors and therefore this information is intended solely for Professional Investors and Eligible Counterparties.