Integrating Environmental, Social and Governance (ESG) analysis in the Investment Process
Impax Asset Management Ltd (“IAM” or the “Manager”) acts as investment manager to Impax Environmental Markets plc (“IEM plc” or “We”). Both the Manager and IEM plc believe that a thorough understanding of environmental, social and governance performance can enhance perspectives of the opportunities and risks offered by individual investments. The Manager has long embedded ESG analysis into its investment process and takes an active approach to engagement with investee companies. The following explains how the Manager integrates ESG analysis into its investment process.
IEM plc invests in companies and assets that are well positioned to benefit from the transition to a more sustainable economy.
Both IAM and IEM plc believe that:
• Capital markets will be shaped profoundly by global sustainability challenges including climate change, environmental pollution, natural resource constraints, demographic and human capital issues such as diversity, inclusion and gender equity.
• These trends will drive growth for well-positioned companies and create risks for those unable or unwilling to adapt.
• Fundamental analysis which incorporates long-term risks, including environmental, social and governance (ESG) factors, enhances investment decisions.
IEM plc is seeking superior risk-adjusted returns over the medium to long-term. Investments are made in "pure-play" small and mid-cap companies which have >50% of their underlying revenue generated by sales of environmental products or services in the energy efficiency, renewable energy, water, waste and sustainable food and agriculture markets. The Manager identifies for investment higher quality companies with strong business models that demonstrate sound management of risk.
OVERVIEW OF IMPAX ASSET MANAGEMENT’S SUSTAINABLE INVESTMENT APPROACH
All IAM’s investments are aligned to the transition to a more sustainable economy. Activities with lower sustainability risks and higher opportunities are set to benefit from a transition to a more sustainable, low-carbon economy and are well positioned for the long-term. They are less at risk of disruption from new technologies, changing consumer preferences or legislation. These well-positioned areas of the economy are sought and prioritised for investment across the Manager’s listed investment strategies.
ESG analysis is an integral part of the Manager’s investment process, at the company level. The analysis enables a deeper and broader understanding of the companies, their corporate structures, oversight mechanisms, risk management capabilities and processes and transparency. IAM seeks to understand the character of the companies through the ESG analysis. The insights from the ESG analysis are then utilised to establish the priorities for engagement with the investee companies.
Stewardship through active ESG engagement and proxy voting are important parts of the investment process. They enable monitoring of the investee companies more effectively and aim at further enhancing the structures, processes, and disclosures of the companies.
INTEGRATING ESG ANALYSIS INTO THE INVESTMENT PROCESS
All companies must meet financial and ESG criteria before entering the IEM universe of investable companies. The investment team members are responsible for integrating ESG analysis into the investment process.
1. Screening. IAM seeks to avoid companies involved in significant controversies that violate global norms related to human rights, labour, environment, and corruption. IAM source information about company involvement in these controversies from external ESG research providers. If the Manager determines a company is the subject of significant ESG controversy, it will likely be excluded from investment. IAM periodically reassesses company involvement in ESG controversies. IAM also reviews the company universe for compliance with international sanctions, as applicable.
2. ESG analysis. IAM conduct a detailed, proprietary ESG analysis of new companies considered for the investable universe and review the ESG analysis on a periodic basis.
IAM analyse companies’ governance structures from a country-perspective, taking into account what constitutes common and best practice for governance in a specific country and identifying potential outliers. The following are some of the factors IAM evaluates:
o Disclosure and general transparency regarding governance structures (internal controls)
o Structure and effectiveness of the Board (relevant backgrounds, experience, diversity, tenures and attendance, "over-boarding", structure of board sub-committees)
o Shareholder rights (shareholder rights in relation to annual general meeting (AGM) practices, calling emergency general meetings (EGMs) and proxy voting, dual share structures with differentiated shareholder rights)
o Ownership structure and control issues (dual share structures, anti-takeover mechanisms such as shareholder plans or "poison pills", dominant shareholders, friends and relatives over-represented, related party transactions)
o Compensation and incentive structures, alignment with shareholder long-term interests and level of disclosure
o Corporate behaviour, reputation and integrity
o Proxy voting and accounting practices (how well are resolutions disclosed, does the company have "aggressive" or "conservative" accounting practices, late filings etc.).
• IAM analyses companies’ environmental and social policies, processes and disclosures identifying the most material risks. IAM seeks investment in companies that have addressed the material risks, with robust processes and management systems scaled appropriately to the importance of the risk.
• IAM analyses companies’ past controversies and seek strong processes and management systems to address and avoid any repeats of past controversies.
Company disclosures and reports are analysed by IAM, with external ESG-research as input and support in the analysis.
When all the data is gathered, an ESG report is written, and the company is assigned a proprietary ESG score. IAM does not seek to exclude a certain number or percentage of companies, but rather seeks an absolute level of ESG quality. Where this is not achieved, a company is excluded from the investable universe.
ENGAGEMENT AS PART OF THE INVESTMENT PROCESS
Engagement is an important part of the ESG analysis and investment process. IAM engages with companies when specific ESG issues or concerns are identified, when further information regarding an ESG aspect (that is not publicly disclosed) is required and/or to encourage improvement in company ESG policies, processes, and disclosures. IAM also finds companies’ responses to ESG engagements very informative of company character. IAM engages individually and together with other investors.
The investment team engages as part of regular meetings with company management teams, through additional conference calls, meetings or as part of other communications with the broader investment community. IAM may also file shareholder proposals to support these efforts. Increasingly, expert organisations drive and coordinate investors’ engagements on important issues and IAM takes part in these.
IAM maintains an engagement database where the engagement issues, actions, timings, and outcomes are detailed. The database is reviewed regularly and if an issue remains unresolved, IAM follows-up with the company in question.
PROXY VOTING AS PART OF THE INVESTMENT PROCESS
Proxy voting is a key component in the ongoing dialogue with companies in which IAM invests. Through implementation of IAM’s voting policy, we aim to enhance the long-term value of our shareholdings, foster corporate governance best practices, and promote sustainability, accountability and transparency.
IAM’s policy is to vote on all shares held where practicable. Voting decisions are informed by corporate governance codes and best practice, advisory governance research, and internal research and voting policies.
IAM discloses a more detailed proxy voting policy and a quarterly summary of its proxy voting records on the Impax Asset Management website www.impaxam.com, as part of the Manager’s commitment to the UK Stewardship Code.
IMPAX ASSET MANAGEMENT MEMBERSHIPS:
In addition, the Manager works on ESG engagement collaborations with clients, partners, and industry organisations to promote sustainable investing and ESG considerations across the globe and is a member of, or signatory to:
• Principles for Responsible Investment (PRI): Aims to help investors integrate ESG considerations into investment decision making and supports sharing best practice in active ownership.
• Institutional Investors Group on Climate Change (IIGCC): A forum for collaboration on climate change for European investors.
• Investor Network on Climate Risk (INCR): Partners with investors worldwide to advance investment opportunities and reduce material risks posed by sustainability challenges such as global climate change and water scarcity.
• The Carbon Disclosure Project (CDP): An independent organisation holding the largest database of corporate climate change information in the world.
• Council of Institutional Investors (CII): Promoting strong governance and shareholder rights standards at public companies.
• Asian Corporate Governance Association (ACGA): An independent organisation dedicated to working with investors, companies and regulators in the implementation of effective corporate governance practices throughout Asia
• UK Sustainable Investment and Finance Association (UKSIF): Provides services and opportunities to align investment profitability with social and environmental responsibility.
• Global Impact Investing Network (GIIN): The largest global community of impact investors (asset owners and asset managers) and service providers engaged in impact investing.
• Task Force on Climate-related Financial Disclosures (TCFD): Develops voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders.
• The UK Stewardship Code: The Code aims to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities.
• Ceres: An organisation working with investors and companies to build sustainability leadership and drive solutions throughout the economy. Ceres addresses topics climate change, water scarcity and pollution, and human rights abuses