ESG Policy

Policy as at:
30/11/2022

ESG Policy Statement

ESG Policy Statement of Bellevue Healthcare Trust.
 

Environmental, Social and Governance (“ESG”) Policy

OVERVIEW

The section that follows summarises the incorporation of ESG factors from both a company perspective at the Bellevue Healthcare Trust level (‘the Company’ or ‘the Trust’) and from the Bellevue Asset Management (‘Bellevue’) perspective, as the appointed investment manager of the Trust. ‘We’ and ‘Our’ refer to Bellevue Asset Management (UK) Ltd. and its staff.

For a number of years, Bellevue has integrated ESG considerations into the investment process for all its products and has been a signatory to the United Nations Principles of Responsible Investment (UN PRI) since 2019. PRI signatories must report externally on their ESG approach and the latest PRI document can be found on the Bellevue Group website.

At a corporate level, the Bellevue Group has deployed a CO2 reduction strategy, encompassing measures such as an independent audit of its CO2 footprint according to ISO14064-1 and GHG protocols, implementation of corporate CO2 reduction and offsetting of excess emissions with high-quality climate projects. Bellevue Group is targeting a reduction in CO2 emissions per FTE of at least 30% by 2030 and has been certified as carbon neutral by Swiss Climate since late 2021.

At the portfolio management level, Bellevue continues to refine and adapt its investment processes with respect to ESG integration and reporting. Our intent is to remain at the forefront of what is a rapidly developing field, in terms of what investors consider to be best practice and evolving UK and European regulations covering implementation and disclosure.

ADDITIONAL DEVELOPMENTS DURING THE PRIOR YEAR

Since the publication of last year’s Annual Report, two key pieces of regulation have come into effect that apply to the Trust: The EU Sustainable Finance Disclosure Regulation (SFDR) and related amendments to the Commission Delegated Regulation (EU) to MiFID II (Sustainability Preferences) in relation to reporting compliance for all funds, even those that do not have specific sustainability objectives.

The intent of implementing SFDR was to improve transparency for investors with respect to products marketed as sustainable investments and qualify any sustainability claims made by fund managers about their products, to prevent greenwashing.

As well as defining measurable parameters against which to benchmark any claims, SFDR classifies funds touting environmental and/or social objectives as either ‘Article 9’ (a fund that has sustainable investment or a reduction in carbon emissions as its objective) or ‘Article 8’ (a fund which promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices).

Any fund not classified as Article 8 or 9 defaults to being ‘Article 6’ (Funds that neither have a sustainable investment objective, nor do they embrace investment in assets with environmental or social benefits). The Bellevue Healthcare Trust is thus an Article 8 product since it does not include any sustainability claims in its investment objectives but does take ESG factors and thresholds into account when making investment decisions. All of Bellevue Asset Management’s equity funds are classified as Article 8. In accordance with SFDR requirements, Bellevue introduced additional ESG criteria (“minimum thresholds”) for the Trust and these are discussed in more detail below.

Both Bellevue Asset Management (UK) Ltd. and the Trust remain out of the current scope for both the UK Climate related reporting requirements and the EU Corporate Sustainability Reporting Directive. These are initially focused on larger asset managers and listed companies. However, we expect all asset managers and listed companies to be required to comply in due time.

 

MANAGEMENT OF ESG FACTORS WITHIN THE BELLEVUE HEALTHCARE TRUST

INVESTMENT PORTFOLIO

As noted previously, the consideration of ESG factors is a core part of the initial stages of the investment process to screen out companies that would not meet Bellevue’s criteria as early as possible. These formal ESG guidelines cover areas such as compliance with global norms (UN Global Compact, Guiding Principles for Business and Human Rights, ILO standards), value-based exclusions, controversies, climate change factors and active ownership (management engagement, voting policies, etc.). Bellevue’s high-level exclusion criteria can be summarised in two guiding principles:

Companies that are involved in serious violations of internationally recognised norms regarding the environment, human rights and business ethics are excluded from all portfolios.

Companies with controversial business activities that exceed Bellevue’s stated revenue thresholds as set forth by norms- based criteria are excluded from all portfolios (these exclusion thresholds are detailed at the end of the ESG chapter).

Generally speaking, the Trust’s healthcare focus makes it very unlikely that any excluded companies would ever fall into our screening processes in the first place. That said, there have been a number of investment opportunities since the inception of the Trust where we have decided not to progress into detailed due diligence because they have failed to meet our broader ESG hurdles. The most common reasons for negative screen-outs continue to be governance structure and/or reporting quality.

The assessment of ESG considerations is often over-simplified to the level of significant controversies or an aggregated ESG score provided by third party agencies. We remain firmly of the view that the process must reflect the pitfalls of an over- simplified “one size fits all” approach, especially in an industry as diverse and complex as human healthcare. Bellevue continues to use MSCI ESG reports for qualitative and quantitative external data.

The scope and quality of external ESG assessments remain variable in our view, although the situation continues to improve. Where the available MSCI data is not comprehensive, we rely on other third-party data providers and internal evaluations.

In FY2022, 100% of the companies that we were invested in received a detailed rating from MSCI during the period. Two of the 29 companies in the portfolio as of 30 November 2022 were not rated at all by MSCI as of 30 November 2021. Although coverage has improved, it was still not the case that MSCI met with the management team of all of the companies reviewed during the period.

Moreover, we continue to come across vexing levels of incomprehension as to the nature of the business being assessed. These issues will get better over time, not least because investors are encouraging companies to engage with these third party agencies to address such misunderstandings.

As the disclosure of data regarding ESG factors becomes more regulated and engagement between rating agencies and companies improves, we expect the various approaches taken by reviewing agencies to converge on an approach that encompasses the current variations in standards between the US and UK/EU and better meets the needs of investors.

As noted above, MSCI reports are only part of the process; we have our own internally-generated qualitative criteria as well that form the basis of decision-making so we are not solely reliant on third-party data or adherence to a singular industry standard as the basis of our approach. We do not apply specific scoring criteria for exclusion from our portfolio because we feel that an external rating or scoring approach has significant limitations and we see these more as tools to consider within a much more comprehensive and holistic approach.

 

ABSOLUTE AND RELATIVE DATA METRICS

We have cautioned previously that relative and absolute assessments of quantitative ESG parameters must be considered carefully, since there are all manner of numerator and denominator issues that confound comparisons. We have reproduced the portfolio level data in Figure 9 below to illustrate the caution that must be applied when analysing such data.

At face value, the relative position of our portfolio compared to the benchmark looks to have worsened from 2020 to 2022, with a materially worse overall quality score leading to a much lower rating (A vs. AAA) when compared to the MSCI World Healthcare Index, which is our internal comparator.

However, ESG Quality Score and the Governance Score of the portfolio have risen and the overall sustainable impact (which is driven by the social impact score on major diseases) remains very high. We would note that the individual outputs in the table are outputs from MSCI and we do not target any specific thresholds for these individual items in our ESG assessment process.

Figure 9 Headline ESG metrics

November

30, 2020

November

30, 2021

November

30, 2022

 

Portfolio

MSCI WHC

Portfolio

MSCI WHC

Portfolio

MSCI WHC

ESG Rating

BBB

A

A

A

A

AAA

Proportion not rated

12%

1%

0%

0%

0%

0%

ESG Quality Score

5.0

6.3

6.4

6.2

6.5

10.0

Environmental Score

5.7

7.0

5.3

7.1

5.4

7.1

Social Score

4.9

5.0

4.9

5.0

4.5

5.2

Governance Score

5.2

5.2

5.6

5.2

6.1

5.8

Overall Sustainable Impact

33.5%

17.7%

37.0%

16.0%

34.1%

17.3%

Our conclusions thus remain the same as in prior years: reducing these complex issues to single level datapoints is unhelpful and confusing, and it remains the case that the larger companies that dominate benchmark indices are able to devote more resources to providing data or simply score better since some of the measurement approaches display an inherent size bias. This bias is acknowledged by the rating agencies and we are hopeful that scoring methodologies will ultimately be adjusted to better aid comparability across the company size spectrum.

For now though, the rating industry remains immature and unsophisticated and it will probably take many years for the structural disadvantages facing smaller and early stage

companies to be fully addressed. Bellevue seeks to interact with companies that it feels have been misunderstood during this rating process and offers guidance on how to communicate more effectively around the issues deemed contentious by external ESG rating agencies.

In accordance with the implementation of SFDR, Bellevue introduced a minimum threshold of 50% “Investments with Sustainable Characteristics” for the Trust portfolio, which is primarily defined by sufficient ESG research coverage and a minimum ESG Rating of BB or higher and compliance with global norms as previously stated.

In addition, the Trust must have a minimum of 25% of the portfolio qualifying as “Sustainable investments”. SFDR defines a “Sustainable Investment” as an investment in an economic activity that contributes to the achievement of an environmental and/or a social objective while not significantly harming any of these objectives. Furthermore, the invested companies must apply practices of good corporate governance (“Good Governance”).

For an investment to qualify as a “Sustainable Investment”, Bellevue applies the 17 UN Sustainable Development Goals (SDGs). These sustainable development goals are general, universal goals for all UN member states, which were adopted in September 2015 as the successor to the Millennium Goals.

MSCI measures the target contribution of companies to each of the SDGs and categorizes them as “strongly aligned”, “aligned”, “neutral”, “misaligned” and “strongly misaligned”. As of 30 November 2022, 64% of the investment portfolio met the definition of “Sustainable investments”, which is well above the 25% minimum threshold.

Figure 10

 

Net invested assets

100%

Investments with sustainable characteristics 88%

Other investments

100%

Sustainable investments (SFDR)

64%

Other investments with sustainable characteristics 24%

More detailed information on the approach and methodology applied can be found on our website: https://www.bellevuehealthcaretrust.com/uk-en/private

 

RESPONSIBLE STEWARDSHIP

 

Responsible investing does not end with the due diligence process and portfolio creation; the importance of ongoing engagement with management teams cannot be overstated. Active fund management arguably derives a material proportion of its longer-term alpha generation opportunities through the ability to proactively consider, debate and influence (via the exercising of voting powers) potential issues at investee companies.

Bellevue takes its voting obligations very seriously and there are multiple structures in place to ensure that we vote in all shareholder meetings. Whilst we use external proxy agency reports to consider how we might vote, we do not outsource our voting to these agencies and are happy to go against their recommendations and against the wishes of management when we consider it important to do so. Over the period in review, we took part at 33 votable meetings (covering 266 resolutions) and the tables below summarise how we voted in these meetings:

Meeting Overview

Category

 

Number

 

Percentage

Number of votable meetings

33

 

Number of meetings voted

33

100.00%

Number of meetings with at least 1 vote Against, Withhold or Abstain

12

36.36%

 

Ballot Overview

Category

 

 

Number

 

 

Percentage

Number of votable ballots

33

 

Number of ballots voted

33

100.00%

 

Proposal Overview

Category

 

 

Number

 

 

Percentage

Number of votable items

266

 

Number of items voted

266

100.00%

Number of votes FOR

209

78.57%

Number of votes AGAINST

8

3.01%

Number of votes ABSTAIN

0

0.00%

Number of votes WITHHOLD

18

6.77%

Number of votes on MSOP

31

11.65%

Number of votes With Policy

264

99.25%

Number of votes Against Policy

2

0.75%

Number of votes With Management

234

87.97%

Number of votes Against Management

32

12.03%

Number of votes on Shareholder Proposals

7

2.63%

Engagement with voting is only part of the process. One must recognise that we are but one of many shareholders and that it may be the case that even after a multi-year engagement with management and exercising our voting power we have not been able to elicit change. In such a situation, we would consider divesting our holding, depending on the materiality of the issue under discussion. We would argue the fact we have yet to divest a holding due to ESG factor considerations stands as evidence that the initial screening approach at the beginning of the investment process is robust in helping us to avoid potentially controversial investments.

Although we want to be supportive of investee management teams and their plans to grow their businesses, we are quite happy to exit positions when we lose confidence in management or strategy and several examples of such situations can be found in our monthly factsheets, which remain the best source of up-to-date information on the evolution of the portfolio and any insights into why changes may have taken place.

TRUST-SPECIFIC EXCLUSION CRITERIA AND TOLERANCE THRESHOLDS

It would be very easy to claim that one has a blanket ban on investing in everything that’s bad or that all one’s investments are sustainable. However, some points of view are subjective and some things are what they are: every human healthcare company is involved in supporting animal testing to some degree and you cannot rationally penalise an industry for a regulatory requirement that is designed to save human lives.

Finally, one must recognise that rarely are matters so clear cut as to be able to definitively state a company has zero involvement or exposure to a controversial area; one can easily take exposures off balance sheet via outsourcing (animal testing is often outsourced, for example).

With these realities in mind, it makes more sense to operate by a set of guiding principles based on data that can be simply ascertained from management and that are realistically achievable for the portfolio overall.

Bellevue selected and agreed an expansive list of thresholds with the Board of the Company that came into effect from

1 January 2022. These are aligned with, or go further than, the criteria enshrined by Bellevue Asset Management’s group- wide policies.

The table below serves as much as a documentary ‘terms of reference’ for people compiling such reports on behalf of underlying investors as it does to inform shareholders about what we are doing in respect of running the portfolio.

The list is largely unchanged from last year save for removing any quantifiable measurement around the use of embryonic stem cells since the Board determined this to be impossible to track in a definitive way, although several investee companies confirm that they use such material for research purposes.

 

Potential Issue/controversy

 

Comment

Exclusion Criteria (max % revenues)

Environmental considerations

Thermal coal

The company would not knowingly invest in a holding involved in the production of any fossil fuels.

2%

Other fossil fuels

The company would not knowingly invest in a holding involved in the exploration for, or production of, any fossil fuels. This encompasses fracking and other unconventional oil sources.

2%

Nuclear power

The company would not knowingly invest in a holding involved in the production of nuclear energy

2%

Palm oil

Palm oil and derivatives such as tocopherol are widely used excipients in biomedical preparations and unlikely to be avoidable within the investment mandate. We try to ensure that investee companies are committed

to sustainable sourcing of such products and are thus not promoting deforestation.

5%

Responsible mineral sourcing

To the extent that it is relevant, we aim to ensure that investee companies source raw materials such as minerals from responsible suppliers who comply with relevant global standards around the environmental and social impact (e.g. no forced labour, conflict minerals etc.) of mining activities.

2%

Environmentally damaging agricultural chemicals (insecticides, herbicides etc.)

The investment focus of the Company is on human healthcare and so we would not intentionally invest into companies manufacturing or

supplying agricultural products that may have an environmental impact. However, there is a long-standing historical linkage between the chemical, pharmaceutical and agrochemical industries and it is possible that such legacy business tie-ups do persist, therefore we apply a higher threshold.

10%

 

Potential Issue/controversy

 

Comment

Exclusion Criteria (max % revenues)

Social considerations

Alcohol production (beverages)

The Company would not knowingly invest in a holding involved in the production of alcoholic beverages, but alcohol is a common constituent of medicinal products and sterilisation solutions.

2%

Tobacco production

The Company would not knowingly invest in a holding involved in the production of tobacco products.

2%

Tobacco sales

Indirect exposure to tobacco sales through retail outlets or peripheral activities is hard to fully discount, hence we allow for a higher threshold versus other considerations.

10%

Cannabis-based products

The Company can invest, and has invested, into holdings that offer therapeutic products derived from, or containing cannabinoids. However, the Company would not knowingly invest into a holding involved in the production or supply of recreational cannabis products.

n/a

Pornography

The Company would not knowingly invest in a holding involved in the production or sale of pornographic material/content.

2%

Gambling

The Company would not knowingly invest in a holding involved in the provision of gambling services or the operation of gambling venues.

2%

Predatory lending practices and price gouging

We seek to ensure that, where applicable, investee companies do not supply products under terms that would constitute unfair, deceptive or predatory terms to customers or engage intentionally in price gouging during periods of tight supply.

2%

Animal testing and related animal welfare issues

The use of animal disease models in pharmaceutical R&D and the undertaking of pre-clinical testing in animal species are integral parts of the regulatory pathway for approving new medicines. We therefore limit our focus to ensuring that investee companies adhere to the highest standards of welfare in respect of the animals that are used for such purposes.

n/a

Genetic research

Whilst we appreciate that some investors find the manipulation of genetic material in animals or human cell lines to be controversial, it has the potential to greatly enhance our understanding of human disease and, via gene therapy, gene editing and gene silencing to be directly deployed as a therapeutic intervention, particularly in areas of high unmet need. As such, we do not consider this to be controversial, as long as research follows accepted ethical guidelines and is appropriately supervised.

n/a

Use of embryonic stem cells

Whilst the utilisation of embryonic stem cells (gathered historically from aborted foetuses, more commonly today from unwanted IVF embryos that are donated with informed consent or taken from similarly donated umbilical cord material) is undoubtedly controversial, it also has the potential to greatly enhance our understanding of human disease and there are not currently viable alternatives in many cases. There are ethics guidelines (most notably those of the US National Institutes of Health, 2009) and our focus is to ensure that, where such research is undertaken, it is performed in line with these guidelines.

n/a

 

Potential Issue/controversy

 

Comment

Exclusion Criteria (max % revenues)

Conventional weapons & military contracts

The Company would not knowingly invest in a holding involved primarily in the provision of armaments. We would note that, as large employers in many countries with their own dedicated healthcare infrastructure, many investee companies will have contracts to supply the military forces of a country with healthcare products and/or services. Military personnel are just as entitled to good healthcare as anyone else, so we do not see this as an issue.

2%

Unconventional weapons

Bellevue Group maintains a list of companies connected with the supply of unconventional weapons and investment into such companies is prohibited.

0%

Governance considerations

Dealing with oppressive regimes

Whilst it may be unpalatable to deal with corrupt or oppressive regimes, it would only compound the misery and suffering of the oppressed people if they were also denied access to healthcare products and services. As such, we do not judge our companies on who they chose to supply life- saving products and services to.

n/a

Bribery & Corruption

The managers are committed to investigating serious allegations of bribery or corruption made against investee companies and discussing these with management.

n/a

Equitable access to products for developing countries

Within the healthcare sector, affordable access to products for less developed countries is rightly highlighted as a controversial area and an important topic. We do engage with management teams around this topic. However, you cannot supply regulated products into markets

where those products have not yet been approved and this point is often misunderstood in certain external ESG ratings, with smaller companies unfairly penalised when they only have approvals in a handful of developed countries.

n/a

Human capital development and diversity

It is laudable that external rating agencies focus on human capital development and diversity. However, one must be pragmatic and take into account the size and geographic focus of a company. A small, research stage entity based in one location is simply not going to be able to match the diversity of a broad-based multi-national, nor will it be at a stage where it is hiring inexperienced people with a view to training them up. We see inappropriate comparisons being made in these areas all too frequently.

n/a

ENVIRONMENTAL MATTERS

The Company has no greenhouse gas emissions to report from its operations, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013.

Investment trusts are currently exempt from TCFD disclosure, but the Board will continue to monitor the situation.

 

EMPLOYEES

The Company has no employees. As at 30 November 2022 the Company had five Directors, three of whom were male (60%) and two of whom were female (40%). The Board’s policy on diversity is contained in the Corporate Governance Report (on page 42).

 

SOCIAL, COMMUNITY AND HUMAN RIGHTS ISSUES

Having no employees, the Company, as an investment company, has no direct impact on social, community, environmental or human rights matters.

 

MODERN SLAVERY DISCLOSURE

Due to the nature of the Company’s business, being a company that does not offer goods or services to consumers, the Board considers that it is not within the scope of modern slavery.

The Board considers the Company’s supply chains, dealing predominately with professional advisers and service providers in the financial service industry, to be low risk in relation to this matter.

CONSUMER DUTY

The Company and Investment Manager are fully cognisant of the rules coming into force on 31 July 2023 and have taken the necessary steps to ensure compliance.

 

OUTLOOK

The outlook for the Company is discussed in the Chairman’s Statement on page 5.

 

STRATEGIC REPORT

The Strategic Report set out on pages 1 to 32 of this Annual Report was approved by the Board of Directors on 3 March 2023.

For and on behalf of the Board

Randeep Grewal

Chairman

3 March 2023