Aberforth Split Level Income | ESG

At the heart of the Board’s approach to stewardship is promoting the success of the Company for the benefit of Shareholders as a whole. The main gauge of success is the achievement of the Company’s investment objective in a manner consistent with its investment policy and strategy. In doing so, the Board considers its corporate governance obligations, and those relating to regulation, risk and market integrity. Both the investment objective and these factors are affected by environmental, social and governance matters.

In discharging its stewardship responsibilities, the Board benefits from a group of directors with deep and diverse expertise. Their main role is one of oversight since the Company’s day‐to‐day activities are undertaken by external firms. Monitoring is based on quarterly updates from the Managers and Secretaries. During the year, the Board reviewed the Managers’ stewardship and ESG related activity. This included the following.

• Enhancements to the Managers’ stewardship and ESG policies and practices. During the year, the Managers’ dedicated additional resource to support sustainability matters.
• Analysis and use of the data from an ESG survey of investee companies conducted in 2021, supporting active engagement during 2022 and 2023.
• The completion of a proprietary methodology in a database module for assessing investee companies’ ESG issues and for tracking related engagement activity.
• The Board reviewed and welcomed the publication of Aberforth Partners LLP's second Governance and Corporate Responsibility statement. It provides information about Aberforth’s approach to ESG matters, including disclosures about greenhouse gas emissions for scope 1, 2 and 3.

Since the Company has no employees and the Board has engaged external firms to undertake its investment management, secretarial and custodial activities, the Company has no greenhouse gas emissions to report from its operations and does not have responsibility for any other emissions‐producing sources under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013. The Board considered the applicability to the Company of the Streamlined Energy & Carbon Reporting Statement (‘SECR’), determining that the Managers’ voluntary detailed disclosures under SECR are most relevant.

The Managers, to whom the Board has delegated investment management responsibilities and discretion to exercise voting rights, play a crucial role in how the Company’s approach to stewardship is put into practice. Their investment decisions, engagement with companies and voting are conducted in a manner consistent with their own stewardship policy. This is designed to deliver the Company’s investment objective while taking into account broader responsibilities to the economy, environment and society. The Board has reviewed, and endorses, the Managers’ Stewardship approach and Policy, the details of which are set out below.

See details provided in sections below.

The Managers’ approach to Stewardship and ESG is available on the Aberforth website in the “About Aberforth” section. The policy framework is set out in the following documents.

• About Aberforth: the background and founding principles of the firm, its core strategic philosophy and nature of the business.

• Investment Philosophy: the Managers’ approach to investing as adopted for the Company, relevant extracts of which are included in the narrative that follows.

• Stewardship Policy: Aberforth’s approach to stewardship of clients’ capital, set out the format of the FRC’s UK Stewardship Code.

• Engagement and Voting Framework: how Aberforth engages and votes, along with what is expected from investee companies.

• Examples of Engagement and Voting: examples of how the Engagement and Voting framework is put into action.

• Governance and Corporate Responsibility: Aberforth Partners LLP’s approach to Stewardship, which is reported annually.

The Managers’ approach to stewardship and ESG is overseen by their Stewardship Committee, which is a sub‐committee of the partnership committee, Aberforth’s ultimate governance body.

The investment cases for many of the Company’s holdings are influenced by environmental, social and governance matters, particularly as the increased profile of such issues affects the stockmarket’s valuations of companies. The Managers do not exclude investments from the portfolio based on ESG considerations alone. Rather, analysis of ESG matters is integrated into the investment process and is considered alongside other factors in forming an investment case.

Where ESG or other matters impinge upon the investment case, the Managers engage with the investee company’s board, which is responsible for the design and implementation of the company’s environmental, social and governance policies. The Managers are well placed to undertake this activity, since engagement has always been a fully integrated element of their investment process and feeds through to the target valuations for companies. The Managers believe that their willingness to engage constructively with the boards of investee companies has benefited investment performance over time and is therefore important to the long term success of the Company.

To support the investment process, Aberforth has enhanced its proprietary investment database with a module to improve the analysis and tracking of important ESG issues. The module captures relevant metrics, such as greenhouse gas emissions, Task Force for Climate‐related Financial Disclosures (TCFD) compliance and the setting of net zero and science based targets.  It also evaluates investee companies on the basis of several ESG subfactors.  The scoring methodology starts with a sector‐driven risk score, which is determined by the Aberforth’s Stewardship Committee and is influenced by inputs from several third parties such as the Sustainability Accounting Standards Board and other relevant external ESG analyses. From there, the investee company’s actual score for each subfactor is determined, taking into account the risk score and company‐specific considerations. This methodology allows the portfolio’s ESG profile to be snapshotted and to be tracked through time, as well as helping to identify risks to investment cases and to focus engagement efforts.

The Board has given discretion to the Managers to exercise voting rights on behalf of the Company. The Managers consider and vote on every resolution that is put to shareholders of the companies in which the Company is invested. The Board endorses the Managers’ voting philosophy, which treats clients as part owners of the underlying companies. These voting principles are set out in the Managers’ “Engagement and Voting Framework” document. The Managers vote against resolutions that they believe may damage shareholders’ rights or economic interests, which specifically includes consideration of governance, environmental and social matters.

The Board receives quarterly reports from the Managers on governance and voting issues pertaining to investee companies. The annual voting activity for the Company is noted in the table below.

Voting is often the conclusion of engagement, which is undertaken directly and over time with the boards of investee company. Under normal circumstances, concerns would have been raised and discussed with an investee company’s directors before the vote. Such engagement improves understanding of issues underlying controversial resolutions and can result in change that allows the Managers to vote in favour of the relevant resolutions.

Among small UK quoted companies, there are still few general meeting resolutions directly relevant to environmental and social issues, so much of the voting is focused on governance. During 2022/23, the Managers did not vote in favour of resolutions for the re‐election of non‐independent directors owing to potential conflicts of interest. Votes against were also prompted by concerns about remuneration and about the effectiveness of directors. Beyond resolutions put to annual general meetings, the Managers voted against the approval of the takeover of one of the investee companies since the terms of the deal under‐valued the business in question.

The UK Stewardship Code, issued by the FRC, sets out the principles of effective stewardship by institutional investors. Aberforth, the Company’s investment managers, are committed to effective stewardship and were early adopters of the UK Stewardship Code. They were again recognised as an approved signatory of the code in September 2022. The Managers publish their submission on their website, along with supporting documentation.

The Managers are a signatory to, and participate in, the annual UNPRI assessment. The results are available within the 'About Aberforth' section of the Managers' website.

The Managers’ approach for their business to stewardship and ESG matters is governed by the Stewardship Committee. Details are set out in their Governance & Corporate Responsibility statement. This includes their policies and practices covering their approach to governance, risk and control, company culture, human resources and environmental matters.

The document also sets out Aberforth’s approach to emissions disclosures. It reported on scope 1 and 2 emission disclosures in 2022 and is enhanced for the inclusion of Scope 3 emissions in 2023. These are reported in the Governance and Corporate Responsibility section of the Managers’ website. These voluntary disclosures are reported under the Streamlined Energy & Carbon Reporting Statement (‘SECR’).

Further details on the Managers’ stewardship policy and supporting documentation are available within the “About Aberforth” section of their website at www.aberforth.co.uk.