AVI Japan Opportunity | ESG

ESG Policy

Policy as at:
30/04/2021

Overview

Asset Value Investors (“AVI”) is an investment management firm that was founded over 35 years ago in 1985.  As long-term stewards of capital for our clients we focus on the long-term prospects for the companies in which we invest. It is integral to our investment strategy that we analyse each investment’s ability to create long-term value and deliver returns in line with our client’s expectations.  AVI seeks to exercise the rights and responsibilities attached to owning equity securities in line with its investment strategy. A key component to AVI’s investment strategy is to understand and engage with the management of public companies.  Shareholder value can be enhanced and sustained through the good stewardship of executives and boards.

It therefore follows that in pursuing shareholder value AVI will implement its investment strategy through proxy voting and active engagement with management and boards.  In doing so AVI’s perspectives on environmental, social and governance (ESG) issues are represented. Engaging with companies on ESG and sustainability is increasingly important when assessing risk. We recognise that many aspects of ESG are linked to industry trends and will vary.  We seek to identify the most relevant factors within each area of ESG and sustainability by materiality and financial risk.

We are fundamentally committed to supporting long-term sustainable businesses that will grow and participate in the prosperity of the economy with a responsible approach to the environment, society, and governance.  We believe that the integration of ESG and sustainability considerations into our investment strategy is not only integral to comprehensively understanding each investment’s ability to create long term value but aligned with our values as responsible investors.

Approach

Responsible investing requires rigorous analysis, judgement, and a thorough understanding of the associated risks. We track and monitor the progress of our investee companies in relation to material ESG factors and engage with management where appropriate to encourage transparent disclosures and promote a responsible and sustainable approach to the environment, society, and governance.

Our approach to ESG should not be viewed as distinct from our investment philosophy, an afterthought to our general practice, but rather as part of an integrated system that provides a vital perspective when analysing the long-term sustainable value creation potential of a company.

As research-driven value investors, we seek to truly understand each company in our portfolio and the context within which it operates on a case-by-case basis. Our approach to ESG integration reflects this. Our process does not involve the use of a filter to screen out negative-scoring ESG stocks, or a filter to only include positive-scoring ESG stocks as we believe this approach is inconsistent with our unique bottom-up investment strategy.

Rather than sitting in contradiction to our traditional analysis, AVI has created a bespoke monitoring system that allows us to track the ESG performance of our portfolio companies and assess their resilience to long term financially relevant ESG risks. This tailored ESG monitoring system is integrated into our newly developed proprietary database enabling financial metrics and ESG metrics to be considered alongside one another. This powerful tool deepens our understanding of the risks and opportunities within our universe, ensures that ESG considerations are integrated into each stage of our analysis and elevates our ability to constructively engage with our investee companies.

Defining 'E', 'S', and 'G'

AVI has identified the factors that we believe are the most material and relevant to our investments. We have drawn on the WEF’s ‘21 core metrics’ (https://www.weforum.org/reports/measuring-stakeholder-capitalism-towards-common-metrics-and-consistent-reporting-of-sustainable-value-creation) – which aims to collate and unify multiple corporate reporting frameworks – as the foundation of our metrics, adapting them to reflect the uniqueness of AVI and its portfolio.

It is our view that effective ESG integration should be regarded as a constantly evolving practice. It should therefore be noted that our chosen sub-sections within ‘E’ ‘S’ and ‘G’ and their respective metrics are not exhaustive and are subject to change both as our integration of ESG deepens further and our expectations of corporate ESG performance increase over time.

Environmental factors

We define Environmental sustainability within the context of Environmental Impact, Tackling Climate Change and Sustainable Management.

A company’s awareness of its environmental impact is fundamental to its ability to engage with the solution. Our metrics in this section track our investee companies’ greenhouse gas (GHG) emissions and use of limited resources. We track performance each year enabling us to assess trends and highlight potential risks or stranded assets where factors such as GHG emissions, carbon intensity and water usage are not decreasing. These metrics are key to highlighting unsustainable business strategy and assessing vulnerability in the context of limited resources, increasingly stringent environmental regulations, and a responsibility to strive towards environmentally sustainable business practice. Corporate disclosure on these metrics should be encouraged as they not only give an important insight into the sustainability of a company’s operations but also represent a significant step in improving corporate transparency and accountability.

We believe that there is a collective duty for urgent and meaningful action in tackling climate change. Monitoring a company’s commitments and efforts to reduce their environmental impact are important ways of assessing the sustainability of a company. Our metrics within this section enable us to track and assess the positive action companies are taking in tackling climate change and the extent to which this is integrated into business strategy.

Understanding a company’s sustainable management is vital in assessing their level of engagement with climate related risks and opportunities material to their operations. Our metrics in this section monitor efforts to integrate TCFD recommendations as well as the internal mechanisms and policies in place to sustainably manage their environmental impact.

Social Issues

Social, we divide into Dignity and Equality, Health and Wellbeing and Community Engagement

A workplace that actively promotes dignity and equality is integral to a sustainable business. Our metrics in this section assess the measures that our investee companies have in place to foster a work environment that is diverse, inclusive, and non-discriminatory. Moreover, we track the steps taken by companies to ensure the protection of human rights and labour rights throughout their supply chain.

Companies that invest in the wellbeing and development of their employees not only positively impact society by providing a supportive, dynamic, and rewarding workplace, but are also positively impacting the sustainability of their company. We believe that long-term value is most effectively created by serving the interests of all stakeholders. Our metrics in this section identify and track the measures our investee companies have in place to promote the wellbeing and aid the progression of their employees. 

Community engagement helps to deepen a mutual understanding and respect between a company and the community within which it operates. Our metrics in this section monitor the ways in which a company invests in its communities as we believe this to be key in promoting inclusive growth and an integral pillar of a sustainable business attitude.

Governance factors

Governance includes Quality of the Governing Body, Corporate Strategy and Ethical Behaviour.

The quality of the governing body is vital to the long-term success of a company. Our metrics in this section monitor the composition, representation, and independence of the board as we believe that the dynamism and knowledge necessary for strong governance is supported by the presence of diverse perspectives and skills.

The corporate strategy underpinning board management gives a vital insight into a company’s priorities. Our metrics in this section assess a company’s approach to its stakeholders, its integration of sustainable business attitudes and management of ESG issues.

Corporate integrity and ethical behaviour are an integral part of sustainable business conduct. Our metrics in this section monitor the policies and procedures in place to mitigate ethical misconduct and understand the mechanisms available to enable violations to be reported and remedied.

Rating System

We give our investee companies a score against each of our metrics according to a methodology that clearly defines the requirements for each score. If or when a company is implicated in a controversy, this is monitored and counts negatively towards their score relative to the severity of the controversy. This provides us with an overall rating of each companies’ ESG performance. This internal rating system is designed to improve clarity and ease when tracking a company’s progress against our metrics and easily identify where a company does not meet our expectation for each metric. The score is not meant to be published or applied to an absolute target to screen companies in our portfolio but is rather an internal mechanism to illustrate a company’s direction of travel in relation to ESG issues and enable trends and weaknesses to be easily highlighted.

Active Ownership

We are committed to actively engaging with our portfolio companies to help build resilience to long-term financially relevant ESG risks and promote sustainable attitudes. Our ESG monitoring system helps us to identify weaknesses in a company and empowers us to engage effectively where appropriate. Through collaborative engagement, we encourage and expect investee companies to take meaningful action in remedying weaknesses in the context of long-term value creation.

As long-term investors, aiming to unlock potential, we would be reluctant to divest in a company where we believe we can influence positive change. However, it remains a possibility if engagement on material ESG issues is consistently inadequate and the resulting risks become untenable. Our buy, hold and sell disciplines are considered on a case-by-case basis and driven by our balancing of ESG considerations with financial performance and our fiduciary responsibility to our clients.

Our process of engagement and escalation will vary with each company. We do not believe that a one formula fits all policy is the most optimal way to achieve a result.  We will consider all aspects of a company’s development including any recent acquisitions, divestitures or changes in leadership when deciding our engagement process.  This is will invariably include both written and verbal communication with the company. Indeed, if required, a public campaign may be initiated to compel change.

Useful links

AJOT ESG Policy
ESG