Aberforth Smaller Companies | 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 achievement of the Company’s investment objective in a manner consistent with its investment policy and strategy. The Board also considers its corporate governance obligations, regulation, risk and market integrity. Both these and investment objective are affected by environmental, social and governance matters. In discharging these 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 primarily 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.
• Continued enhancements to the Managers’ stewardship and ESG policies and practices.
• Publication of the Managers' ESG integration framework – their methodology used for assessing investee companies.
• Further development of a proprietary methodology in a database module for assessing investee companies’ ESG issues and for tracking related engagement objectives and activity.
• Updating and publication of the Managers’ Engagement and Voting framework.
• Publication of Aberforth’s third Governance and Corporate Responsibility statement, which describes Aberforth’s own approach to ESG matters.
 

Since the Company has no employees and the Board has engaged external firms to undertake the Company’s 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’) and determined 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 (www.aberforth.co.uk) in the “About Aberforth” section. The policy framework is set out in the following documents.

• About Aberforth: the firm’s background and founding principles, its strategic philosophy and nature of the business.
• Investment Philosophy: the Managers’ approach to investing as adopted for the Company.
• Stewardship Policy: Aberforth’s approach to stewardship of clients’ capital, set out in the format of the Financial Reporting Council's (FRC) UK Stewardship Code.
• ESG Integration Framework: how Aberforth's integrated ESG framework operates in practice.
• Engagement and Voting Framework: how Aberforth engages and votes, and what it expects of 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.
 

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. This engagement is purposeful, discreet and always occurs with the objective of improving investment outcomes. The Managers are well placed to undertake this activity. Engagement has always been a fully integrated element of their investment process and their influence is supported by meaningful stakes in the investee 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 developed a module within its proprietary investment database that tracks and analyses important ESG issues. The database captures relevant metrics, such as greenhouse gas emissions, Task Force for Climate-related Financial Disclosures (TCFD) compliance, and net zero and science-based targets. It also evaluates investee companies on the basis of several ESG subfactors. The methodology starts with a sector-driven risk assessment, which is determined by Aberforth’s Stewardship Committee and is influenced by inputs from several third parties such as the Sustainability Accounting Standards Boards (SASB). From there, each investee company is evaluated taking into account the risk materiality, mitigating practices, targets for improvement and opportunities. 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 methodology is described in greater detail in Aberforth's ESG Integration Framework document.

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 ASCoT 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 includes consideration of 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.
ASCoT's voting activity, 12 months to 31 December 2023:
Shareholder meetings at which ASCoT's shares were voted 94
Shareholder meetings at which ASCoT's shares voted against or abstained 18
Number of resolutions voted 1,387
Number of resolutions voted against 11
Number of resolutions abstained 17

Voting is often the conclusion of engagement, which is undertaken directly and over time with the boards of investee companies. In 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 remain few general meeting resolutions directly relevant to environmental and social issues, so much of the voting is focused on governance. During 2023, the Managers did not vote in favour of resolutions for the re-election of non-independent directors who could risk board independence. 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 and, for a separate company, against the proposed disposal of assets.

The UK Stewardship Code, issued by the FRC, sets out the principles of effective stewardship by institutional investors. The 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 2023. 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 is governed by the Stewardship Committee. Details are set out in their “Governance and 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, along with its Scope 1, 2 and 3 emissions. These voluntary disclosures are reported under the Streamlined Energy & Carbon Reporting Statement (‘SECR’).

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