CC Japan Income & Growth Trust | ESG

The Board believes that ESG related issues can affect both the performance and sustainability of an investment portfolio and that ESG factors can be potential indicators of management quality and operational performance. Companies with strong, sustainable profiles swill, it believes, have greater potential to grow and survive in all market conditions. 

The Investment Manager is responsible for engagement on ESG matters and has a structured yet flexible approach to incorporating ESG into the investment process. Its fundamental, hands-on research approach allows it to seamlessly integrate its responsible investing efforts alongside the Company’s investment strategy in an effective manner, which the Board believes will achieve the best long-term results for the Company’s investors. 

The ESG factors considered vary by the industry and company under review, though in all cases the  Investment Manager considers whether the following factors are relevant and may have a material impact on stock performance: 
Environmental: Pollution, site management/consideration, greenhouse gas emissions, climate change, habitat protection, recycling, water 
Social: Human/employee rights, working conditions, health and safety, firm employee relations, child/forced labour, conflict zones 
Governance: Board composition, independence, transparency, compensation and accountability,  shareholder rights and relations, cyber security, protection of personal data, corruption.

The ESG factors are integrated into the Investment Manager’s bottom-up investment process and these issues are considered alongside financial land strategic issues during assessment and engagement with companies. The ESG risks are qualitative factors rather than quantitative inputs in a financial model. The Investment Manager has a policy that prohibits investment in a list of companies that manufacture  controversial weapons but does not specifically exclude investment in industries or individual companies on standardised ESG factors. 

A key component of the ESG process is engagement. The Investment Manager dedicates a significant amount of time and resource focusing on the ESG characteristics of the companies in which the Investment Manager invests, and monitoring is carried out through investment reviews. 
 

The strategy of the portfolio has an explicit focus on improving relationships between corporate managers and shareholders in Japan. Consequently, corporate governance is a key point of discussion in every meeting held with company management. The goal in each case is to help the senior representatives of the company develop not only an understanding of the role and requirements of long-term shareholders but also the realisation that their actions must be consistent with mutually determined objectives. 

The team at Coupland Cardiff Asset Management LLP (“CCAM”) conducts over 300 meetings and calls a year with the management of many different companies. Engagement serves three main purposes as it relates to ESG: 

1. Due Diligence – engaging with companies, conducting due diligence, and understanding potential risks and opportunities relating to the investment.

2. Education – through engagement with companies, sharing best practices and providing insights into the ESG practices of peers (e.g., disclosures, targets, and benchmarking).

3. Action – engaging with companies to encourage disclosures and target setting. 

Although the Investment Manager does not seek to agitate management through aggressive behaviour with public disclosures or proposals, it does and will vote on resolutions which it believes are consistent with the future growth and development of the company. Conversely, it will vote against those that do not and would be prepared to sell the shareholding if this were deemed to be the most appropriate course of action. 

Japan Stewardship Code: The Investment Manager’s commitment to the Japan Stewardship Code is set out on its website: https://www.couplandcardiffcom/legal-disclosures 

UK Stewardship Code: The Investment Manager’s statement of compliance with the UK Stewardship Code can be found on its website: www.couplandcardiffcom

Principles of Responsible Investment (“PRI”): CCAM became a signatory to the UN-supported Principles for Responsible Investment (“PRI”) on 6 December 2018. The PRI is fast becoming a global standard for investment managers’ ESG alignment. As a signatory to the Principles, the Investment Manager publicly commits to adopt and implement them, where consistent with its fiduciary responsibilities. The Principles can be found here: https://www.unpri.org/pri/what-are-the-principles-for-responsible-inves….

The Investment Manager also commits to evaluate the effectiveness sand improve the content of the Principles over time. It believes this will improve its ability to meet commitments to beneficiaries as well as better align its investment activities with the broader interests of society. CCAM reports annually to the PRI on the firm’s responsible investment initiatives, activities and achievements and seeks to meet the standards expected by the PRI in doing so. 
 

The two examples below demonstrate our stewardship approach through constructive, ongoing engagement. 

Company 1 (Consumer Durables) – Governance remuneration: 
In response to a number of proposals for the AGM regarding changes to the remuneration of directors and retirement benefits the Investment Manager contacted the company for clarification The company explained that these changes had been introduced as a direct consequence of a desire to adhere to the principles of the Corporate Governance Code. The Investment Manager particularly liked the intention to alter the cash payment for directors, from one based on length of service as a director, to one that incorporated a share allocation reward based on the company’s performance. Having received this explanation for the changes, it was felt that the proposed changes were appropriate, the amounts considered reasonable, and the vote was cast in favour of the amendments.

Company 2 (Manufacturer) – Dividend policy:
The company withdrew its dividend forecast for the full year after the Q1 results. Despite the general uncertainties surrounding the pandemic, given the company’s previous comments and healthy financial position, this course of action was inappropriate. During a subsequent call with the company, it became clear that this was likely to be a precursor to cutting the dividend. The Investment Manager expressed its belief that this was not consistent with prior communication from management and not in alignment with its requirements as a long-term shareholder. As a result of this conversation with the company, the Investment Manager sold out of its position.