Henderson European Focus Trust | ESG

The Board has reviewed and is supportive of the Manager’s team approach which is set out below.

The Fund Managers, John Bennett and Tom O’Hara within the Janus Henderson European Equities team, consider there to be a clear link between good corporate governance - in each of the environmental, social and governance (ESG) factors - and the cost of capital applied by global investors. Their approach is built upon fundamental stock-picking blended with sector themes which allows them to isolate investment decisions from ‘market noise’.  However, the resulting approach can be contrarian, and can lead to investing in change. ESG factors can play a role in identifying trends in corporate change and sector development.

ESG considerations begin at the in-depth research stage of the investment process, where a stock or sector are assessed. Importantly, the ESG analysis undertaken focuses more on the rate of change of a company’s ESG credentials than its current ESG scores. Although headline ratings from external providers are a useful starting point, the team believes that these metrics are often backward looking. External providers of company ratings face huge difficulties in aligning subjective topics contained within the ESG arena with a single scoring system and this has resulted in a high level of dispersion in ratings depending on the agency. For this reason, the Fund Managers strive to gain a good understanding of the procedures and initiatives a company is putting in place to improve their ESG practices, focusing on the delta rather than the absolute. This research is often far ranging, including topics such as board composition and staff remuneration as well as carbon targets and green financing.

The Fund Managers’ approach to ESG is pragmatic and focuses on the areas that they believe will be the most material. Governance considerations are an integral part of the approach to fundamental analysis as it is these factors that have historically been proved to be material to an investment case. Environmental and social factors can also prove to be material. In some instances, they will be pivotal to the emergence of sector themes, such as electromobility or renewable energy. The Fund Managers utilise a number of sources of quantitative and qualitative company research.

Company engagement is an important source of insight into a company and forms a key part of the team’s assessment of management and ESG standards.

The Fund Managers maintain active and continuous dialogue with most of the companies they invest in and engage with the senior management of the majority of holdings at least once, and often more than twice, a year. Discussion points are wide ranging and include business strategy, compensation, capital allocation, risks, management succession and environmental and social issues where relevant.

The Fund Managers collaborate closely with Janus Henderson’s in-house governance and responsible investment (“GRI”) team, as a specialist resource on ESG issues. The GRI team provides support to the Fund Managers on research and engagement and leads participation in various external ESG initiatives. In advance of company meetings, the GRI team works to screen companies for significant issues and maintains a range of ESG screens. These are applied across all holdings, with the aim of identifying material ESG issues that can be fed into the engagement and/or investment processes. On occasion, the Fund Managers will participate in governance-focused meetings jointly with the GRI team and may join collaborative investor engagements if it is believed that shareholder interests are more adequately served that way. Company engagement around general meetings is used to inform voting decisions.

If the Fund Managers do not feel that shareholder concerns are being addressed when engaging with a company, they will be prepared to consider disinvesting.

The Fund Managers monitor for ESG risks as part of their investment process and utilise the following resources:

• ESG risk reporting: the team receives a monthly ESG risk report highlighting companies rated high risk according to their overall ESG rating, controversies, corporate governance score or climate impact. The reports utilise data from Sustainalytics and ISS.
• Governance & Responsible Investment Team: the GRI team highlights portfolio ESG risks and reviews ESG risk data.