Henderson International Income | ESG

The board believes that integrating environmental, social and governance factors or “ESG” into investment decision-making and ownership practices is an important factor for delivering the investment outcomes shareholders seek. 

ESG considerations are a component of the investment process employed by the fund manager. The fund manager has a specialised group within the investment department focused on responsible investment and governance, ESG solutions and ESG strategy and operations. ESG risk reporting is also provided by the group to help investment teams monitor the ESG risks in their portfolios, and the manager subscribes to a broad range of external ESG information providers and makes this information directly available to the investment teams.

In addition to monitoring and analysing ESG factors, the investment team actively engages with portfolio companies to encourage them take steps where appropriate to enhance their corporate practices regarding ESG considerations. 

When employing fundamental security analysis, the investment team takes a long-term view, seeking to identify companies differentiated by their sustainable competitive advantage, strong earnings potential and shareholder friendly management teams. Strength of business models is crucial to the Company’s investment strategy. As such, a considerable amount of time is spent by the fund manager identifying fundamental factors, including ESG factors, which may impact profits, cash flow and dividends and ensuring that investee companies have robust policies and processes in place to manage these. The primary aim of this analysis is to improve the risk adjusted returns of the portfolio, but the manager is also concerned with ensuring companies are operating responsibly regarding their impact on society and the environment. It is worth noting that the portfolio is global in its nature and as a result level of disclosure and attitudes to environmental and social factors can vary depending on the sector and the region in which a company operates. Nonetheless, each material ESG factor, in addition to the quantitative and qualitative assessments, is an important consideration when evaluating the opportunity and the portfolio’s investments.

The analysis of ESG factors before investments are made can lead to certain stocks or sectors being excluded or not invested in. Material ESG factors can also lead to the disposal of positions where the investment team believes that the risks have increased.

The investment team seeks to understand how investee companies are managing ESG risks and opportunities through their policies and processes, and where their investments are targeted to evolve their business models to remain sustainable over the long term. 

Janus Henderson engages actively with companies and their management teams and uses a variety of sources to help identify and monitor material ESG risks and opportunities, including research from their fund managers and analysts, and input from the Janus Henderson responsible investment and governance  team and third-party data providers. The investment team is able to engage MSCI, a leading firm researching and rating ESG factors globally, to support investment research.

Companies with weaker ESG risk profiles are not automatically excluded from the portfolio provided they are making progress in mitigating these risks. These companies can be good investments if they can address the ESG issues they face, and often low ESG ratings can relate to historic issues that have been remedied. The team does avoid or disinvest from companies where the ESG risk is material and where the company is not willing or able to mitigate these risks, and hence remains on a deteriorating trajectory.

Stewardship is a fundamental part of the investment team’s long-term, active approach to investment management. Strong ownership practices, including engagement with management and boards, can help protect and enhance long-term shareholder value. Janus Henderson supports the UK Stewardship Code and is a founding member of the UN Principles of Responsible Investment (“UN PRI”). Additionally, Janus Henderson is a supporter of a number of broader ESG initiatives such as the Access to Medicine Index which aims to improve availability of healthcare in developed and emerging markets and Climate Action 100+, an investor-led initiative to engage with heavily emitting companies to reduce their greenhouse gas emissions.

As a part of the research process portfolio managers and analysts meet frequently with company management, senior executives and boards, with Janus Henderson conducting thousands of meetings per year. These meetings typically occur prior to initiating a position and throughout the holding period. The portfolio managers naturally develop long-term relationships with the management of firms in which they invest. Should concerns arise over a firm’s practices or performance, they would seek to leverage these constructive relationships by engaging with company management or express their views through voting on management or shareholder proposals. Escalation of engagement activities depends upon a company’s individual circumstances.

The board believes that voting at general meetings is an important aspect of corporate stewardship, and a means of signalling shareholder views on board policy, practices and performance. Responsibility for voting the rights attached to the shares held in the Company’s portfolio has been delegated to the manager, who actively votes at shareholder meetings and engages with companies as part of the voting process. 

Voting decisions are guided by the best interests of the investee companies’ shareholders and made in consultation with the fund manager, who has an in-depth understanding of the respective company’s operations. Voting decisions are taken in keeping with the provisions of the manager’s ESG Investment Principles, which set out the manager’s approach to corporate governance, corporate responsibility and compliance with the Stewardship Code, and are publicly available on the manager’s website. To retain oversight of the process, the directors regularly receive reports on how the manager has voted the shares held in the Company’s portfolio, and they review the ESG Investment Principles at least annually.

As an active manager, Janus Henderson’s preference is to engage with management and boards to resolve issues of concern rather than to vote against shareholder meeting proposals. In their experience, this approach is more likely to be effective in influencing company behaviour. They therefore actively seek to engage with companies throughout the year and in the build up to the annual shareholder meeting to discuss any potentially controversial agenda items. However, where they believe proposals are not in shareholders’ interests or where engagement proves unsuccessful, they will vote against.