Monks Investment Trust | ESG

Addressing sustainability and fossil fuel investments

Many shareholders will be aware of the public debate surrounding investments in fossil fuels. The Board and the Managers take their stewardship responsibilities very seriously. Environmental, Social, and Governance (ESG) factors are intrinsically linked with long-term investing. The Managers embed the analysis of these factors into their core research when searching for high-quality growth companies. They are supported by a dedicated ESG analyst who assists with the ongoing stewardship of each holding; he is part of a wider team of more than 40 people. The objective is not to seek perfection but to focus on materiality and the direction of travel. Engagement can encourage responsible behaviour and meaningful change. The Company’s direct investments in businesses with fossil-fuel-related activities totalled 2.6% versus 4.8% for the index at the year end. 

Engaging with portfolio companies

Throughout the year, the Managers regularly engage with portfolio companies. An interesting case study is the building materials company, CRH, which is the largest contributor to the portfolio’s carbon footprint. However, CRH’s products are essential for investments in our built environment, including new energy infrastructure crucial for the energy transition. The Managers have engaged with CRH about their carbon emissions for an extended period, playing a crucial role in the company becoming a leader in lower-carbon solutions and setting some of the industry’s most ambitious carbon reduction plans. Importantly, if the Managers believe that insufficient progress is being made relating to important ESG factors, they will sell a stock. A recent example includes the miner Rio Tinto, where concerns regarding governance and the approach to environmental impact were not adequately addressed. The Company has since sold its holding.

Governance and Sustainability

The building blocks of our investment philosophy – bottom-up stock-level research and long-termism – chime with an increasing focus on stewardship and focus on Environmental, Social, and Governance factors. We understand that businesses operate in a complex and dynamic world where their activities may have positive and negative impacts. There are no shortcuts. We believe that getting to know companies on a case-by-case basis is essential as we seek to understand their unique circumstances and assess material factors that may influence their sustainability. This directly impacts our assessment of holdings within the Monks portfolio.
Our latest thinking can be found within our dedicated Monks Stewardship Report on our website.

The Board believes that it is in the shareholders’ interests to consider environmental, social and governance (ESG) factors when selecting and retaining investments and has asked the Managers (Baillie Gifford & Co Limited as AIFM and Baillie Gifford & Co as portfolio manager) to take these issues into account.

The Managers do not exclude companies from their investment universe purely on the grounds of ESG factors but adopt a positive engagement approach whereby matters are discussed with management with the aim of improving the relevant policies and management systems and enabling the Managers to consider how ESG factors could impact long-term investment returns. The Managers’ Statement of Compliance with the UK Stewardship Code can be found on the Managers’ website: bailliegifford.com. The Managers’ policy has been reviewed and endorsed by the Board. The Managers, Baillie Gifford & Co, are signatories to the United Nations Principles for Responsible Investment.

The Company publishes an annual stewardship report which includes examples of engagement on ESG matters, as well as setting out the Managers’ approach to proxy voting. The annual stewardship report is available on the Company’s website monksinvestmenttrust.co.uk.

Corporate governance and stewardship
The Board has given discretionary voting powers to Baillie Gifford & Co. The Managers vote against resolutions they consider may damage shareholders’ rights or economic interests and report their actions to the Board.
The Board believes that it is in the shareholders’ interests to consider environmental, social and governance (ESG) factors when selecting and retaining investments and has asked the Managers to take these issues into account. The Managers do not exclude companies from their investment universe purely on the grounds of ESG factors.
A positive engagement approach is employed whereby matters are discussed with management with the aim of improving the relevant policies and management systems and enabling the Managers to consider how ESG factors could impact long-term investment returns. The Managers’ statement of compliance with the UK Stewardship Code can be found on the Managers’ website at bailliegifford.com. The Managers’ policy has been reviewed and endorsed by the Board. In addition, the Monks Stewardship Report, which outlines the Managers’ approach to engagement and provides examples, is prepared annually, and is available on the Company’s page of the Managers’ website at monksinvestmenttrust.co.uk.
 

Climate change
The Board recognises that climate change poses a serious threat to our environment, our society and to economies and companies around the globe. Addressing the underlying causes is likely to result in companies that are high emitters of carbon facing greater societal and regulatory scrutiny and higher costs to account for the true environmental impact of their activities.
The Managers utilise data sourced from a third party provider to map the carbon footprint of the equity portfolio, using the information to prioritise engagement and understand what higher emitting companies are doing to manage climate risk better. Best practice in this area is evolving rapidly, and it is therefore challenging to establish reliable comparisons company-to-company and year-on-year. Based on the most recent analysis, as at 30 April 2024 the carbon intensity of The Monks Investment Trust’s portfolio was 71% lower than the Company’s benchmark (FTSE World Index). This analysis estimate is based on 81% of the value of the Company’s equity portfolio which reports on carbon emissions and other carbon related characteristics and Scope 1&2 Weighted Average Carbon Intensity (WACI) by Revenue. Based on reported and estimated Scope 1,2&3 WACI by Revenue, covering 93% of the Company’s portfolio, carbon intensity was 61% lower than the benchmark index at 30 April 2024.
Baillie Gifford’s Task Force on Climate-Related Financial Disclosures (‘TCFD’) Climate Report is available on the Managers’ website at bailliegifford.com. A Monks-specific TCFD climate report is also available on the Company’s page of the Managers’ website at monksinvestmenttrust.co.uk. The Managers have considered the EU Sustainable Finance Disclosures Regulation (‘SFDR’). The Managers are reviewing the UK FCA’s sustainability disclosure
requirements and investment labels regime (‘SDR’). The Managers consider that all materials published in connection with the Company are in compliance with the anti-greenwashing rule effective from 31 May 2024, and are assessing the appropriateness for the Company of the various labels available under the regime, in advance of their introduction.
The Managers are signatories to the United Nations Principles for Responsible Investment, the Carbon Disclosure Project, the Net Zero Asset Managers initiative, and are also members of the Asian Corporate Governance Association and the International Corporate Governance Network.