Montanaro European Smaller Companies | ESG

The Board and Manager of MESCT have long believed that there is a strong correlation between how well a company fares on ESG grounds and the value it creates for its shareholders over the long run. 

For many years, ESG has been at the heart of the Manager’s investment process, which seeks to identify the highest quality and best managed SmallCap growth companies in Continental Europe.  MESCT is therefore the product of rigorous fundamental research and ESG analysis all completed in-house, supplemented by direct company engagement.  

Established in 1991, MAM is a privately owned boutique based in London specialising exclusively in quoted global Small & MidCap equities. 

Sustainability and a consideration for all stakeholders are embedded within MAM’s culture.  In June 2019, Montanaro became a certified B Corporation.  “B Corps” are companies from any sector that meet exceptionally high standards of social and environmental performance, transparency and accountability.  In 2020, MAM amended its Articles of Association to place a legal obligation on its Board to consider the impact of MAM’s business on the environment and society as a whole.  As a “B Corp”, MAM has to demonstrate the highest ESG. standards.    

At the COP 25, the UN Climate Change Conference, MAM joined fellow B Corporations to announce that it would aim to achieve Net Zero Carbon by 2030.  MAM supports various sustainability initiatives - we even have beehives on our office roof to help a local bio-diversity project in the City of London.     

MAM is known for its distinctive “Quality Growth” investment approach.  It believes that the most attractive and replicable investment returns come from the highest quality businesses, run by the very best management teams.  ESG forms a key part of MAM’s definition of a company’s “Quality”.  As a result, ESG is fully integrated into the investment process – the Montanaro team will not invest in companies that fail to meet its high ESG standards or those unwilling to engage on areas of weakness.  

MAM is fortunate to have one of the largest specialist SmallCap teams in Europe, with 35 staff including 11 sector Analysts, a Head of Sustainable Investment and an ESG & Impact Specialist.  Through rigorous training and a consistently applied investment process, the Analysts conduct ESG research on the companies under their coverage as part of all fundamental analysis.  The team also actively votes at every company AGM and will vote against management / the Board where appropriate.

MAM is a signatory to the UN PRI, the Carbon Disclosure Project (CDP), the Stewardship Code and the LGPS Code of Transparency.  MAM’s expertise in ESG has also been recognised on multiple occasions over the years – in 2019, for instance, it was shortlisted by Investment Week for two awards:  Best ESG / SRI / Impact Research Team and Best Thought Leadership Paper on Sustainable Investing.  In the same year, the Montanaro Better World Fund won the Best Impact Fund and Best Impact Report awards.

Investors have a position of immense responsibility as they direct often substantial capital flows across global economies.  As such, investors should consider the ethical value (either good or bad) of a company’s products, services and wider operations.   

On ethical grounds, MAM will not invest in any company which derives 10% or more of their revenue from the following: 

• Exploration & production of fossil fuels;       
• Tobacco producers & distributors;   
• Alcohol producers & distributors;    
• Weapons (unless used for defence purposes);
• Gambling;      
• Adult entertainment;
• High Interest rate lending;    
• Animal testing (unless it is required by law for healthcare related companies).

MAM’s Environmental Policy helps it to distinguish between those companies which are managing their environmental footprints well and those with material environmental risks or weaknesses. 

With the help of an internally designed Environmental Checklist, the sector specialist Analysts assess and score companies out of 10 on their environmental profile.  MAM’s approach helps to derive more accurate risk analysis, helping the team to invest in those businesses capable and willing to manage their environmental footprint in a changing world. 

The team considers specific areas of environmental exposure in its analysis:

• Environmental intensity: how much carbon, water and waste is produced / consumed by investee companies?
• Stranded asset risk: how exposed are companies to unanticipated or premature write-downs of assets?
• Reporting: which companies are failing to report high quality environmental data?
• Climate change: which companies have taken steps to materially reduce their carbon footprint?

MAM’s Social Policy allows it to analyse specific social factors, leading to more accurate risk analysis of investment opportunities.  The areas that the team focuses on are influenced by the UN Global Compact. 

With the help of an internally designed Social Checklist, the Analysts assess and score companies out of 10 on the risks and opportunities that they face from a social perspective.  Analysts score companies on the following areas: Labour Practices; HR Management & Training; Health & Safety; Supply Chain Management; Social value add of product / service; Anti-bribery controls; and Quality of reporting. 

The team also measure and record the following data points:

• % Employee Turnover;          
• % Women in Workforce;       
• % Women in Management;  
• Gender Pay Gap Breakout;    
• Company 5-year tax rate;      
• Underlying tax rate;   
• Estimated Tax Gap;    
• Social tax rating. 

The Montanaro team also actively engages with its investee companies to better understand their approach to environmental and social issues, improve areas of weakness and encourage improved levels of data disclosure and reporting.  From time to time, the team also undertakes in-depth, “deep dive” ESG research projects (recent reports include nutrition, supply chain management and Net Zero Carbon).

MAM seeks to align the interests of company management teams with the interests of long-term shareholders.  Its Corporate Governance Policy helps to identify companies with high standards of governance and those with areas of risk or weakness.  The logic here is simple: good corporate governance increases the quality of a business and the commitment and motivation of management (management should rightly be reasonably rewarded for delivering value to shareholders).   The higher the quality of a business, the greater the predictability and sustainability of future investment returns.

With the help of an internally designed Corporate Governance Checklist, the Analysts assess and score companies out of 10 on their corporate governance profile.  The Checklist considers:

• Executive remuneration;
• Capital allocation record; 
• Board independence;
• Board ownership;
• Board diversity. 

Executive Remuneration is one of the most contentious area of Corporate Governance.  This is largely because it is so difficult to come up with a “one size fits all” framework with which to appraise executive pay.  No company is the same and every business model is different.  MAM is often approached by companies’ Remuneration Committees to discuss the structure of Executive remuneration packages and appropriate targets, a role it takes very seriously. 

MAM has funded a UK registered charity, Tribal Survival, which supports the welfare of remote indigenous populations.  This is of great personal interest to MAM’s founder, Charles Montanaro, who studied Anthropology at university.  Charles has spent time over the years trekking in remote jungles in the Amazon and West Papua in search of undiscovered tribes, armed with his trusty machete (which has thankfully always returned unscathed).  Most years, Charles takes two doctors to distribute medicine provided by the World Health Organisation to these remote communities.  The charity encourages and supports these communities to retain their traditional way of life.

The MAM team also volunteers time and provides financial aid to small local charities in partnership with the Giving Department.  Since 2019, MAM has been supporting City Harvest in London.  The charity provides a simple solution: feeding more than 10,000 people per day with nutritious, quality surplus food.  The charity collects high quality surplus food from the UK’s leading retailers, wholesalers, restaurants and manufacturers to distribute to more than 300 community programmes that serve meals to vulnerable people.  Demand for City Harvest’s aid has ballooned during the pandemic.  In 2020, they delivered 7.9 million meals, 100% greater than the 3.8 million meals rescued and donated to partner charities in 2019.  Their services are needed more than ever and we are proud to support them.