Montanaro UK Smaller Companies | ESG

The Board and Manager of the Montanaro UK Smaller Companies Investment Trust (“MUSCIT”) have long believed that there is a clear correlation between how well a business fares on ESG grounds and the value it creates for its shareholders over the long run.  We believe that businesses that do not take ESG seriously may not be around in 10 years’ time. 

For almost 20 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 the UK.  MUSCIT is thus the product of rigorous fundamental research and ESG analysis, supplemented by direct company engagement.  

Established in 1991, Montanaro Asset Management (“MAM”) is a privately owned boutique 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 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. 

At 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 all kinds of sustainability initiatives and even have beehives on its roof to help a local biodiversity project in the City of London.  MAM is also a signatory to the Net Zero Asset Managers initiative.       

MAM is known for its distinctive “Quality Growth” investment approach.  In summary, it believes that the best and most sustainable investment returns come from the highest quality businesses, run by the very best management teams.  ESG forms a central 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 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 38 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 analysis on the companies under their coverage as part of 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 also became a signatory to the Living Wage Accreditation in November 2022.     

Investors occupy a position of immense responsibility as they direct capital flows across economies.  As such, investors should consider the ethical value (either good or bad) of a company’s products, services and wider operations.  By doing this, investors can aid the development of economic systems that benefit all stakeholders. 

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

• Exploration & production fossil fuels;     
• Tobacco producers & distributors;           
• Alcohol producers & distributors;             
• Controversial weapons;
• Gambling;           
• Pornography;    
• High Interest rate lending;           
• Animal testing (unless it is required by law for healthcare related companies).

MAM’s Environmental Policy and tools help to assess which companies are managing their environmental footprints well and those with material environmental risks or weaknesses. 

Via an internally designed Environmental Checklist, the Analysts assess and score companies out of 10 on their environmental profile.  MAM’s approach helps to drive 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 quality environmental data?
• Climate change: which companies have taken steps to materially reduce their carbon footprint?

MAM’s Social Policy allows is 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. 

Via 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 included 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, while highlighting companies with areas of risk or weakness.  The logic here is simple: good corporate governance increases the quality of a business – and the higher the quality of a business, the greater the sustainability of investment returns.

Via an internally designed Corporate Governance Checklist, the Analysts assess and score companies out of 10 on their 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. 

MAM supports a number of charities across causes that are important to us.  These include:

Tribal Survival: a UK registered charity founded by Charles Montanaro, which supports the welfare of indigenous populations.  This is an issue of personal interest to Charles, 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 and nurses 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.

City Harvest London: the charity collects high quality surplus food from the UK’s leading retailers, wholesalers, restaurants and manufacturers to distribute to more than 350 community programmes that serve meals to vulnerable people in London.

Rewilding Britain, the pre-eminent rewilding charity in the UK and the only country-wide organisation in Britain focusing on rewilding and the amazing benefits it can bring for people, nature and climate.

Dorset Wildlife Trust: We will be the anchor partner as the Trust rewets the headwaters of the River Sherford, in Dorset. The project will liberate the river and create between over 30 hectares of wildlife rich wet land, store carbon in wetter soils and reduce pollution and flooding.