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. MAM recertified as a B Corp in 2023 with our highest ever score after improvements to our governance structure, climate targets and HR policies.   

At COP 25, the UN Climate Change Conference, MAM joined fellow B Corporations to announce that it would aim to achieve Net Zero Carbon for our operational emissions by 2030.  In March 2023, we updated these targets, to become Carbon Negative by 2030 and remove from the environment all the carbon MAM has emitted since its founding in 1991.

MAM supports all kinds of sustainability initiatives and even has 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, with a Net Zero by 2050 goal for our financed emissions.

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 two ESG & Impact Specialists.  Through rigorous training and a consistently applied investment process, the Analysts and ESG & Impact Specialists 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 UK Stewardship Code, the Carbon Disclosure Project (CDP), the Net Zero Asset Managers (NZAM) Initiative, the Local Government Pension Scheme (LGPS) Code of Transparency, and the Tobacco Free Portfolios Finance Pledge. MAM is also a member of Farm Animal Investment Risk & Return (FAIRR), Glasgow Finance Alliance for Net Zero (GFANZ), UK Sustainable Investment and Finance Association (UKSIF) and the Investor Coalition on Food Policy.

On ethical grounds, we do not invest in companies that are involved in any of the controversial activities listed below. 

Specifically, we: 

• do not invest in companies with any production revenue exposed to these activities;
• apply a 10% revenue threshold for companies providing revenue-generating products or services linked to the Banned List.

We distinguish between core business functions that directly enable or sustain banned activities and ancillary services that are incidental or non-essential. For example, a company supplying specialised drilling equipment to the oil and gas sector would be subject to our exclusion threshold, whereas a firm providing HR software would not, as it does not facilitate extraction or contribute materially to fossil fuel production. This approach ensures that our exclusions are both rigorous and proportionate, aligning with our ethical investment principles while maintaining a focus on materiality.

Fossil Fuels

• Exclusion of companies involved in the exploration and production of coal, oil and gas.
• Ban encompasses both onshore and offshore extraction.
• We also ban investment in fossil fuel refinement companies.

Tobacco 

• Exclusion of companies involved in the production of tobacco products.
• Ban encompasses traditional products (e.g. cigarettes) and vaping, heated tobacco products and e-cigarette products

Alcohol             

• Exclusion of companies involved in the production of alcohol products. 

Gambling         

• Exclusion of companies that own or operate gambling facilities of any kind (e.g. casinos, racetracks, lottery operations, online gambling, spread betting).
• Companies that provide key products or services fundamental to gambling operations, including (but not restricted to) products manufactured exclusively for gambling or gambling technology are fully excluded.

Pornography  

• Exclusion of companies that produce pornography.
• Ban encompasses magazines, newspapers, videos, films, websites and related software, as well as companies involved in the staging of live sex shows or the ownership of sex shops.
• Companies that provide key products or services fundamental to pornography operations, for example IT maintenance or software design.

High Interest Rate Lending

• Exclusion of any business whose activity is the provision of home-collected credit (“doorstep lending”), unsecured short-term loans (“payday loans”) or pawnbroker loans.
• Common indicators of exploitative lending are close to triple-digit Annual Percentage Rates; short loan term durations (less than 18 months); and no requirement for security.

Weapons 

• Controversial/indiscriminate weapons exclusions: of companies involved in the production or supply of indiscriminate weaponry (defined as nuclear weapons, anti-personnel mines, cluster munitions, chemical weapons or biological weapons), with no turnover threshold to be applied.
• Any company involved in the production, processing, supply or storage of weapons-grade nuclear fissile materials, with no turnover threshold to be applied.
• Any company involved in the provision of parts or services for anti-personnel mines, cluster munitions, chemical weapons or biological weapons, with no turnover threshold to be applied.
• Non-military firearms exclusion: any company deriving more than 10% of its turnover from the production or sale of non-military firearms or ammunition, excepting companies specialising exclusively in products specifically designed for hunting or sporting purposes.

Animal Testing 

• Exclusion of companies that conduct (either themselves or via outsourcing) animal testing.
• We allow animal testing for the purposes of regulated healthcare research and regulatory requirements.
• Where animal testing is conducted it must be required by regulation and we expect companies to have a clear animal testing policy compliant with “The Three Rs”:
• Replacement: methods which avoid or replace the use of animals in research;
• Reduction: use of methods that enable researchers to obtain comparable levels of information from fewer animals, or to obtain more information from the same number of animals;
• Refinement: use of methods that alleviate or minimise potential pain, suffering or distress, and enhance animal welfare for the animals used.

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 (10 is best) 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:

• Climate targets
• Carbon Emissions
• Water
• Waste
• Biodiversity

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. 

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.  

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

• Diversity
• Labour practices
• Policies
• Tax

MAM seeks to align the interests of company management teams with the interests of long-term shareholders.  Its 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 Governance Checklist, the Analysts assess and score companies out of 10 on their governance profile. 

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

• Board composition and independence
• Insider ownership
• Remuneration
• Committees and independence.
• Ethics and controversies

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. 

The Montanaro team actively engages with its investee companies to better understand their approach to environmental, social and governance issues, improve areas of weakness and encourage higher levels of data disclosure and reporting.   From time to time, the team also undertakes “Deep Dive” sustainability research projects (recent reports include The Built Environment, Biodiversity and Net Zero Carbon).