Rights & Issues Investment Trust | ESG

As a high-conviction active asset manager, the Investment Manager recognises that it has an important role to play in the allocation of capital, both as active owners and long-term stewards of the assets in which it invests on behalf of shareholders. The investment team has a defined investment process, and consideration of material ESG issues is integrated into both investment analysis and decision-making, influencing asset allocation, portfolio construction, security selection, position sizing, stewardship, engagement and subsequent decisions on whether to remain invested or exit.

The Investment Manager’s Responsible Investment Policy and Stewardship Report, available on its website, describes how it supports the Company’s integration of environmental, social and governance (ESG) responsibilities, setting out its sustainability governance and oversight, its approach to ESG integration and materiality and core material ESG issues.

The Company’s investment universe comprises small and mid-size companies which may be exposed to important sustainability risks and opportunities that can have material impacts on value. As an active investment manager, the Investment Manager believes that effective ESG integration cannot be outsourced to third parties, but must be incorporated into the fundamental analysis conducted by the investment team.

In particular, smaller companies remain under-researched by ESG rating agencies relative to their larger listed peers. Where they are covered at all, smaller companies are often penalised by rating agencies, either due to their corporate governance arrangements or a relative lack of detailed corporate disclosure about ESG issues. These factors present challenges but also, in the Investment Manager’s view, opportunities to identify ESG risks or opportunities affecting companies which are not priced efficiently by financial markets.

To grow successfully, the leadership of smaller companies must not only execute strategically; they must also lay the foundations for future growth by creating appropriate corporate governance structures. The Investment Manager believes that as corporate culture is set at an early stage, the relationships formed with key stakeholders such as customers, the workforce and suppliers at this point in a company’s development can be fundamental to long-term success. The Investment Manager fully endorses the principles of the UK Corporate Governance Code, and while it acknowledges the need for pragmatism with smaller companies, it still expects high standards of governance at investee companies to support their growth in a sustainable manner.

Climate

Limiting global temperature rises to 1.5 degrees above preindustrial levels, in line with the Paris Agreement, is an urgent challenge facing the global economy. The Investment Manager uses its influence as an investor through stewardship and active ownership to encourage companies to identify, manage and mitigate climate change risks or opportunities. The Investment Manager believes that the scale of climate change will impact all sectors, industries, and asset classes and acknowledges the positive role that investors can play in tackling it through investment decisions and capital allocation.

Biodiversity

The Investment Manager considers biodiversity impacts in its ESG analysis of companies, in line with the its approach and commitments. The Investment Manager engages with investee companies where it believes their practices are unsustainable, with the goal of achieving change, reversing biodiversity loss, while preserving and enhancing the value of the Company’s assets.

Human Rights

Companies with poor management of human rights can face a range of issues including fines, workforce issues and supply chain challenges which may affect their licence to operate. The Investment Manager monitors and assesses human rights policies and procedures for its investee companies to ensure that they are promoting good governance and management of human rights issues. It expects companies to comply with internationally-recognised human rights codes and standards.

Human Capital

Good human capital management supports both value creation and business resilience, and The Investment Manager believes that investing in human capital correlates with longer-term business success. Promoting Diversity, Equity and Inclusion (DE&I) enables companies to attract talent from a wider talent pool. It also contributes to better decision-making, performance, innovation, and employee satisfaction and retention. The Investment Manager understands that approaches to human capital management, including DE&I will differ, and as an active owner it seeks to understand an investee company’s operating model and engage to advise on best practice and potential improvements.

Health and safety

Where a company fails to meet health and safety standards, the Investment Manager will engage and encourage the company to improve its practices and to disclose health and safety indicators. Good health and safety should be embedded in a business, and the Investment Manager promotes a zero-harm ethos.

Engagement is central to The Investment Manager’s active ownership approach. The investment team maintain a dialogue with companies to inform their investment decisions and carry out strategic engagement, based on ESG materiality. The Investment Manager regularly engages with companies to monitor material ESG issues that will impact the long-term success of an investment. The Investment Manager is committed to long-term engagement goals, however to protect shareholders’ interests it reserves the right to exit an investment if the investment team concludes that progress is insufficient or does not meet the Company’s strategic objectives. The Investment Manager also engages in collective engagement where such action aligns with its own objectives.

Exercising its shareholder voice through active proxy voting is central to the Investment Manager’s stewardship approach to represent shareholders’ interests, hold boards to account and support investee companies. Its investment managers are accountable for the exercise of their shareholder votes supported by the Stewardship team, which is responsible for proxy voting operations, the monitoring of meeting ballots and providing an initial assessment of each meeting’s agenda, including an assessment of independent proxy advisory research. 

The Investment Manager’s in-house data science team has built a proprietary desktop tool, known as ESG Hub, which allows the investment teams to apply multi-factor ESG screening to their investment universe and to build custom reports. The data science team also works with third-party ESG data providers to challenge and provide constructive feedback to enhance the quality and integrity of the ESG data sets used by the Investment Manager.

The Investment Manager does not exclude, except i) where required by law, ii) in line with the specifications of Rights and Issues Investment Trust Plc’s mandate, or iii) if a company is involved in banned activities under the following international conventions:

• The 1997 Ottawa Convention (Anti-Personnel Mine Ban Treaty)
• The 2008 Convention on Cluster Munitions (CCM)

The Investment Manager uses third party vendors to screen for involvement in controversial and banned weaponry.