As fundamental long-term contrarian value investors, we consider it an important part of company analysis to assess corporate governance, as well as the management of social and environmental issues. This forms part of our risk assessment of business fundamentals. We believe that ignoring ESG factors may lead to an incomplete understanding of the risks to an investment case, and may consequently result in the wrong investment decisions. Indeed, we believe that successful integration of ESG factors can contribute positively to the risk-adjusted returns achieved by the investments we make on our clients’ behalf.
Our starting point is not to exclude any particular sectors or countries unless excluded in individual managed accounts by the client’s concerned. However we do avoid companies about which we have serious governance concerns, and companies in which we have concerns about business being conducted in an unethical manner, unless it is clear that such concerns have been or are being dealt with by management and any shortcomings have been addressed.
Once we become shareholders, it is our responsibility to continue to monitor any relevant ESG issues, and to engage with management where appropriate. We believe responsible ownership is a necessary part of our fiduciary duty.
OP is a Tier 1 respondent to the UK Stewardship Code, and a signatory to UN Principles for Responsible Investment (PRI) with an A rating.
In this context, ESG factors are integrated into our investment process, at the idea generation stage and throughout the investment horizon. As long-term investors, this may span over several years. This is reflected in key investment notes, where there is a dedicated section for analysing relevant ESG issues.
ESG incidents are identified by either portfolio managers, analysts or by MSCI, our third party provider of ESG research, data and controversy monitoring. Issues are assessed by the wider investment team with additional oversight from the OP Stewardship Committee. Managing an ESG incident is done on a case-by-case basis and will depend on the materiality of the incident. In fact, ESG-related issues often provide us with investment opportunities where we can see an improvement in such issues playing a role in the recovery in the results and perceptions of a company and its share price.
While it is important to understand how we integrate ESG into our process, it is equally important to understand the elements of a broader sustainable investment approach that our approach does not incorporate. For example, our value-driven, index-agnostic approach makes it incompatible with “impact” investment where investors actively seek a social or environmental return separate from, or in addition to, a financial return.
We accept that climate change is one of the most significant challenges facing the world today and we are committed to playing our part into lowering harmful emissions by engaging with the companies in which we invest in to reduce their emissions footprint over time.
As part of this we are now signatories of Climate Action 100+, the leading investor initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change. We have begun preparations to integrate the goals of the Taskforce on Climate-related Financial Disclosure (TCFD) into our company engagements and research notes during 2020.
One important point to note is that while we aim to see individual companies improve their level, and management of, carbon emissions, the concentrated, index-agnostic nature of our investment approach means that the carbon footprint of the portfolio overall will be dictated by the mix of stocks we buy. The carbon footprint of the portfolio overall can thus shift significantly with individual purchase and sales. For this reason, we do not believe that tracking our portfolio-level emissions footprint is sensible.
We will engage with a company's board and/or management where there are stewardship-related weaknesses and we feel that our interaction with the company may have an influence. We ordinarily hope to address our stewardship concerns through discussions that we hold with company representatives within the ordinary routine of interaction. However, we may decide to extend our engagement activity and/or escalate specific areas of concern in order to effect the change we are seeking. Such decisions are made on a case-by-case basis, influenced by factors such as our view of the materiality of the issue. The incident reports we receive from MSCI give their assessments of severity, and a confirmed violation classified as severe will be more likely to prompt engagement.
The Stewardship Committee monitors the progress of our engagement efforts, providing useful oversight. The Committee will sometimes challenge the materiality rating, or the method and process of engagement to reflect concern about a particular activity or aspect of governance.
The process of escalation in our engagement can include:
- withholding support or voting against management (and informing them)
- meeting/communicating with non-executive directors or the chairman
- collaborative intervention with other institutional investors
It is OP's policy to vote all shares where we are entitled to do so, except where there are onerous restrictions - for example, shareblocking. OP employs the services of ISS to manage the voting of proxies and assist our decision-making. ISS provides analysis and voting recommendations for each proposal. ISS's voting policies reflect best practice within the industry and are extremely thorough. The voting policies of OP are generally aligned with the voting policies of ISS and our voting instructions will follow those of ISS in all but a relatively small number of incidences. However, if there are company-specific factors which lead us to take a different view, we vote accordingly. ISS’s voting policies were last revised in 2017 and can be found at the following link https://www.issgovernance.com/policy-gateway/2017-policy-information/. For example, the policy applied by ISS in the UK broadly reflects guidance from the Pensions and Lifetime Savings Association (formerly known as the National Association of Pension Funds).
Oldfield Partners’ response to the UK Stewardship Code has received a Tier 1 ranking by the Financial Reporting Council, and meets the engagement policy requirements of the Shareholders’ Rights Directive II.