Environmental, Social and Governance

• The Trust’s portfolio is ESG AA rated by MSCI. This is higher than the benchmark rating of A, and is an improvement against the equivalent score one year ago, when the Trust was rated A. The improvement in the Trust’s ESG MSCI rating is a result of a mixture of changes in the portfolio as well as MSCI upgrades on the ESG scores of a number of investee companies.
• The portfolio contains more ESG “Leaders,” and fewer laggards, than the benchmark.
• The Trust’s carbon footprint is 48% of its benchmark (2021: 66%). The improvement in the Trust’s carbon intensity, versus the prior year, is also driven by changes in the underlying portfolio.

More details on the Manager’s approach to ESG are set out on pages 26 to 34 of the annual report.

• Environmental factors relate to how a company conducts itself with regard to environmental impact and sustainability. Types of environmental risks and opportunities may include a company’s energy and water consumption, waste disposal, land use and development and its carbon footprint.
• Social factors pertain to a company’s relationship with its employees, vendors, and broad set of societal stakeholders Risks and opportunities include conditions and rates of pay, the company’s initiatives on employee attraction and retention, gender discrimination and how a company is managing its supply chain, including for example the risk of forced and child labour.
• Corporate Governance factors may include the corporate decision-making structure, the independence of board members, treatment of minority shareholders, executive compensation and political contributions, capital allocation and the risk of bribery and corruption.

More details on the Manager’s approach to ESG are set out on pages 19 to 25 of the annual report.

Our ESG Investment team is a centralised resource of over twenty analysts dedicated to maximising the quality and value of ESG engagement, research and analysis across all asset classes. The function has a number of responsibilities including: standard setting on all ESG matters, quality assurance and consistency of the ESG regional analysts’ research and analysis, the consideration of governance issues, undertaking thematic sustainability-driven research and highlighting themes and emerging risks in ESG. In addition, we have three dedicated ESG analysts in Singapore working alongside the Asia Pacific Equities team to ensure the integration of ESG factors within investment decisions. As part of our increased focus and investment in ESG in the region, we have recently established an APAC Sustainability Institute to build upon our ESG heritage, develop Asia-centric ESG insights and engage with policymakers to help shape the region’s ESG regulatory framework.

We consider both macro and micro ESG issues.

• Macro ESG factors are broad thematic issues that impact companies and the products and services they provide. These include issues like climate change, access to finance or access to healthcare. These are secular, industry-impacting trends that may present a clear risk or opportunity for a company.
• Micro ESG factors are company/industry specific issues that relate to how a company’s products or services are made or delivered.

Our five stages of ESG integration:

• Idea generation: Understanding themes and dynamics inherent in sectors, countries, and companies, we are able to use ESG as a lens to generate new investment ideas for the portfolio. This could include companies that are well placed to help in climate transition or companies that are managing their supply chain in a way that makes them more attractive to global clients.
• Research: ESG disclosure by companies in Asia tends to be lower quality than might be observed in Europe or North America but while such disclosure means it may be challenging to collect information, it also means that extensive company due-diligence by the us can create investment opportunities.
• Buy / sell: At this stage we must weigh the decision to buy (or sell) a company. We have a clear quality threshold for investment and ESG is a fundamental and non-negotiable part of this.
• Portfolio Construction: Whilst a simplification, the better quality a company, and the more conviction we have in the company, the more of that company we might elect to buy (whilst being sensitive to valuations). ESG is a key part of the discussion around ‘position sizing’, or just how much of a company to buy.
• Engagement: We continue discussing ESG issues with senior management over the course of the investment, both to protect the value of investments and to enhance the value of investments through constructive challenge and debate with management around strategy and execution, with the mutual aim of fostering sustainable shareholder returns.

More details on the Manager’s approach to ESG are set out on pages 19 to 25 of the annual report.

We are committed to regular, ongoing engagement with companies to help maintain and enhance their ESG standards into the future. These meetings provide an opportunity to discuss various relevant ESG issues including board composition, remuneration, audit, climate change, labour issues, human rights, bribery and corruption. Companies are strongly encouraged to set clear targets or key performance indicators on all material ESG risks so as to enable performance monitoring.

Since ESG disclosure by Asian companies is often poor, ESG engagements give us an opportunity to source additional information and potentially to:

• xploit an information gap: if a company does not disclose ESG information and the market is unable to form a robust view of its quality, its shares may be priced inefficiently. Making use of on-site, face to face visits, we are able to develop an informed view of every company and to exploit any pricing inefficiency that we judge may exist.
• Close the information gap: if we own a company that is misunderstood by the market, we can work constructively with the company’s management team to encourage improved and enhanced disclosure, allowing the market to better understand, and hence better price, the company’s securities.

ESG engagements are conducted with consideration of the 10 principles of the United Nations Global Compact and companies are expected to meet fundamental responsibilities in the areas of human rights, labour, the environment and anti-corruption.

More details on the Manager’s approach to ESG are set out on pages 19 to 25 of the annual report.

Having considered the regional universe and peer group in which a company operates, the Investment Manager allocates it an ESG score between one and five. This is applied across every stock covered globally. Examples of each category and a small sample of the criteria used are detailed below: 

1. Best in class

• ESG considerations are a material part of the company’s core business strategy 
• The company provides excellent disclosure on ESG issues 
• The company provides opportunities from strong ESG management.

2. Leader

• ESG considerations are good but not market-leading
• Disclosure is good but not best in class
• Governance is generally very good.

3. Average

• ESG risks are considered as a part of the principal business
• Disclosure is in line with regulatory requirements
• Governance is generally good but with some minor concerns

4. Below average

• There is evidence of some financially material controversies
• There is poor governance or limited oversight of key ESG issues
• There are some issues in treating minority shareholders poorly.

5. Laggard

• Many financially material controversies
• Severe governance concerns
• Poor treatment of minority shareholders.