Integration of ESG factors in our investment decision making process

Environmental impact:

Our focus is on environmental factors such as carbon emissions that can reasonably be expected to impact the intrinsic value of the investment over the holding period, including the impact of taxes or penalties relating to carbon emissions. Climate risk can impact the investment opportunity of companies in certain sectors (like agriculture) and this will be taken into account in researching that specific company before being included in our portfolio, as well as on an on-going basis if we hold a position in a company whose return could be negatively impacted by climate change.

Our initial and ongoing assessment of an investment opportunity includes a consideration by the analyst of earnings quality, potential pitfalls and an article search to uncover and understand potential controversies, as well as developing an understanding of the reason for any mispricing. Given explicit movement in the regulatory environment regarding carbon emissions, our consideration of climate risk factors has been directed towards high carbon emitters and the explicit impact of carbon emissions on earnings via increased tax. We are also however cognisant that by their very nature some industries are more carbon intensive, which indeed adds an element of regulatory risk to the investment case especially with regards to current and forthcoming environmental regulation. These risks (among others that we identify) form part of our overall assessment of the attractiveness of an investment expressed in the conviction of the analyst or where quantifiable and appropriate, modelled into our explicit upside or downside price targets.

Social responsibility:

We believe that a company that puts effort into maintaining its social license to operate, while behaving ethically and in an environmentally sustainable way, is more likely to produce sustainable free cash flow and financial returns over the long term. In turn, companies that do not manage their ESG risks appropriately will erode their ability to generate sustainable free cash flow over the long term. As such, social issues that can impact the risk or return potential of an investment are inherently part of our fundamental analysis, though difficult to quantify. For example, there are numerous case studies indicating that a company’s supply chain is less likely to be stable if it has poor labour practices; and operational performance may also be weakened by increased worker turnover and decreased worker motivation and productivity. By effectively managing social issues, companies can secure access to environmental resources; build human capital to secure a motivated, productive and skilled workforce; benefit from a competitive advantage in the market; and strengthen its supply chains.

Corporate governance:

Governance is the primary ESG factor on which we focus during our ongoing investment analysis. We conduct our own investment research using reports and communication with customers, competitors and suppliers, and analyst reports, among other sources, to get as much information about the company and its management as possible. Additionally, we have a step that specifically requires us to do an article search on the management team – where have they been involved previously, have they done what they said they would do, have they been involved in any debacles, how have they treated minorities etc., and one of the final steps in our investment process is in engaging with management. We avoid positions in companies that are considered to be poorly governed and engage management of companies in discussions on issues of concern. We apply negative screening for poor earnings quality factors including aggressive accounting which may be indicative of pervasive governance issues. Further to this, we support public policy initiatives that promote greater corporate sustainability, transparency and accountability, where appropriate, and support shareholder resolutions at annual shareholder meetings aimed at persuading companies to adopt higher standards of corporate responsibility, where appropriate.

Use of internal rather than external ESG research:

We conduct extensive in-house primary research including thorough financial, operational and strategy analysis, using both public and proprietary sources like financial filings, industry consultants, competitors, customers, company management, trade journals, etc. to get as much information about the company and its management as possible, including the identification and consideration of any significant ESG risks. We also engage extensively with management thereafter to corroborate our findings and discuss any identified risks. To the extent that there is specific ESG / proxy voting research available, we will consider this as part of our voting decision. Our internal view on the particular matter will still determine our votes.

Oversight and implementation responsibilities for ESG integration:

ESG risk assessment is a specific step in our investment decision making process, which is embedded in our custom-designed research management system and it is the responsibility of each investment analyst to consider ESG risks during their research process on a specific company. After completing each step, analysts have to provide a synopsis of the research findings, and articulate an opinion by marking a “traffic light” system as Green (no significant issues found), “Yellow” (some issues to discuss), or “Red” (significant issues found, we should not be long this stock). This research output is constantly discussed between the analysts and Portfolio Manager while the analysts are performing the work, and if we agree that any step should be marked “Red”, then work is stopped and we do not invest. If we are invested, the research is constantly updated and any significant changes are discussed in our weekly Investment and Risk Committee meetings, and may lead to position size changes or disinvestment.

The proxy voting process is managed by the Operations team who maintains a diary of upcoming investee company meetings, engages with the Investment team on how they would like to vote, instructs the vote through the custodian, and maintains records thereof for reporting to our clients. Please refer to our Proxy voting policy for further details.

The CFO and COO are responsible for maintaining our ESG policy and ensuring that it addresses the CRISA principles, and are also responsible for reporting to clients and collating the Stewardship report.

Active Ownership

Engagement with companies and other industry participants:

Engaging with company management is an integral part of our investment process and we’ve had a number of successes in persuading companies to make decisions that result in better returns for shareholders, and have disinvested where we’ve been unsuccessful. By engaging with the companies in which we invest, we contribute both to safeguarding our shareholders’ investments and to helping their investments have a net positive effect on society. For example, we’ve previously engaged with market regulators to report suspected insider trading and methods to improve liquidity, as well as with stock exchanges on inadequate disclosures made by certain companies. We also engage with fellow shareholders on matters of mutual interest, including ESG concerns.

Incorporation of the Code for Responsible Investing in South Africa (“CRISA”) principles

We are fully in support of the objectives and principles of CRISA, and have therefore incorporated and specifically addressed these principles in our ESG and Responsible Investing Policy and Proxy Voting Policy, as summarized below:

Summary of how these principles are incorporated

CRISA principle 1 – Incorporation of ESG:

We recognize that ESG factors can carry risks that could have an impact on the performance of our underlying investments, and as such, ESG risk analysis is fully integrated in our investment process, with a particular emphasis on corporate governance.

CRISA principle 2 – Active ownership:

Engaging with company management is an integral part of our investment process and we’ve had a number of successes in persuading companies to make decisions that result in better returns for shareholders, and have disinvested where we’ve been unsuccessful. By engaging with the companies in which we invest, we contribute both to safeguarding our shareholders’ investments and to helping their investments have a net positive effect on society. We also engage with capital market regulators and stock exchanges to promote positive change for all stakeholders. We participate in proxy voting activities in accordance with our Proxy Voting Policy and voting guidelines.

CRISA principle 3 – Collaboration:

We collaborate with industry participants on Responsible Investing and ESG matters. For example, we’ve engaged with stock exchanges on inadequate disclosures made by certain companies and with the market regulator to report suspected insider trading. We’ve engaged with fellow shareholders on mattes of mutual interest including ESG concerns.

CRISA principle 4 – Conflict of interest:

Our Conflict of Interest Management Policy outlines key parameters within a framework to avoid and/or manage potential conflicts.

CRISA principle 5 – Disclosure:

A link to our ESG and Responsible Investing Policy and Proxy Voting Policy is published on our website, together with a link to request historic voting records, engagement records or our annual Stewardship Report. This information is also reported to investors on a quarterly basis.

United Nations Principles for Responsible Investment (“UNPRI”)

Steyn Capital Management has been a United Nations PRI signatory since November 2021.

Measurement of success

Investment process:

We regard our investment process around ESG as successful if we have successfully disinvested from or avoided investing in a company on the basis of ESG concerns which are subsequently revealed.

Active ownership:

We regard our actions as successful if our engagement and voting efforts have resulted in management delivering a more favourable outcome for all shareholders and other stakeholders.

Disclosure

Our company engagements and voting records are reported to clients on a quarterly basis. This information is also summarised in our annual Stewardship Report.