ESG and Responsible Investing Policy
As institutional investors, and fiduciaries of client assets, we have a duty to act in the best long-term interests of clients. In this fiduciary role, we believe that environmental, social, and corporate governance (“ESG”) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time). ESG risk analysis is therefore fully integrated into our investment process, with a particular emphasis on corporate governance.
We believe that good stewardship of client assets further requires an active ownership approach, which we achieve through proxy voting and ongoing engagement with investee companies and other stakeholders.
We endorse the objectives and principles of the Code for Responsible Investing in South Africa (CRISA), and have therefore incorporated these principles in our investment process.
The principles of CRISA are intended as complementary guidance to Regulation 28 of the Pension Fund Act, 1956 (the “PFA”) and will further assist funds in adopting a responsible investment approach. Regulation 28 of the PFA promotes responsible investing of fund assets, based on a sustainable, long-term, risk-aligned and liability-driven investment philosophy.
Steyn Capital Management (SCM) is a United Nations Principals for Responsible Investment (“UNPRI”) signatory.
ESG and RI factors Policy and Integration in Investment Process
Overarching policy
ESG is integrated into our investment approach as a risk assessment and management tool, with the overarching objective of maximising our risk-adjusted returns. Our active ownership objectives are company specific in nature, focussed on successfully resolving specifically identified ESG issues that could have an impact on our investment case and long-term return potential. Our active ownership approach increases portfolio companies’ focus on ESG issues and holds them accountable, resulting in better outcomes for our investors and other stakeholders.
Specific sectors or potential investments are not excluded from our initial universe based on broad ESG factors, as we believe this approach lacks precision and ignores important nuances. Rather, our ESG risk analysis is done at a stock-level during our detailed research process, but precludes investment where the identified ESG risks are considered so pervasive that it cannot be mitigated. For example, we will exclude companies where the stock-level research identified ESG issues such as management impropriety, pervasively bad earnings quality (indicative of pervasive governance issues), child labour, arms smuggling, terrorism financing etc.
In the case of less severe ESG issues, we may choose to invest with a more modest position size and engage with management on their action plan for ESG improvements. 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.
Our investment research process includes a step directly focussed on identifying any material ESG concerns at the company in question, and the potential impact of this on the investment case. This involves both qualitative and quantitative analysis of ESG factors. We will assess the extent to which ESG factors are being managed, determine the impact of qualitative factors on financial sustainability, and incorporate quantitative factors into our valuation of the business. An elevated ESG risk, via for example high carbon intensity, provides for a significantly higher hurdle rate for investment, and the analyst would incorporate the potential impact of future taxes, penalties or business continuity risks into the assessment of the upside, downside and conviction estimates.
Any concerns with ESG are specifically noted and opined upon in the ESG step as part of our initial and ongoing fundamental work. Early identification and quantification of potential risks, and addressing these directly by either engaging with the company to affect change, or disinvestment where necessary, remains a key focus of our ESG integration.
Additional guidance on specific ESG factors
Environmental Factors
Steyn Capital supports the aims of the Task Force on Climate-Related Financial Disclosures (“TCFD”) as we believe that disclosure drives awareness of climate risks, which is the first step in managing and reducing the risk and allows stakeholders to measure progress and hold management teams accountable. Consistent, accurate information related to climate related targets and disclosures is key to investors being able to adequately engage on these issues.
Our portfolio is constructed on a bottom-up basis, selecting our best ideas without the constraint of an overarching benchmark, and without applying any blanket environmental screening process to specifically exclude broad segments of the listed universe.
Each investment is evaluated on a case-by-case basis with consideration given to environmental risks to determine the possible impact of these risks on the investment case including the long-term return potential. We will assess the extent to which environmental factors are being managed, determine the impact of qualitative factors on financial sustainability and incorporate quantitative factors into the valuation of the business. An elevated environmental risk (via for example high carbon intensity) provides for a significantly higher hurdle for investment and the analyst would incorporate the potential impacts of future taxes, penalties or business continuity risks into the assessment of the upside, downside and conviction estimates. Any concerns with environmental factors are specifically noted and assessed in the ESG step and where material can preclude an investment.
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 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.
In recognition of the importance of a Just Transition, our “E&S” views are well-balanced and we consider the big picture when assessing ESG (and other) risks on each investment on a case-by-case basis. While environmental emitters do require a higher return hurdle, we will not exclude or divest from companies based solely on these environmental criteria, provided that the business model is ethical. We are also cognizant that environmental outcomes need to follow a sensible path to ensure that social impact is not overlooked, which is more acute especially in an emerging markets context. For example, to decarbonize South Africa to a low carbon economy will require a lot of effort in understanding the social impact and ensuring it is executed in a Just manner. Our investment process considers each risk on a case-by-case basis as described above.
Social responsibility factors
We believe that companies cannot achieve sustainable economic success while neglecting their social and environmental responsibilities.
High standards of corporate responsibility generally make good business sense and have the potential to protect and enhance investment returns. 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.
Social and ethical issues identified during our detailed research process, could preclude an investment. For example, we will exclude companies with material social issues such as human rights violations, child labour, arms smuggling, terrorism financing etc., in the case of less severe social issues, we may choose to invest with a more modest position size and engage with management on their action plan for improvements. 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.
Corporate governance
We believe good governance to be a key indicator of a sustainable business. Governance structures within a company have the ability to influence a plethora of matters which are critical to the success and quality of a business, such as capital allocation, business strategy, employee and management incentives, etc.
Governance is the primary ESG factor on which we focus during our ongoing investment analysis. Good governance that is focussed on the long-term sustainability of a business will inherently work towards addressing the other ESG factors that may present a risk to its longevity.
Governance is addressed through several mechanisms in our research steps, including initially an earnings quality assessment and interrogation of accounting practices (indicative of potentially pervasive governance issues), analysis of directors’ incentives and alignment with shareholders, and directors’ dealings in shares.
We avoid positions in companies that we consider to be poorly governed, and will proactively engage management on potential items of concern. We apply negative screening for poor earnings quality factors including aggressive accounting, which may be indicative of pervasive governance issues.
Resources
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, suppliers, 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.
The investment analysts consider ESG risks during the research process on a specific company, and engage with the management teams on ESG matters. ESG issues affecting companies are frequently complex and company-specific in nature and often not generic across businesses. The analyst responsible for a particular company is therefore best placed to sufficiently identify, understand and consider the specific ESG items affecting the investment case and update our custom designed research management system.
Significant issues identified during the pre-investment phase will results in no investment. Research on existing investments is constantly updated and any changes/new ESG issues identified may lead to position size adjustment or disinvestment.
One of the final steps in our investment process is engaging directly with management to corroborate our findings and discuss any identified risks.
Stewardship and Active Ownership
Engagement and Collaboration
As fiduciaries of client assets, we believe it is our duty to drive value as well as be good stewards. We often engage with fellow shareholders to collaborate on matters of mutual interest, including ESG concerns.
Active ownership through engaging with company management is an integral part of our investment process. Through this engagement with 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.
Our investment team engages with company management multiple times throughout the year. We utilise these opportunities to discuss any environmental, social and governance issues.
Engagement will initially include discussions with management, but where appropriate have included writing letters to the board and market regulators, reaching out to fellow shareholders, and direct engagement with board members.
We support public policy initiatives that promote greater corporate sustainability, transparency and accountability, where appropriate, and support shareholder resolutions aimed at persuading companies to adopt higher standards of corporate responsibility, where appropriate Engagement records are published on our website: https://steyncapitalmanagement.com/esg-and-responsible-investing-policy/
Proxy voting
We believe that as good stewards we should exercise our shareholder rights through proxy voting where necessary to drive investor returns.
When we believe that the interests of our investors may be affected or prejudiced by any proposal, we typically engage with management and other shareholders prior to the vote, and at times also attend the meeting.
Our detailed Proxy Voting Policy and voting guidelines is contained in a separate policy, which is published on our website (Proxy Voting Policy – Steyn Capital Management), together with a summary of our voting records.
Further details of our company engagements and voting records are reported to clients on a quarterly basis and available on request. This detailed information is also included in our annual Stewardship Report.
Principles supported by UNPRI signatories
SCM has been a UNPRI signatory since 17 November 2021. UNPRI signatories acknowledge that as institutional investors, they have a duty to act in the best long-term interests of their beneficiaries. In this fiduciary role, they believe that ESG issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time).
PRI signatories also recognise that applying these Principles may better align investors with broader objectives of society.
- Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
- Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
- Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
- Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
- Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
- Principle 6: We will each report on our activities and progress towards implementing the Principles.
The Second Code for Responsible Investing in South Africa (“CRISA”) principles
We endorse 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: CRISA principles incorporated herewith and in our other policies are
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 into our investment process, with a particular emphasis on corporate governance. We have formulated our approach in our ESG & Responsible Investment Policy, which is published on our website.
ESG and Responsible Investing Policy – Steyn Capital Management
CRISA principle 2 – Diligent Stewardship:
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, which is published on our website. A summary of our proxy voting activities and engagements for the year is also published on our website and updated quarterly. We include further details on these engagements in our Annual Stewardship Report, which is shared with investors and may be made available to non-investors on request.
Proxy Voting Policy – Steyn Capital Management
CRISA principle 3 – Capacity Building & Collaboration:
We collaborate with industry participants on Responsible Investing and ESG matters. For example, we have engaged with stock exchanges on inadequate disclosures made by certain companies and with the market regulator to report suspected insider trading and suggest methods to improve liquidity. We have also engaged with fellow shareholders on matters of mutual interest including ESG concerns. For example, in matters requiring a shareholder resolution, we may approach our fellow shareholders to either vote for or against a resolution, where we believe the outcome of the vote would be material to our investment.
We are a signatory to the UNPRI, which promotes similar objectives to CRISA.
CRISA principle 4 – Sound Governance:
Governance has always been a significant focus area in our investment process and we’ve often engaged with company management in this regard. Please refer to further details contained in our Governance integration guidelines above.
Within Steyn Capital, we uphold the highest standards of governance and all employees are bound by the CFA code of ethics, which is embedded in our Employee Code of Conduct. Annual classroom style training on company policies is provided to all employees, and employees are required to sign annual declarations that they have read, understood and complied with all policies during the year.
Relevant functions within the firm’s governance framework and risk management processes have been delegated to Committees, but André Steyn, as CEO, accepts ultimate responsibility for the implementation of an effective risk management process and maintaining a sound control environment.
The Risk Management Committee’s quarterly review of the Enterprise Risk Management Framework includes a heat map/risk matrix assessment of the firm’s current status and progress around sustainability, diversity and ESG/Responsible Investing, amongst many other considerations.
Our Conflicts of Interest Management Policy outlines key parameters within a framework to avoid and/or manage potential conflicts. Our policy is disclosed on our website.
Conflict of Interest – Steyn Capital Management
CRISA principle 5 – Transparency:
Our ESG and Responsible Investing Policy and Proxy Voting Policy is published on our website, together with a summary of our historic voting and engagement records, which is updated quarterly. We include further details on these engagements in our Annual Stewardship Report, which is shared with investors and may be made available to non-investors on request.
Review
This policy is approved by the Risk Management Committee (Exco) and will be periodically reviewed and updated by this committee.
Funds and Strategies
