Environmental, Social and Governance (ESG)
The Company’s approach to ESG
The Board believes that it is in shareholders’ best interests to consider environmental, social and governance (“ESG”) factors when selecting and retaining investments and has directed the Company’s Investment Manager, Ocean Dial Asset Management Limited (“Ocean Dial”), to take these issues into account in its investment process. As long-term investors, the Board considers that it is mutually beneficial for the Company and its shareholders and the management of investee companies to have a relationship based on accountability, engagement and trust. In so doing, it helps to enhance the long-term value of the Company’s investments. Consequently, evaluation of ESG factors is an inherent part of Ocean Dial’s investment process as demonstrated by its Responsible Investment Policy below:
Responsible Investment Policy of the Investment Manager
1. Strengthen the risk/reward nature of our portfolios
2. Support the building of a sustainable economic and financial system
3. Adhere to the UN Principles of Responsible Investment
Investment Approach & Integration of ESG Principles
We are long term investors and our approach is to identify companies that can deliver sustainable and profitable growth well into the future. We are focused on capital preservation and index benchmarks play no role in our stock selection process. Experience tell us that sound governance is an essential element of a company’s survivability and that detailed analysis beyond the financial data is required to understand the true characteristics of the business. Hence our research of the issues surrounding governance have long formed the major element of our process. This includes but is not limited to, conviction in the alignment of interest between the owners, managers and minority shareholders of a business, the nature and extent of the true independence of the Board and its specialist sub-committees, capital allocation and dividend policies, tax treatment, key man risk and succession planning. In short, we see ourselves as proportionate owners of a business.
Insomuch that governance plays a central role in our investment philosophy, we naturally veer away from certain sectors where practical issues of “getting business done” within India can undermine good governance. These sectors tend to be capital intensive, rely on multiple bureaucratic approvals for authorisation and are often cash flow negative. We also choose to avoid industries that are considered harmful to the wellbeing of society not least because they are often on the wrong end of regulation and tax considerations that can create unforeseen financial uncertainty. These include tobacco and alcohol, as well as defence equipment manufacturers of all description.
We also recognise that Boards and their management teams are increasingly prioritising (to a greater or lesser degree) the environmental and social issues surrounding business. We give as equal importance to these additional non-financial elements of our analysis as we do to our financial modelling. We also recognise that India is at an earlier stage of evolution than its developed peers and currently lacks the oversight of a regulator, peer group pressure or indeed consumer activism to drive transformation. We believe that the responsibility is therefore on shareholders as good corporate citizens, to understand the extent to which generic issues around this subject are being addressed. These include but are not restricted to topics such as gender diversity, environmental impact on production, carbon footprint, work place health and local community engagement. We accept also that there is no exhaustive list of ESG questions and more importantly, there will be specific topics relevant at a sub industry level that will require deeper analysis. A standard ESG “toolbox” approach to these matters can therefore miss the point. As such we find the support of a third party research specialist, whose work on specific companies is used to complement our own, helps us to understand issues in more detail and increases the probability of reaching the desired outcome. As our process and understanding of these subjects develops and as reporting standards and transparency improves, we may adapt our engagement with external research providers.
To conclude, ESG is not a style factor or an addition to our methodology. It is an inherent component of an evolving investment process that seeks to discover long-term equity winners in the overall context of India’s risk-reward opportunity set.
Constructive dialogue with “management” is at the core of our investment process. The investment team (always in pairs) meets and interacts regularly with both investee companies and potential portfolio holdings in order to build conviction in a specific thesis. In 2019 we held over 240 company meetings face to face in various formats. We meet onsite where possible and will take the opportunity of visiting manufacturing facilities as well a corporate headquarters in order to build a clearer picture. We endeavour to meet employees outside of the senior management team in addition, as this also helps to strengthen our understanding. We prepare in advance of our meetings in order to exploit the time spent and we record meticulously the impressions built in order to preserve the value of the interaction. Whilst having faith in the importance of this engagement we are also conscious that one should “never ask the barber if you need a haircut”, risking subjectivity through over engagement. On average we meet each portfolio company no more than twice a year “one to one”, supplemented by formal updates to the market, quarterly conference calls and so on. This risk is also mitigated by meeting with other connected parties such as suppliers, competitors and customers. It’s not uncommon that this secondary process leads us to uncover a new potential investment or a different line of enquiry or thinking.
Holdings in individual companies are not large and our votes are not likely to carry weight. However as responsible investors, and due to our remit to invest in small and mid-cap Indian equities supported by a long term investment approach, management teams do look to us for guidance on aspects of best practice. In turn we look to influence their thinking positively. We believe straight discussions with senior management and “promoters” is the best way to achieve this.
When a corporate strategy deviates form an expected path, or a governance issue arises or indeed our view on an investee company alters as a result of new information learned, we consider our clients best interest first, by default. In most cases we will engage with the company in order to clarify the facts and our thinking before taking any buy/sell decision. If we are unsatisfied, we will exit rather than escalate. However, there are times when it pays to move faster and if we judge this to be the right outcome, we will do so unflinchingly. We do not invest in companies with the specific intention of using active engagement as a means of influencing strategic decision making.
Ocean Dial considers proxy voting a part of its investment process and uses respective fund custodians to do so. Votes are generally cast in line with management unless it is decided that investors’ interests are best represented otherwise. We believe that this can only be managed on a case by case basis. Voting records are retained and can be made available as requested.
United Nations-backed Principles of Responsible Investment Initiative (PRI)
As part of its commitment to responsible investing, Ocean Dial is a signatory to The United Nations-backed Principles for Responsible Investment Initiative (PRI).