Environmental, Social and Governance (ESG) considerations and the smaller companies’ team investment process:
Whilst the management of the Company’s investments is not undertaken with any specific instructions to exclude or include certain asset types or classes, at the smaller companies team we consider ESG risks and opportunities for all of our investments and thus, ESG considerations are inextricably embedded in our investment process in order to achieve a successful and sustainable performance for the longer term. There is a broad understanding within the smaller companies team and abrdn that a full and thorough assessment of ESG factors allows us to make better investment decisions that lead to better outcomes for our clients. With this in mind, we undertake thorough diligence and consider material ESG risks and opportunities alongside other financial metrics in order to make the best possible investment decisions at a stock picking and at a portfolio construction level.
ESG analysis is a core constituent in the “Quality” analysis of our fundamental research. We appreciate that ESG considerations entail both risks and opportunities, especially for smaller companies, and thus our research approach and analysis reflects this accordingly. In more detail, all the analysts of the team are required to undertake a comprehensive ESG quality assessment (ESG Q score analysis) and reflect this in the research note provided for each of the companies under coverage. The ESG Quality of a company is very important to our stock selection and portfolio construction process given that it is one of the core considerations ensuring our traditionally lower risk investment approach continues.
The team has a very close relationship with the c.50 ESG specialists within abrdn, while at the same time has an on-desk ESG analyst to assist in the above research process and the ESG engagements with the companies. Through the utilisation of third party provided research such as MSCI and most recently our own in-house ESG rating tools we are able to identify, where appropriate, leaders and laggards, areas of weakness and areas of strength. In addition, to complement our analysis, we have developed a thorough engagement process that allows us to achieve a constructive dialogue with the companies at an on-going basis in order to monitor steps taken by the companies by establishing “engagement milestones” while at the same time aiming to preserve and enhance the value of our clients investments. Given the importance of ESG matters, the engagement milestones are reviewed on an ongoing basis in addition to ongoing monitoring of companies’ actions to assess the need for further engagement and/or changes to our internal investment view. Finally, as part of our broader stewardship activities we are participating actively in the voting process of our holdings, in line with the best practices.