As winner of Asia Asset Management’s 2021 Best of the Best awards for Best ESG Engagement Initiative (Hong Kong) and Best ESG Manager in ASEAN, FSSA Investment Managers (FSSAIM) continue to prioritise the integration of environmental, social and governance (ESG) analysis into its investment process by focusing on effective stewardship and good governance. According to Alistair Thompson, director of FSSAIM, it is an approach that entails a particular emphasis on the assessment of quality governance standards of each potential investee company – including past reputation, quality of professional leadership, alignment of interest with the main shareholder, related-party transactions, true independence of board directors, and incentives that drive management teams.
“We believe that relevant ESG factors highlight the sustainability of a company’s earnings and could have a significant impact on investment performance; we also believe that quality companies with better ESG credentials will generally merit a higher valuation multiple compared to weaker companies that may warrant a discount. By evaluating ESG factors we can assess what might significantly improve, or indeed destroy the investment case in terms of future valuations,” explains Thompson.
FSSAIM’s ability to focus on the long term, Thompson continues, is demonstrated by a mindset that affords the team’s portfolio managers and analysts “the privilege of engaging with companies in a positive way” to help them grow sustainably.
When it comes to highlighting the importance of ESG, his message is clear: “We view ourselves as owners of businesses…and with ownership comes the responsibilities of a shareholder. Management teams that are receptive to constructive criticism and suggestions are more likely to be good long-term stewards of the businesses they run. Furthermore, if the management of a business does not treat its stakeholders fairly, it is only a matter of time before they will compromise the interests of minority shareholders, and we would not invest in such a business, irrespective of how attractive the investment opportunity might be.”
For active managers such as FSSAIM, particularly in emerging markets and Asia, taking a ‘soft, nudge-nudge approach’ over a hard stance when it comes to dealing with investee companies – many of which are family-owned companies – is paramount.
“We have to demonstrate to investee companies that we are long-term partners, and we need to earn the right to engage as long-term shareholders. Their approach tells us about their company culture and that is the key take away when it comes to our engagement,” observes Thompson.
Just one example of successful ESG engagement includes the team’s relationship with investee company, the Godrej Group. Indeed, as far back as December 2012, FSSAIM wrote to its chairman to highlight the growing need to source palm oil more responsibly, a proposal that was accepted and led to positive change. More recently in 2019, as plastic packaging was becoming a more serious issue, FSSAIM highlighted this and introduced them to a firm, Polymateria, which came up with a solution for biodegradable packaging. The CEO of Godrej Consumer Products got in touch with the company and began a pilot program. Godrej even helped Polymateria get their certification in India so they could scale up their solutions, notes Thompson.
FSSAIM also occasionally collaborate with similarly aligned investment managers and asset owners to try and effect change on a larger scale. And while these efforts tend to be more targeted and thematic in nature, one recent and ongoing example can be seen in the team’s collaborative engagement plan to combat microplastic pollution. Drafted by the FSSAIM’s parent company, First Sentier Investors (FSI), and UK-based charity, the Marine Conservation Society (MSC), the plan aims to encourage manufacturers of domestic and commercial washing machines to fit, as standard, filters to their products to prevent plastic microfibres from entering marine ecosystems. The end goal, as Thompson explains, is to have filters fitted to all new washing machines by the end of 2023.
“This filter technology is currently available and relatively inexpensive, but is not widely applied across the industry. FSI garnered a number of initial supporters and we have agreed to lead engagement efforts on two of the companies identified in the screening, namely Midea Group and Samsung Corp,” he adds.
What is clear is that active investors have the power to drive change: “We do not believe that there are perfect businesses. There are shades of grey in every business and once we have established that a company is investible we will focus on the darker grey areas,” concludes Thompson.
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