Edinburgh Investment Trust Half Yearly Report - Flipbook - Page 10
8 / STRATEGIC REPORT / THE EDINBURGH INVESTMENT TRUST PLC
PORTFOLIO MANAGER’S REPORT / CONTINUED
ENVIRONMENTAL, SOCIAL AND GOVERNANCE
PORTFOLIO ISSUES: HOW THEY ARE MANAGED
FOCUSING ON WHAT MATTERS
With a mandate to manage the Trust’s assets and a long
term investment perspective, the Global Fundamental
Team (‘GFT’) looks holistically at companies when making
investment decisions. It examines macro-economic
factors which address financial, societal or environmental
changes that a group may face (for example new
technology, demographic or climate change). The team
also considers internal changes that may take place
within an organisation including restructuring, closing
business lines, or pivoting to new business models and
products. Such internal changes may enable a company
to re-engineer itself so that its future is very different from
its past.
As part of these examinations, the GFT undertakes
materiality assessments to identify and prioritise the key
exposures that a company faces over the investable time
horizon of the Trust, which is typically three years. These
assessments bring together the external factors and
internal changes and enable the team to determine where
the greatest threats and opportunities lie for each holding.
These key issues lead the team’s engagement with
companies. The team assigns Resiliency scores, using a
1-5 scale, based on how well a holding is managing its key
exposures. It also assigns Conviction scores, again on a
1-5 scale, which reflect the team’s conviction in owning a
stock. Portfolio weightings are determined to some extent
by conviction scores and changes in these over time.
Within this context, analysing a company’s ESG exposures
becomes straightforward. Whether these exposures focus
on climate change areas, supply chain matters, diversity
stats, or other areas, the team takes a holistic approach to
ensure that it considers the most likely and most potentially
impactful exposures for a holding. It is not uncommon for
some ESG related risks / opportunities to have a longer
time horizon than the Trust’s focus – for example, where
physical or transitional risks arise from global warming.
The team, therefore, also considers a group’s emerging
exposures within the context of a group’s macroeconomic
and evolving environment – this helps the team develop
a view of how competitive a group will be in three years
and beyond.
IMPLEMENTING OUR MATERIALITY PROCESS
IN PRACTICE
Haleon
Edinburgh acquired a position in Haleon as a result of its
spin-out from GSK. Since then the team has been increasing
the weighting in the holding across client portfolios,
including for the Trust. The team has raised its conviction
and resiliency scores for Haleon to 4 (from 3) as Haleon’s
management has demonstrated its ability to drive attractive
topline growth with an appropriate balance of price and
volume. Maintaining volume growth is key for brand health
and thus the long duration growth of Haleon’s portfolio.
Driving attractive topline growth is a key identified material
risk/opportunity for Haleon, growing revenue through
increased household penetration, market share gains, and
portfolio innovation and expansion. Haleon is a leading
consumer health company with a strong scientific heritage
and, as such, plays an important role as a trusted brand
as consumers increasingly make their own decisions about
healthcare.
BENEFITS OF OUR APPROACH
One of the many virtues of this approach is nuance.
Investors know that companies come in all shapes, sizes,
and management abilities, and a holistic approach makes
understanding nuance possible. Take, for example, the
risks and opportunities from climate change. For one
group, a key concern might be the speed at which it is
(or isn’t) transitioning from fossil fuels to greener energy.
For another group, a prime concern could be that all of its
manufacturing plants are concentrated in areas of extreme
flood risk. And a third company might lack the board
expertise required for managing climate issues and linking
this directly with pay and group strategy. Appreciating the
nuance in these is critical – not only does it lead to much
better engagement with a group and increases the chance
of promoting positive change, it also helps the team make
more informed investment decisions for the fund.
One example of employing nuance in engagement over the
past year has been in the team’s engagement with banks
on their approach to incorporating carbon considerations
in lending decisions. While lending decisions have
ramifications beyond the investable time horizon of the
fund, having these discussions with banks has helped
the team understand banks’ asset allocation decisions
and expectations for return on investment. Inevitably,
different banks manage climate risks differently – some
may not enforce specific exclusions on coal or fossil fuels