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Environmental, Social and Governance

We consider environmental, social and governance factors as part of our investment process

How we invest responsibly

Environmental, Social and Governance (“ESG”) Engagement  

ESG considerations have always been an integral part of the Manager’s investing process and Asia Dragon Trust’s holdings – in China and elsewhere – are selected after careful due diligence on their ESG underpinnings, among others.

The Board is cognisant of the importance of ESG factors to all stakeholders and has been working alongside the Manager to better understand the impact of ESG factors on the Manager’s decision making. At the Board’s request, the Manager has presented its ESG investment framework and, in particular, the potential impact of climate change on the Company’s portfolio.

More details on the Manager’s approach to ESG are set out on pages 19 to 25 of the annual report.

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ESG highlights  

  • We aim to outperform whilst maintaining a better ESG profile and a lower carbon footprint than the benchmark
  • We have been actively integrating ESG into our investment decision-making process for almost 30 years and believe that ESG factors are financially material and can meaningfully affect a company’s performance
  • Deep, on the ground ESG resources and expertise enable us to glean insights from company visits and obtain an ESG information advantage
  • The Trust’s portfolio is ESG A rated by MSCI. This is higher than the benchmark rating of BBB
  • The Trust is among the top 8% of all Asia ex Japan open ended and closed ended funds based on Morningstar sustainability ratings
  • The Trust has 34% lower carbon intensity relative to its benchmark

More details on the Manager’s approach to ESG are set out on pages 19 to 25 of the annual report.

What is ESG, and why do we do it?

  • Environmental factors relate to how a company conducts itself with regard to environmental impact and sustainability. Types of environmental risks and opportunities may include a company’s energy and water consumption, waste disposal, land use and development and its carbon footprint.
  • Social factors pertain to a company’s relationship with its employees, vendors, and broad set of societal stakeholders Risks and opportunities include conditions and rates of pay, the company’s initiatives on employee attraction and retention, gender discrimination and how a company is managing its supply chain, including for example the risk of forced and child labour.
  • Corporate Governance factors may include the corporate decision-making structure, the independence of board members, treatment of minority shareholders, executive compensation and political contributions, capital allocation and the risk of bribery and corruption.

More details on the Manager’s approach to ESG are set out on pages 19 to 25 of the annual report.

Our approach

Our ESG Investment team is a centralised resource of over twenty analysts dedicated to maximising the quality and value of ESG engagement, research and analysis across all asset classes. The function has a number of responsibilities including: standard setting on all ESG matters, quality assurance and consistency of the ESG regional analysts’ research and analysis, the consideration of governance issues, undertaking thematic sustainability-driven research and highlighting themes and emerging risks in ESG. In addition, we have three dedicated ESG analysts in Singapore working alongside the Asia Pacific Equities team to ensure the integration of ESG factors within investment decisions. As part of our increased focus and investment in ESG in the region, we have recently established an APAC Sustainability Institute to build upon our ESG heritage, develop Asia-centric ESG insights and engage with policymakers to help shape the region’s ESG regulatory framework.

We consider both macro and micro ESG issues.

  • Macro ESG factors are broad thematic issues that impact companies and the products and services they provide. These include issues like climate change, access to finance or access to healthcare. These are secular, industry-impacting trends that may present a clear risk or opportunity for a company.
  • Micro ESG factors are company/industry specific issues that relate to how a company’s products or services are made or delivered.

Our five stages of ESG integration:

  • Idea generation: Understanding themes and dynamics inherent in sectors, countries, and companies, we are able to use ESG as a lens to generate new investment ideas for the portfolio. This could include companies that are well placed to help in climate transition or companies that are managing their supply chain in a way that makes them more attractive to global clients.
  • Research: ESG disclosure by companies in Asia tends to be lower quality than might be observed in Europe or North America but while such disclosure means it may be challenging to collect information, it also means that extensive company due-diligence by the us can create investment opportunities.
  • Buy / sell: At this stage we must weigh the decision to buy (or sell) a company. We have a clear quality threshold for investment and ESG is a fundamental and non-negotiable part of this.
  • Portfolio Construction: Whilst a simplification, the better quality a company, and the more conviction we have in the company, the more of that company we might elect to buy (whilst being sensitive to valuations). ESG is a key part of the discussion around ‘position sizing’, or just how much of a company to buy.
  • Engagement: We continue discussing ESG issues with senior management over the course of the investment, both to protect the value of investments and to enhance the value of investments through constructive challenge and debate with management around strategy and execution, with the mutual aim of fostering sustainable shareholder returns.

More details on the Manager’s approach to ESG are set out on pages 19 to 25 of the annual report.

Importance of engagement

We are committed to regular, ongoing engagement with companies to help maintain and enhance their ESG standards into the future. These meetings provide an opportunity to discuss various relevant ESG issues including board composition, remuneration, audit, climate change, labour issues, human rights, bribery and corruption. Companies are strongly encouraged to set clear targets or key performance indicators on all material ESG risks so as to enable performance monitoring.

Since ESG disclosure by Asian companies is often poor, ESG engagements give us an opportunity to source additional information and potentially to:

  • xploit an information gap: if a company does not disclose ESG information and the market is unable to form a robust view of its quality, its shares may be priced inefficiently. Making use of on-site, face to face visits, we are able to develop an informed view of every company and to exploit any pricing inefficiency that we judge may exist.
  • Close the information gap: if we own a company that is misunderstood by the market, we can work constructively with the company’s management team to encourage improved and enhanced disclosure, allowing the market to better understand, and hence better price, the company’s securities.

ESG engagements are conducted with consideration of the 10 principles of the United Nations Global Compact and companies are expected to meet fundamental responsibilities in the areas of human rights, labour, the environment and anti-corruption.

More details on the Manager’s approach to ESG are set out on pages 19 to 25 of the annual report.

Our ESG scoring system

Having considered the regional universe and peer group in which a company operates, the Investment Manager allocates it an ESG score between one and five. This is applied across every stock covered globally. Examples of each category and a small sample of the criteria used are detailed below: 

1. Best in class

  • ESG considerations are a material part of the company’s core business strategy 
  • The company provides excellent disclosure on ESG issues 
  • The company provides opportunities from strong ESG management.

2. Leader

  • ESG considerations are good but not market-leading
  • Disclosure is good but not best in class
  • Governance is generally very good.

3. Average

  • ESG risks are considered as a part of the principal business
  • Disclosure is in line with regulatory requirements
  • Governance is generally good but with some minor concerns

4. Below average

  • There is evidence of some financially material controversies
  • There is poor governance or limited oversight of key ESG issues
  • There are some issues in treating minority shareholders poorly.

5. Laggard

  • Many financially material controversies
  • Severe governance concerns
  • Poor treatment of minority shareholders.