Responsible Investment

We believe that the assessment of ‘responsible investment’ at a listed company level can uncover valuable insights, helping us assess opportunities and value at risk. We feel that only full integration of Environmental, Social & Governance (ESG) issues into the investment process fosters real sensitivity to their impact on valuation, stock rating, conviction, and portfolio weighting. Our goal is to ensure that we consider all aspects of responsible investment when we undertake stock analysis and assess companies for possible inclusion into portfolios.

For Celeste, ESG issues relate to the quantifiable list of things that we see that might impact the company.  Normally these issues are a subset of wider industry issues but may, in some cases, be solely related to the company’s operations.  Increasingly these issues can be quantified via increased numerical disclosure via Annual Report and Sustainability Reports.  In some cases, there is no disclosure and any attempts to quantify or explore potential impacts must be done via engagement with management or wider industry participants.  We see the major ESG issues that tend to sit across most companies (again, either positive or negative) as

• Environmental – power and water usage, ocean sustainability, climate change, waste management, recycling, biodiversity loss and depletion of natural resources.
• Social – diversity and inclusion, gender pay gap closure, employee retention, ongoing employee education and upskilling, employee wellbeing, human rights, modern slavery, and children’s rights, ethical sourcing, supply chain oversight, privacy and data security.
• Governance – board diversity and independence, board attendance, tax transparency, anti-corruption, related party transactions, quality of accounts, shareholder rights, executive compensation and incentives, risk management and ethical behaviour.

We assess this information in a holistic way to form a view on whether the corporate entity will, based on current business strategy and corporate practices, produce superior investment results.  We believe that a thematic focus or investment screening process to eliminate companies based on responsible investment metrics is not the ideal way to deliver long-term wealth. Applying ‘broad brush’ approaches can lead to investment opportunities being ‘screened out’ when ESG themes are too broadly applied.

Our principle focus in evaluating ESG issues relates to the impact they are likely to have on the value of our investments. As such, we seek to develop a clear understanding of how these ESG issues may impact valuation (both positively and negatively). We apply quantitative scores to E, S and G issues, respectively.  We initially assess the potential materiality or impact to the valuation of the industries in which the company operates (High (±15%), Medium (±10%) and Low (±5%).  We measure this against the company performance in each of the E, S & G issues (1 through 4, in increasing order of performance). This matrix then produces an aggregate assessment of the likely impact of the ESG performance of the business on the valuation of the cash flow stream that this business produces.

How does this work in practice?  If a company has a high environmental risk and poor performance, this will immediately highlight risk to our view on valuation.  We then focus on the specific issues, attempt to quantify their impact on the valuation.  An example here may be higher remediation costs on a contaminated site.  Often this will be undertaken as scenario analysis with a range of valuation outcomes.  If we can quantify the impact, this will be either reflected in the forecast earnings we maintain in our financial models or calculated explicitly and then deduced directly from the target price valuation.

Often it is hard to exactly assess the direct impact an event or behaviour may have on a valuation.  For example, poor safety performance as a mining contractor leads to higher employee injuries which may over time lead to mining companies not renewing their contracts.  In this case, we would look to adjust for this risk by altering the discount rate or capitalisation multiples that we ascribe to the underlying cash flow streams that the business generates.

It is this analysis of the likely costs and benefits of the ESG issues, along with a view on execution of the strategy, company earnings, accounting, board, and management and gearing to make an overall assessment around the analyst’s conviction on the stock.

The vast bulk of our ESG research is undertaken via detailed stock analysis from our in-house investment team. ESG information is obtained from multiple sources including data published by companies, information obtained in meetings, material from the company’s competitors, customers or suppliers, industry bodies, government departments and some not-for-profit organisations.

We became a signatory to the United Nations Principles for Responsible Investment (UNPRI) in July 2008. We decided that we would focus on the UNPRI as it fits in with our investment process and determining value at risk.  We made the UNPRI principles the basis of our Investment Policy and Investment Framework. This framework enables us to use our small and mid-cap company contacts and investments to focus on key UNPRI issues around environmental footprint, sustainability, social impacts, workers’ rights, gender balance as well as corporate oversight, reporting and governance.

We vote on 100% of the resolutions where our mandates allow as we believe that we should have a view on the operation of the company, reflecting our fiduciary responsibility to ensure we act in the best interests of clients. We do not use proxy advisors to make our voting decisions for us.

We maintain a small office and offset 120% of our annual carbon footprint.