The Board believes that ESG related issues can affect both the performance and sustainability of an investment portfolio and that ESG factors can be potential indicators of management quality and operational performance. Companies with strong, sustainable profiles will, it believes, have greater potential to grow and survive in all market conditions.
Chikara Investments LLP, (the “Investment Manager”, “Chikara”) is responsible for engagement on ESG matters and has a structured yet flexible approach to incorporating ESG into the investment process. Its fundamental, hands-on research approach allows it to seamlessly integrate its responsible investing efforts alongside the Company’s investment strategy in an effective manner, which the Board believes will achieve the best long-term results for the Company’s investors.
The Investment Manager considers whether ESG factors are relevant and may have a material impact on stock performance. The factors considered by the Investment Manager vary by the industry and company under review and may include the following: :
- Environmental: Pollution, site management/ consideration, greenhouse gas emissions, climate change, habitat protection, recycling, water
- Social: Human/employee rights, working conditions, health and safety, firm-employee relations, child/ forced labour, conflict zones
- Governance: Board composition, independence, transparency, compensation and accountability, shareholder rights and relations, cyber security, protection of personal data, corruption.
The ESG factors are integrated into the Investment Manager’s bottom-up investment process and these issues are considered alongside financial and strategic issues during assessment and engagement with companies. The ESG risks are qualitative factors rather than quantitative inputs in a financial model.
The investment team conducts its own research which is complemented by data and research of third parties. Chikara has engaged a third party ESG and climate data provider, who provides ESG related metrics and analysis. These reports are reviewed by the investment team where available and assist them in identifying potential areas for engagement with companies as it relates to ESG factors. Third party reporting includes Corporate ESG assessments, Climate Impact Reporting, Norms Based Research, and EU Regulatory Reporting.
The Investment Manager has a policy that prohibits investment in a list of companies that manufacture controversial weapons but does not specifically exclude investment in industries or individual companies on standardised ESG factors.
Engagement and Stewardship
A key component of the ESG process is engagement. The Investment Manager dedicates a significant amount of time and resource focusing on the ESG characteristics of the companies in which the Investment Manager invests, and monitoring is carried out through investment reviews.
The strategy of the portfolio has an explicit focus on improving relationships between corporate managers and shareholders in Japan. Consequently, corporate governance is a key point of discussion in every meeting held with company management. The goal in each case is to help the senior representatives of the company develop not only an understanding of the role and requirements of long-term shareholders but also the realisation that their actions must be consistent with mutually determined objectives.
The team at Chikara conducts over 300 meetings and calls a year with the management of many different companies. Engagement serves three main purposes as it relates to ESG:
- Due Diligence –engaging with companies, conducting due diligence, and understanding potential risks and opportunities relating to the investment.
- Education – through engagement with companies, sharing best practices and providing insights into the ESG practices of peers (e.g., disclosures, targets, and benchmarking).
- Action – engaging with companies to encourage disclosures and target setting.
Although the Investment Manager does not seek to agitate management through aggressive behaviour with public disclosures or proposals, it does and will vote on resolutions which it believes are consistent with the future growth and development of the company.
Conversely, it will vote against those that do not and would be prepared to sell the shareholding if this were deemed to be the most appropriate course of action.
Japan Stewardship Code: The Investment Manager’s commitment to the Japan Stewardship Code is set out on its website: https://www.chikarainvestments.com/japan-stewardship-code
UK Stewardship Code: The Investment Manager is a signatory to the UK Stewardship Code and its statement of compliance with the Code can be found on its website: https://www.chikarainvestments.com/stewardship-code
Principles of Responsible Investment (“PRI”): Chikara became a signatory to the UN-supported Principles for Responsible Investment (“PRI”) on 6 December 2018. The PRI is fast becoming a global standard for investment managers’ ESG alignment. As a signatory to the Principles, the Investment Manager publicly commits to adopt and implement them, where consistent with its fiduciary responsibilities. The Principles can be found here: https://www.unpri.org/pri/what-are-the-principles-for-responsible-investment. The Investment Manager also commits to evaluate the effectiveness and improve the content of the Principles over time. It believes this will improve its ability to meet commitments to beneficiaries as well as better align its investment activities with the broader interests of society. Chikara reports annually to the PRI on the firm’s responsible investment initiatives, activities and achievements and seeks to meet the standards expected by the PRI in doing so.