The aim of our sustainability analysis and indeed all of our research efforts at SCM is to give the investment team the tools to understand, in greater detail, the risks and opportunities facing our portfolio companies. Achieving a greater depth of understanding allows us to identify and work towards potential improvements in our companies with the intention of improving the strength of these businesses. This work forms the foundation of our stewardship of our clients’ capital.
There are real world changes happening across Emerging Markets (EM). Governments’ priorities are moving away from growth for growth’s sake; carbon policy is front of mind but labour protection and biodiversity are just two of an increasing number of sustainability topics now on policymakers to-do list. The EM growth model is shifting towards higher value provision of goods and services developed by local firms, not just assembling other people’s products for the lowest cost, or digging primary products out of the ground. Assessing how our companies use key inputs and control emissions, improve supply chain robustness and transparency, and attract and retain key talent are now parts of the EM investor toolkit when assessing business quality and the durability of growth. To that end we developed a predominantly in-house approach designed specifically for the challenges of Emerging Markets. These challenges include data availability, corporate unfamiliarity with ESG and the customs of formal engagements. Its focus is assessing risks and opportunities to core business profitability from regulation change and/or consumer preference shifts.
Our approach is embedded across the firm in research and engagement, but to different degrees in portfolio construction depending on our client demands and individual product design. We don’t impose moral values on client portfolio objectives beyond the avoidance of the worst kind of practices, but we do aim to positively influence companies in our portfolios.
Segregating ESG factors from other factors in research and engagement, or over-emphasising their importance over other drivers of long-term value doesn’t seem right to us. Similarly, creating a single ESG score as a tidy proxy for godliness or limiting engagement to only ESG topics is an artificial segregation more helpful for marketing purposes, rather than understanding how these factors help or hinder our understanding of our companies. We do recognise that many of our investors are requesting more detail on our sustainability efforts, and financial regulators in several major jurisdictions where we serve clients would like more data, particularly on climate-related disclosures. As a result we have designed our first standalone annual sustainability report to respond to our clients’ requests and to fulfil our future regulatory obligations. We welcome your feedback.
Please note, at present we are outside the scope for mandatory TCFD reporting in the UK, but in our latest annual sustainability report (Annual Sustainability Report 2022) we include a voluntary TCFD aligned disclosure reflecting our support for the aims of the TCFD.
UK Stewardship Code Signatory
Somerset Capital Management is a signatory to the United Nations Principles for Responsible Investment and the UK FRC Stewardship Code (2022).
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