Consideration of ESG issues is not new. They have been part of the research and evaluation process used by Polar Capital’s fund managers for many years and incorporated as a factor in their assessment of the risks and opportunities facing companies in which they may invest.
Environmental, social and governance factors can affect the manager’s view of a company’s growth rate assumptions, competitive position and the discount rate used in financial models. We do not view ESG questions as non-financial. These issues have the potential to affect the long-term financial profile of companies in the same way as more obvious financial considerations such as sales, margins and asset turns.
Polar Capital’s ESG monitoring uses company scores provided by third-party research: each company is rated on a scale from AAA to CCC, relative to other companies in the same industry. Polar Capital’s ESG oversight reports list the five weakest scores for every strategy in each of the environmental, social and governance categories, then an overall asset-weighted score for each portfolio and its benchmark. This analysis is the starting point for discussion in oversight meetings. As is the case with conventional third-party investment research, PMs do not always agree with the third-party ratings, but they can assess what the consensus is saying. Finally, the risk team sends each fund manager the full ESG research on any portfolio holding rated CCC. The appropriate course of action remains the fund manager’s prerogative.
Stewardship and engagement
Polar Capital’s stewardship activities are a key aspect of the wider investment process which is undertaken differently by the diverse range of strategies within the company. An active, bottom-up approach to engagement and voting is an essential way for Polar Capital’s fund managers to enact active ownership and perform their duty as stewards of their investors’ capital. While we are not activist investors, we engage with companies where we feel it will have a positive impact on company performance and enhance shareholder value.
Polar Capital’s fund managers approach engagement in a measured way as long-term investors. Funds frequently meet company management, an integral part of the analytical process that drives investment decisions. This is typically the forum in which our fund managers raise strategic ESG issues such as capital allocation, board make-up, remuneration criteria and specific environmental and social questions. These discussions often help investee companies with required ESG disclosures and will involve executive management as well as, where necessary, key non-execs.
Polar Capital uses Institutional Shareholder Services (ISS) to assist with proxy voting. This highlights all situations where the proxy adviser recommends voting against management, identifies contentious issues and produces research as part of recommendations. Where ISS recommends voting against management, these issues are reviewed by the fund management teams and the PMs then decide how they wish to vote. Proxy voting records are summarised here.
Polar Capital reports stewardship activity in keeping with its obligations under the Financial Reporting Council’s Stewardship Code as a Tier 2 signatory.