Environmental, social, and governance considerations are an increasingly important factor in our clients’ decision-making processes. As an international business, while we see varying approaches across our client groups, we are witnessing positive change in all geographic regions. At Polar Capital, ESG considerations aren’t new to our investment teams – or indeed to our culture and way of working. By providing a centralised infrastructure upon which our autonomous investment teams can leverage and develop, we believe we are well placed to meet our clients needs and desired outcomes.
Active management providing long-term fund performance for our clients underpins what we do at Polar Capital
To achieve this, our investment teams benefit from a devolved structure, where each investment team has autonomy over its own investment strategy, and where there is no one-size-fits-all investment approach. As such, analysis and interpretation of environmental, social and governance (ESG) issues is specific to each investment team.
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 in their assessment of the risks and opportunities facing companies in which they may invest.
ESG factors can affect an investment team’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 returns.
As an example of the approach to ESG within Polar Capital, the Emerging Markets & Asia team, whose flagship emerging market equity strategy was launched in June 2018, incorporates an additional layer of ESG analysis as part of its investment process, with the aim of quantifying ESG impact versus the Fund’s benchmark. While the Fund was launched at Polar Capital in 2018, the investment process has been honed over many years. In fact, lead manager Jorry Noeddekaer has invested with an ESG perspective for nearly 20 years. The team manages four funds which are classified as promoting environmental or social characteristics under SFDR.
In November 2020, the Group established two new Management Committees, the Sustainability Committee and the Diversity and Inclusion Committee, that report directly to the Group Executive Committee, a sub-committee of the Polar Capital Holdings plc Board of Directors
The Sustainability Committee is chaired by the newly appointed Head of Sustainability and comprised of members of staff from across the business including the CEO, CIO and CRO. The Committee has been established with the objective of co-ordinating the company’s sustainability initiatives at a corporate level, including implementation of key regulatory and industry advances. The Committee also promotes the sharing of best practice for ESG integration and knowledge insight across the business. The Committee will play an instrumental role as Polar Capital continues to strengthen its ESG position from both an investment and corporate standpoint.
Polar Capital established the role of Head of Sustainability for the Group in November 2020. The Head of Sustainability leads and co-ordinates Polar Capital’s sustainability initiatives at a corporate level and acts as a focal point for ESG activity in investment portfolios. The role will also oversee the further development of Polar Capital’s integration of ESG factors at fund level as well as enhancing their responsible investment and stewardship capabilities. The position reports directly to the CEO and CIO on corporate and investment activities respectively.
Each investment team at Polar Capital has autonomy in the way it evaluates ESG issues
As such, they use the information and data sources available to them to assist with their assessment including, but not limited to, a company’s financial reports, a company’s ESG and other non-financial reports, third-party ratings and data providers.
This level of investment autonomy is central to Polar Capital’s approach. Nevertheless, portfolio characteristics (performance, style, macro factor sensitivity, decision-making patterns and liquidity) are observed and monitored centrally by Polar Capital’s CIO and risk team. ESG monitoring is an integral part of their oversight process.
The risk team monitors each portfolio’s ESG characteristics every month and circulates the results to the portfolio managers. Each strategy is then reviewed in detail every four months in a meeting with the lead fund managers. Analysis of each strategy’s ESG profile is part of this process.
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.
This gives an overall asset-weighted score for each portfolio and its benchmark, the analysis of which is the starting point for discussion in oversight meetings.
Portfolio managers have access to the full specialist ESG research and, as is the case with conventional third-party investment research, they do not always agree with their ratings. Having access to the reports, however, does allow them to assess what the consensus is saying.
The appropriate course of action remains the portfolio manager’s prerogative.
Polar Capital’s stewardship activities are a key aspect of the investment teams’ wider investment process and these are specific to each investment within the Group
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. Fund Managers 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.
In March 2021, Polar Capital joined the investor-led collaborative engagement initiative Climate Action 100+. This initiative aims to tackle the systemic climate change challenge, focusing on key emitters and using the significant ($52trn) weight of its supporting investors to influence the behaviour of company management to implement strong governance around climate change.
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 investment teams and the portfolio managers then decide how they wish to vote. Proxy voting records are summarised here.
Further information on Polar Capital’s approach to shareholder engagement can be found in our SRD II Shareholder Engagement Policy here.
Polar Capital fully supports the new UK Stewardship Code 2020 (the ‘Code’), seeks to align its activities with the principles of the Code and intends to apply to become a signatory in 2021. We believe the new format for the Code based on activity and outcomes of stewardship practices is an important step for accountability and credibility of stewardship practices for the industry. We look forward to preparing our first stewardship report, which we have decided to produce for the FRC’s October 2021 deadline in order to align with our March year-end annual reporting cycle.
All Polar Capital funds adhere to formal exclusions on all companies that are linked to the production and/or marketing of controversial weapons (cluster munitions, antipersonnel mines, depleted uranium etc). Polar Capital also considers EU sanctions, the US OFAC list and UN-sanctioned entities.
The EU’s Sustainable Finance Disclosure Regulation came into force on 10 March 2021 and requires Polar Capital to provide information on its approach to sustainability at both investment manager level and at fund level
Investment Manager Level Requirements
Polar Capital is required to explain whether, and if so how, it considers the adverse impacts of its investment decisions on sustainability factors at investment manager level, across all the funds that it manages. At present, Polar Capital does not take into account the adverse impacts of its decisions on sustainability factors but has provided further information on its intent to do so in future here.
Information on how Polar Capital takes into account sustainability risks within its remuneration decisions can be found in Polar Capital’s Remuneration Code here.
Product Level Requirements
For the funds subject to the SFDR, Polar Capital is required to provide information on how sustainability risks are considered in the investment decision-making process in pre-contractual disclosures.
This information is provided in the Risk Factors section of the relevant fund’s prospectus supplements, which can be found in the Fund Literature section of each fund’s page on the Polar Capital website.
Polar Capital manages the below funds that, under the SFDR, are classified as promoting environmental or social characteristics (Article 8):
Article 8 Funds
- Polar Capital Funds plc - Global Insurance Fund
- Polar Capital Funds plc - Emerging Market Stars Fund
- Polar Capital Funds plc - Asian Stars Fund
- Polar Capital Funds plc - China Stars Fund
Further, Polar Capital manages the following funds that, under SFDR, are classified as Article 9 funds. These funds have sustainable investment as their objective. Sustainable investment means an investment in an economic activity that contributes to an environmental or social objective, provided that the investment does not significantly harm any environmental or social objective and that the investee companies follow good governance practices.
Article 9 Funds
Polar Capital provides further information in respect of its Article 8 and Article 9 Funds within Annexes to each Fund’s prospectus supplements.