Sustainable Business Practice

Engagement with companies

We engage with companies about their operations, including ESG risks. As we are long-term owners in the capital of the companies we invest in, management teams tend to value our feedback. They see we are truly aligned, with a focus on the long-term success of the company for all stakeholders, which includes society at large.

When we believe certain ESG risks are apparent and cause any of our beliefs to be under threat, we will encourage management to improve its performance. If persistent engagement proves unsuccessful, we will sell our investment. We prefer not having to vote with our feet though.

 

Proxy voting policy

Investolarg is committed to exercising its voting rights associated with the shares held in Investolarg Global Small-Cap Fund as well as any investment mandates where proxy voting is delegated to us. Proxy voting enables us to build continuous dialogue with our portfolio holdings helping to promote best standards in corporate governance. We are committed to the Financial Reporting Council’s Stewardship Code which aims to enhance the quality of engagement between investors and companies to help improve long-term risk adjusted returns to shareholders.

We use software provided by Broadridge for our proxy voting.

Sustainability at Investolarg

At Investolarg sustainability is not only something we consider for our portfolio investments but is a philosophy deeply engrained in our day to day living.

Energy Saving

• At our headquarters in Amsterdam, we have energy saving lighting that automatically turn off when motion is not detected. Our computers are always turned off every evening before departing the office.

Paper Usage & Plastic Recycling

• At Investolarg we do our very best to reduce the amount of paper that we use at the office. Documents such as annual reports, quarterly results and company presentations are now all obtained electronically rather than in paper form. If in face to face meetings we are provided with paper copies of presentations, it is company policy to return this for re-use and an electronic copy is instead requested.
• We strictly recycle all paper used in the office with both regular card, paper recycled as well as confidential waste.

Travel & Carbon Offsetting

• We travel extensively across the globe to meet with companies in order to be able to better understand the cultures, something that is impossible to do from our desk in Amsterdam. At Investolarg we are fully committed to offset our Carbon Footprint.

Diversity

• As part of our Phase 2 ESG analysis, diversity forms part of our corporate governance analysis. At Investolarg, we believe diversity is not only important at the companies in which we invest but is also important in our own organisation. We believe that diversity leads to improved group thinking and ultimately a more successful organisation. We have a multinational team and we promote equality throughout our company.

For further information about our sustainable investing policy, please contact us via enquiries@Investolarg-im.com.

Sustainability-Related Disclosures

In this section we provide the regulatory disclosures required by the Sustainable Finance Disclosure Regulation (“SFDR”). The section summarises the integration of sustainability risks into our investment process and provides further details of our ESG research process. The headings used as mandated by the regulation.

Summary

We seek to invest in companies that are part of the solution, or at the very least do not materially contribute, to environmental and social challenges. In order to achieve this overall goal, we do not promote specific environmental or social characteristics. Instead, we aim to invest in companies that act as responsible corporate citizens. We only include investments in the Investolarg Global Small-Cap Fund that comply with minimum social and environmental safeguards, including those concerning labour rights, human rights, anti-corruption and environmental protection. Companies that are involved in significant controversies or materially detract from society achieving its sustainable development goals are not suitable investments for the Investolarg Global Small-Cap Fund.

We have developed our own proprietary ESG research process which is fully integrated into our company analysis. Screening is conducted to avoid companies which attain 10% or more of their revenues from controversial activities or have violated any of the UN Global Compact principles. “Controversial activities” are defined as any business activity over which the morality is heavily debated among international governing bodies. These activities are seen to cause net-harm to humans such as indiscriminate weapons and tobacco. Investee companies are then assessed against weighted environmental, social, and governance indicators within our proprietary Investolarg ESG template. Each ESG performance indicator is given a weighted score based on an investee company’s performance relative to its industry peers. While we utilise external ESG-research to support our analysis, we establish our own internally calculated ESG score. The score is used as a monitoring and engagement tool, as well as one for continual improvement.

A variety of data sources are used to assess the ESG performance of the Investolarg Global Small-Cap Fund. These include self-disclosures from investee companies (including one-on-one meetings, annual reports, company presentations, website disclosures and proxy statements), MSCI ESG Manager and Bloomberg.

Below is a selection of the sustainability indicators assessed in our ESG template:

• Environment
  • GHG intensity
  • Waste production
• Social
  • Violations of UN Global Compact
  • Exposure to indiscriminate weapons
• Governance
  • Board gender diversity
  • CEO pay ratio

No sustainable investment objective:

This financial product promotes environmental or social characteristics but does not have as its objective a sustainable investment.

Environmental or social characteristics of the financial product:

We seek to invest in companies that are part of the solution, or at the very least do not materially contribute, to environmental and social challenges. In order to achieve this overall goal, we do not promote specific environmental or social characteristics. Instead, we aim to invest in companies that act as responsible corporate citizens. We only include investments in the Investolarg Global Small-Cap Fund that comply with minimum social and environmental safeguards, including those concerning labour rights, human rights, anti-corruption and environmental protection. Investee companies that are involved in significant controversies or have violated any of the UN Global Compact principles are excluded from the Fund. “Controversial activities” are defined as any business activity over which the morality is heavily debated among international governing bodies. Such activities include indiscriminate weapons, such as biological and chemical weapons, or tobacco and gambling.

Investment Strategy:

We employ a fundamental bottom-up investment process to construct a concentrated yet diversified portfolio of 25-35 stocks of undervalued companies with a market capitalisation of below EUR 5 billion at the time of investment. The Fund’s investment process focuses on identifying what we consider to be high quality, undervalued companies that offer the potential for asymmetric risk/reward outcomes. Our in-depth investment approach focuses on seven key investment characteristics:

1. Business quality
2. Undervaluation
3. Financial strength
4. Understandable
5. Aligned
6. Proactive
7. ESG

We believe that environmental, social and governance (ESG) factors can influence a company’s intrinsic value. A key factor in determining a company’s intrinsic value is its long-term growth potential, which is driven by its sustainable competitive advantage. We believe a company can increase its competitive advantage if it considers its long-term impact on the environment and society. It allows a company to better attract and retain key stakeholders, whilst reducing monetary, regulatory and reputational risks. Good governance practices and a strong awareness of ESG factors demonstrates the desire of management teams to mitigate these risks. We assess ‘good governance practices’ of investee companies as part of our ESG analysis. Companies are assessed against a variety of factors including board composition; board, executive and employee remuneration relative to peers; IT governance; voting right structure and governance policies.

Proportion of investments:

The SFDR requires financial market participants to distinguish between direct exposures in investee entities and all other types of exposure to those entities. The Investolarg Global Small-Cap Fund only includes direct investments in investee companies. The Fund does not include any indirect investments, such as through derivatives.

Monitoring of environmental or social characteristics:

Investee companies that meet our selection criteria are assessed against environmental and social factors at least annually under our ESG due diligence process. ESG analysis is carried out in-house by the Investolarg team. While we do utilise external data providers to support our analysis, we do not depend on any third-party. The full ESG process is reviewed by the team annually. This is supplemented by daily monitoring including one-on-one meetings with management, outputs of shareholder meetings, daily briefs, press releases and news alerts. As we are long-term owners in the capital of the companies we invest in, we believe in active ownership. We regularly engage with our investee companies about their operations, including environmental and social factors. If we believe significant ESG risks are apparent, we flag these concerns with management, provide guidance and encourage them to improve performance.

Methodologies:

We analyse a variety of sustainability indicators in our ESG template. Each of the sustainability indicators are given a weighted score based on an investee company’s performance relative to its industry peers. The score weights are determined by a double materiality assessment. The assessment is used to identify 1) the sustainability indicators that are most material to our investee companies and 2) the sustainability indicators which have the most material impact on society.  Below is a selection of the sustainability indicators assessed in our ESG template. The indicators are split between three themes: environmental, social and governance.

Environment:

• GHG intensity: The sum of the investee company’s annual scope 1 and scope 2 GHG emissions (tCO₂e) are added together to calculate the company’s ‘total GHG emissions’. This figure is then divided by the company’s annual total revenue in € millions.
• Waste production: The investee company’s annual waste tonnage is calculated from company reports. Where possible, the total tonnage is split by recycled waste, non-recycled waste, and hazardous waste (as defined in Article 3(2) an Article 3(17) of Directive 2008/98/EC). These figures are then reported as a percentage of total waste.

Social:

• Violations of UN Global Compact: The investee company’s ticker is run through MSCI’s Business Involvement Screening Research tool (BISR) to assess whether it has been involved in any violations of the UN Global Compact principles or OECD Guidelines for Multinational Enterprises. If MSCI does not cover the investee company, then company records, the internet and the Bloomberg terminal are searched.
• Exposure to indiscriminate weapons: The investee company’s ticker is run through MSCI’s Business Involvement Screening Research tool (BISR) to measure the proportion of company revenue that is attained from the manufacture or distribution of anti-personnel mines, cluster munitions, chemical weapons and biological weapons. If MSCI does not cover the investee company, then company records, the internet and the Bloomberg terminal are searched.

Governance:

• Board gender diversity: The number of women on the investee company’s Board of Directors is divided by the total number of Board members. This figure is represented as a percentage and is compared with the investee company’s peer and country average.
• CEO pay ratio: The total annual compensation of the investee company’s median employee (excluding the Chief Executive Officer) is divided by the total annual compensation of the Chief Executive Officer. This figure is represented as a ratio of x:1.

Data sources and processing:

We use the following data sources to assess the ESG performance of our Fund:

• Direct information from investee sources: one-on-one meetings, annual reports, company presentations, website, proxy statements
• MSCI ESG Manager including the BISR tool
• Bloomberg

We cross reference data sources to ensure data quality. To ensure accuracy, we do not include estimated data in our calculations.

Limitations to methodologies and data:

A key limitation of the Investolarg ESG process centres around the lack of available ESG data among our chosen asset class, global small-cap equities.  Gathering data on small-cap companies can be challenging as smaller companies often disclose little ESG data. Third-party data providers also frequently lack adequate levels of ESG coverage on small-cap companies, which means we are unable to rely solely on such providers. This highlights the importance of our engagement process. It is vital that we engage with our investee companies as it enables us to raise awareness and elevate the importance of ESG among our investee companies. Our ESG process allows us to facilitate continual improvement by providing guidance, as well as encourage more disclosure and transparency. A further limitation is that there is some level of subjectivity involved in the calculation of the Investolarg ESG scores. To address this limitation we have conducted a double materiality assessment to determine a weighting for each ESG metric within the total ESG score. The assessment aims to reduce subjectivity by selecting ESG metric score ranges guided by defined industry guidelines. Each metric in our ESG template is given a strict definition and measurable score range.

Due diligence:

Sustainability risks are considered under our ESG due diligence process. ESG due diligence is an integral part of our business operations and is fully integrated into the Investolarg Global Small-Cap company selection process. Before we make an investment decision, we conduct ESG research on the prospective investment. Investee companies that are included in the Fund are reassessed periodically.  The due diligence process includes the following stages: screening, proprietary ESG analysis, engagement and proxy voting.

Full details can be found in our ESG Due Diligence Policy.

Engagement policies:

As long-term investors, we believe in active ownership. Our focus is on building long-term relationships with our investee companies by engaging on material issues with the relevant personnel. We regularly engage with the management teams of our investee companies on their operations, including ESG factors. Engagement topics are determined by our bottom-up analysis and are prioritised in terms of sustainability risk and impact. Engagement is conducted through one-on-one meetings and supplemented with conference calls, emails and, where possible, site visits. Our engagement process can be broken down into four key stages: initial due diligence and engagement, in-depth engagement, proxy voting and continued monitoring and reporting.

Full details can be found in our ESG Engagement Policy.