One of the key strengths of our team is the bottom-up research undertaken as the basis for stock selection. Hence for ESG research we use our own data and inputs gathered from company research, management meetings and site visits, supplemented with data from third parties. It is important to note that in the mining sector, some companies do not yet report on ESG indicators to the high standard which the market is coming to expect. In many cases our own in-house data is more accurate than that of third-party databases. However, we recognise the need to incorporate external independent information, as a sense check for the work undertaken by our fund managers.
Baker Steel’s framework for ESG research covers 4 areas: initial pre-screening, ESG scoring, the impact of ESG scores into investment decision making, and on-going monitoring. Initial screening, the first stage of our framework, involves the requirement for key sustainability metrics that are non-negotiable. Companies must have policies in place on ethics, anti-bribery and corruption, human rights, and anti-child labour. A further critical screen relates to tailings management, in recognition of the threat of tailings dam failure, a sizable challenge for mining companies. Our research and experience in the sector highlight that companies which have strict ESG policies typically deliver superior performance over time, due in part to lower chances of accidents, scandals, and bad practice relative to those companies without strict policies in place. Furthermore, a well-run mining company from an ESG perspective may avoid fines, production delays due to strikes or loss of investor confidence.
The second stage is the ESG scoring process, which is conducted across our investable universe with scores adjusted throughout the year in line with company updates and events. We measure and weight 20 sustainability metrics which are most relevant to our investment strategy, to evaluate a company’s ESG performance, flag issues and highlight plans for mitigation. A qualitative score is then overlayed to consider further aspects of ESG performance which fall outside of the quantitative scoring, informed by the investment team’s company research, meetings and site visits. We also utilise third party scoring as a cross check to our own scores.
Thirdly, ESG scores are incorporated into the investment decision making process. ESG scores are directly integrated into and alongside our investment valuation analysis, where inclusion in the portfolio and weighting decisions are based on ESG scores. The final stage is ongoing monitoring of companies’ ESG progress, primarily through meetings and site visits, with engagement on ESG issues and voting rights utilised as necessary to ensure companies remain aligned with our ESG principles and adhere to best practice.
An active management approach is required to ensure ESG is prioritised while seeking returns
