How we engage through ESG discussions
There is a clear lack of ESG data for small and micro cap companies in ESG databases, which is why we in 2021 decided to set up our own approach covering ESG analysis of our small and micro cap companies. For some of our micro cap funds the coverage is below 40% in for example MSCI’s ESG database. As Fondita has five micro and small cap funds, it is important for us to get a better picture of how our portfolio companies work with ESG and as minority owners it’s a good way to engage with the companies.
Our goal is to understand how they work with ESG within the company, what their targets are regarding i.e., carbon reduction, waste management and water reduction, diversity, and inclusion and how they are planning to reach the targets. To conduct meetings focusing on company ESG topics on top of the normal ESG assessments conducted by portfolio managers in their equity analysis, gives us a better view of ESG risks and opportunities within the companies, adds value and takes us one step further in integrating ESG in our investment process.
During the second half of 2022, I’ve conducted close to 40 meetings with our portfolio companies. To make the most out of these meetings, I prepared the participants in advance with questions related to the ESG aspects most relevant to Fondita. The discussions have covered company ESG approaches, different policies in place and ESG targets. During the meetings I have noticed that most of the companies, some more than others, have at least started their ESG work. For us it’s important to see that our portfolio holdings are working with ESG topics and that having the discussions may nudge them towards further development. Our aim is to have annual follow-ups with the companies to make sure they are delivering on their promises.
“The purpose of our meetings with the companies is to encourage them to be more transparent and work towards their ESG goals”
In most cases we are minority owners, and this approach is an excellent way to engage with our portfolio holdings. The purpose of our meetings with the companies is to encourage them to be more transparent and work towards their ESG goals. Even though our approach is fairly new, we have already noticed that progress has been made. As an example, one holding had a very poor ESG rating in one of the ESG databases, which impacted the ESG rating of our funds negatively. In the discussions it turned out that the main reason was lack of transparency with regards to different company policies. Through this mutually beneficial discussion the company was able to improve their rating fairly easily. This is a perfect example of the mutual benefits of such dialogues: we can support the companies in their ESG work by engaging with them through dialogue, and at the same time make sure that the companies fulfill our ESG requirements.
With the new year starting I’ve already started booking new company meetings, and to this day I’ve already booked a lot of meetings for the upcoming weeks. I’m sure this year will be as interesting as last year, if not even more interesting. I look forward to engaging with the companies and hearing how the ESG work has evolved in the portfolio holdings during the year.
Isabelle Ramsay, ESG-analyst