Salt’s investment philosophy is based on the value of a company being the net present value of the operating free cash flows (FCF’s) the equity market expects that company to generate over its economic life.
The key drivers of FCF are the return on invested capital that a company generates and the rate at which it is able or chooses to invest capital. Understanding, quantifying and projecting these two key value drivers is thus critical to assessing the attractiveness or otherwise of a particular stock. In turn, the generation of long term sustainable returns is dependent on stable, well-functioning and well governed social, environmental and economic systems.
As a result, the consideration of environmental, social and governance (ESG) factors, particularly as they potentially impact on the ability of a company to sustain levels of return over the long term, is integral to the stock specific research we carry out.
Reflecting these beliefs, Salt is a signatory to the United Nations Principles for Responsible Investment.
The Principles for Responsible Investment
As a signatory on the UN PRI initiative, Salt’s Responsible Investment Policy is centred upon the six principles defined within this initiative outlined below.
1. We will incorporate ESG issues into our investment analysis and decision-making processes.
2. We will be an active owner and incorporate ESG issues into our ownership policies and practices.
3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.
4. We will promote acceptance and implementation of the Principles within the investment industry.
5. We will work together to enhance our effectiveness in implementing the Principles.
6. We will report on our activities and progress towards implementing the Principles.
To find out more about this initiative, please visit www.unpri.org.
Incorporating ESG Issues into the Investment Process
ESG issues are integrated into the fund management/research process at two levels; as part of the stock specific research carried out by Salt analysts and as an input into our ranking screen, the Salt Scoring Model.
Stock Specific Research
As above, Salt analysts consider the potential for ESG factors to influence long term returns on invested capital (positively and negatively). Specific ESG considerations include, but are not limited to;
- Climate change policies / the pricing of externalities (eg; carbon emissions trading schemes)
- The availability of finite resources / security of corporate supply chains
- Pollution and waste
- Opportunities driven by environmental pressures – for example, in renewable energy / clean technology etc
- The emerging international consensus on human rights and labour standards has implications for companies operating globally
- Shifting demographics - in particular, ageing populations in Australasia
- Changes in the regulatory environment
- Societal trends - changing fashions or tastes leading to the emergence of new markets or shifts in existing ones.
- The increasing reach of the media has amplified demands for corporate accountability, tying responsible behaviour to a company’s brand. Salt analysts attempt to identify whether corporate management teams are at least aware of such factors and have processes in place to manage them and mitigate any potential (reputational) risks
- Are the interests of shareholders (and other stakeholders) properly aligned with those of the management team?
- More specifically, does a company have appropriate management structures and incentives in place?
The Salt Scoring System
ESG factors are explicitly integrated into the Salt Scoring System, which systematically ranks securities using a range of qualitative and quantitative measures, based on consideration of a business’s fundamental attractiveness, the firm’s financial structure and the stock’s relative value.
A firm’s fundamental attractiveness is ultimately measured by the return on invested capital it generates. The Salt Scoring System assesses various factors likely to influence whether such returns are sustainable. Factors considered include; the strength of the business franchise, the quality of the management team and the relative risks / opportunities presented by ESG factors.
Regarding ESG, we rank companies based on our assessment as to the relative risks and opportunities the business faces as a result of individual environmental, social and governance factors. This assessment incorporates a view on management’s awareness of such factors, as an indicator of a company’s likely ability to both respond to emerging positive trends so as to exploit opportunities, as well as defend the business against possible threats.
Engagement with Companies
Salt has a long standing track record of engagement with company management teams, both at executive and Board level. Our preferred approach in this area is one of active engagement where we are able to share our philosophy and approach to ESG matters.
We believe the key to engagement is constructive and private communication with Board members or company executives where we can encourage positive change. When engagement fails to resolve concerns, we will seek to escalate matters either ourselves or via contact with other institutional investors in an attempt to strengthen our negotiating position via collaboration. Voting against company proposals is a vital tool in order to address concerns. “Going public” in relation to our concerns is generally a last resort.
Salt maintains a Proxy Voting Policy which is designed to reasonably ensure that proxies are voted in the best interests of those clients who have authorized us to address these matters on their behalf.
Our guiding principles in performing proxy voting are to make decisions that:
- favour proposals that have the potential to maximize a company’s shareholder value, and
- are not influenced by conflicts of interest, or
- in contravention of our stance on ESG factors.
Decisions on how to vote proxies are made on a company-by-company and resolution-by-resolution basis, whilst endeavouring to preserve and increase the value of the investment in the best interests of our clients.
Where directed, Salt will endeavour to vote according to underlying clients’ Proxy Voting Policies and if instructed by the client will vote in accordance with their instructions. We also keep a record of all Proxy Voting activity and where requested provide this to clients.
Salt does not apply a standard Screening or Exclusions Policy across all of our portfolios, although certain mandates are managed on behalf of other clients with negative screens in place.