ENGAGEMENT POLICY DECEMBER 2019 1 Our Responsible Investment philosophy p. 2 — Principles — Our values — Our conviction 2 Engagement at the heart of our approach to responsible investment p. 3 — Dialogue with companies — Investor engagement — Site visits 3 Our engagement process p. 4 — Identification of engagement targets — Implementation of the engagement approach — Integration in our ESG analysis model and investment decisions 4 Our transparency requirement p. 6 — Definition of engagement objectives — Engagement activity reporting TABLE OF CONTENTS
2 Engagement at the heart of our approach to responsible investment p. 3— Dialogue with companies— Investor engagement— Site visits
3 Our engagement process p. 4— Identifi cation of engagement targets— Implementation of the engagement approach— Integration in our ESG analysis model and investment decisions
4 Our transparency requirement p. 6— Defi nition of engagement objectives— Engagement activity reporting
T A B L E O F C O N T E N T S
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O U R R E S P O N S I B L E I N V E S T M E N T P H I L O S O P H Y
Principles“Socially responsible investment (SRI) is a multi-faceted concept that is constantly evolving”(1) and involves a combination of economic and social requirements. SRI saw a major turning point in the 90s, when it widened its scope from predominantly ethical considerations to include the concept of sustainability. As a result, extra-fi nancial criteria, ESG (Environmental, Social and Governance), have been gradually incorporated into fi nancial management, moving from an informal framework to a statutory one.
Our valuesDNCA Finance is a management company founded in 2000 by asset management experts specialising in private and institutional investors. Over the years, the founders have put together a team of experienced and well-regarded asset managers and developed a simple, clear and successful range of funds focused on conviction management.
Our investment choices are the result of deep and fundamental analysis of companies.
Before investing, we study a security from all angles to select bonds and shares off ering the best potential performance for the risk taken.
Of course, our analysis and our continuous dialogue with companies are marked by social concerns. Our investments are fi rmly focused on long-term performance that considers all the risks and challenges that companies face. This is why governance has always been a key criterion whereas these days it is unthinkable to invest in a company without gaining assurances as to the quality of its managers, the independence of its control bodies and its respect for its minority shareholders. We have gradually incorporated social and environmental concerns into our approach, as we are convinced that they are relevant as we pursue our business: to select tomorrow’s winners. Alongside fi nancial analysis and value creators, ESG criteria have been logically incorporated into DNCA’s management.
Our convictionIn 2017, DNCA Finance signed the United Nations Principles for Responsible Investment (UN PRI) to give a structured framework to our approach and to take part in industry discussions on the subject as an active long-term investor. This step has grounded our conviction as responsible asset managers in relation to our investor clients and to the companies we fi nance.
We aim to off er a diff erentiating and innovative approach that evolves to meet new challenges as they arise. Therefore, our Responsible Investment policy distinguishes two concepts: Corporate Social Responsibility (CSR) and Sustainable Economic Transition. We evaluate these two aspects based on indepth analysis of economic and social trends as well as on recognised expertise in SRI. In the rest of this document, we present in detail how these two concepts emerged and our approach in response to them in the context of SRI.
Our Responsible Investment Policy can be found on our website.
E N G A G E M E N T A T T H E H E A R T O F O U R A P P R O A C H T O R E S P O N S I B L E I N V E S T M E N T
As a responsible investor, we attach the utmost importance to maintaining constant dialogue with the companies we invest in. It may be to shed additional light on our analysis or to encourage the companies we fi nance to adopt best practices, but whatever the purpose, we consider shareholder engagement as fundamental to our responsible investment approach and our fi duciary duties.
We distinguish two ways of interacting with companies: dialogue with companies and shareholder (or investor) engagement. We supplement these interactions with regular site visits.
Dialogue with companies As conviction managers, we believe that it is essential to meet the companies we invest in or are considering investing in on a very regular basis. This is as much for fi nancial analysis as for ESG. In particular, these meetings give us the opportunity to question management about its strategy and to what extent its implementation incorporates all stakeholders’ interests. These discussions generally give us a much clearer picture of the extent to which ESG issues have become an integral part of the corporate culture than we can gain by simply reading the documents published by the companies. The information obtained during these meetings contributes signifi cantly to the quality and responsiveness of our ESG research.
Investor engagement(2)
Built on the conviction that improving the practices of the companies we invest in helps protect the value of our clients’ investments, we have implemented a formal engagement approach aimed at infl uencing companies to take more account of ESG issues. More generally, we are convinced that it is part of our fi duciary duty not only to select the best investments but also to encourage best practices and greater transparency by companies and, more generally, by markets.
We distinguish two types of engagement:
Reactive engagement, following a controversy or a particular incident;
Proactive engagement, to encourage companies to develop greater transparency and better management of their ESG issues.
We have a formal engagement process for both cases, which is set out in the next section.
Finally, we believe that some global and systemic issues, as well as engagement with global companies in which we have limited infl uence, require coordinated and/or collaborative action to achieve the best results. We have therefore joined several industry-wide collaborative initiatives, led in particular by the PRIs, to promote best practices on systemic or cross-functional issues.
Site visitsAs well as institutionalised dialogue with company management teams, we believe that it is vital to add a more operational aspect, so that we can deepen our knowledge of the activities and practices of the companies we invest in. So, we regularly take part in site visits, which are an opportunity to discuss matters with operatives on the ground and shed more light on how the company manages its ESG issues.
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(2) Our engagement approach also applies to companies in which we hold debt.
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O U R E N G A G E M E N T P R O C E S S
We have developed a formal engagement process with three steps:
Identifi cation of engagement targets;
Implementation of the engagement approach;
Integration in our ESG model and our management decisions.
Identifi cation of engagement targetsEngagement targets are identifi ed in diff erent ways depending on whether the engagement is reactive or proactive.
_ REACTIVE ENGAGEMENT
We monitor daily the news fl ow of the companies that we cover and analyse in detail the controversies that they face. This enables us to identify companies with which we would like to conduct reactive engagement. Therefore, we systematically ask for a meeting with companies facing controversies considered “serious”, meaning those identifi ed as level 3 in our internal analysis tool.
_ PROACTIVE ENGAGEMENT
Target companies for proactive engagement are identifi ed based on several factors:
• The proportion of the company’s equity that we own, which determines in part our power to infl uence;
• The proportion of our total investments that the company represents for DNCA Finance, which determines the level of our risk exposure;
• The presence of the company in our SRI funds, which justifi es greater attention to ESG risks;
• The company’s “Responsibility” rating, which can alert us to inadequate management of ESG risks.
Each year, we select a list of at least 10 companies with which we would like to begin or continue engagement. In selecting the companies, priority is given to the following situations:
• We own more than 5% of the company’s equity;
• Our investment in the company represents more than 1% of our total investments;
• The company is included in our SRI funds and has a “Responsibility” rating of less than 5/10 and/or a rating in one of the four aspects of the “Responsibility” analysis (shareholder, environmental, social, societal) of less than 3/10 (if this aspect is considered material).
Implementation of the engagement approach The engagement approach is implemented in a similar way for reactive and proactive engagement.
When a company has been identifi ed in our list of targets, an engagement plan is drawn up by the ESG research team. This plan includes:
• Engagement objectives, which must be clear, precise and measurable - Indicators to monitor the progress and success of the engagement, which must have a qualitative and a quantitative aspect;
• The contacts targeted for this approach (top management, IR, HR manager, health and safety manager, environment manager, etc.);
• The estimated duration of the engagement approach (after which escalation procedures may be triggered).
Discussions with the company are then organised on the basis of this engagement plan.
The progress of the engagement approach is described according to its status (in progress / closed) and its change (positive / negative). The results of engagement discussions are systematically communicated to the asset managers concerned and specifi c reports are made to clients, in our quarterly newsletter and in our annual engagement report.
Escalation procedures can be triggered if the target company refuses to respond or does not put in place appropriate means to address the problems or weaknesses identifi ed. These escalation procedures are determined on a case-by-case basis, in conjunction with the management teams.
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Integration in our ESG analysis model and investment decisions
_ INTEGRATION IN OUR ESG ANALYSIS
The dialogue with the companies we invest in is an invaluable source of added value in our analysis, both fi nancial and specifi cally ESG. We systematically record all engagement-related dialogue and actions in our proprietary tool ABA, so that we can adjust, where appropriate, the company’s “Responsibility” or “Transition” ratings and keep track of our regular exchanges with the management teams of the companies we invest in.
_ INTEGRATION IN OUR INVESTMENT DECISIONS
The results of engagement actions are integrated in our ESG analysis via our proprietary tool ABA and can in particular impact the company’s “Responsibility” rating. This rating, which is available to all asset managers, gives an indication about the company’s ESG risk level and has a direct impact on whether it is eligible to be included in the SRI funds.
The engagement results are systematically communicated to the management teams via ABA and directly by email to the asset managers concerned. Asset managers are systematically invited to take part in engagement meetings with the companies held in their portfolios.
_ INTEGRATION WITH OUR VOTING POLICY
As an active and conviction investor, we attach the utmost importance to exercising our voting rights eff ectively to ensure that the company is managed in the best interest of our investor clients. Therefore, we hold very regular discussions with the companies in which we are shareholders before their AGM, to discuss resolutions and explain, where appropriate, our voting decisions to management. Finally, we place particular importance on shareholder dialogue on environmental and social resolutions, which are an opportunity to remind management of our engagement and expectations on these issues.
Our voting policy can be found on our website.
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O U R T R A N S P A R E N C Y R E Q U I R E M E N T
Definition of engagement objectivesOur engagement activities contribute significantly to the quality and integration of our ESG approach. We have set ambitious objectives for our interactions with the companies we invest in.
Each year, we undertake to hold at least 500 meetings with companies (dialogue or engagement) on specifically ESG issues;
At least one meeting a year (dialogue or engagement) must be held with all companies in our SRI funds;
All companies in the portfolio that are the subject of a controversy considered serious in our proprietary analysis tool must be the subject of an engagement approach.
Engagement activity reportingAs engagement is an integral part of our responsible investment approach, we want to be as transparent as possible about our dialogue and shareholder engagement actions.
Therefore, the main engagement actions taken will be reported in our quarterly SRI newsletter. An annual report on engagement activities and how we exercise voting rights will also be published; it will enable our clients and stakeholders to measure our actions to influence the companies we finance.
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