Evenlode Investment continues to evolve its stewardship and ESG framework, as it looks to capitalise on growing assets under management (AUM) in order to exert influence on management teams around the world.
Evenlode, which runs UK Income and Global Income funds, hired Sawan Kumar as stewardship analyst from Schroders in August 2017, charging him with fully integrating the team's work on ESG metrics into its investment process.
Chris Elliott, co-manager on the Evenlode Global Income fund, said that as a long-term investor the firm had always been focused on ESG issues.
"We are a small team; there are 15 of us," Elliott said. "We do not have the room to carry anything that does not help us with the long-term management of the funds. We would not do ESG if we did not think it was important."
Previously, however, while it was "always something that was highly valued", much - including voting at AGMs - had fallen upon Elliott's co-manager Ben Peters, which he did "in his spare time and it was definitely not as well-thought-out a structure [as it is now]".
Kumar was brought in to "evolve [Evenlode's] existing framework", noting he joined at a time the firm was gathering assets rapidly after the launch of its Global Income fund.
He said: "Our AUM was around £1.6bn, progressing quite quickly and we were at a size where we could potentially affect change by engagement with companies".
Governance was the first port of call, with Kumar building a governance and engagement framework using the data Evenlode already had on firms as well as publicly available information.
"We do not necessarily use external, proxy research advisors; we use our in-house analysis," he said.
"We are long-term investors and a lot of the companies in our portfolio have been held since inception, so there has been about ten years of analysis that has been done, which is great for me to use."
Alongside information that is already publicly available in annual and sustainability reports, he said, this analysis provided a blueprint for its engagement with management teams.
"It has allowed us to use voting as a bit of an engagement tool with the companies that we invest in."
Not every company responds well, or at all, to its letters, but it has had some success. Evenlode voted against the renumeration report of polymer manufacturer Victrex, a holding in its UK Income fund.
Kumar wrote to the chair of Victrex's remuneration committee (RemCo) outlining Evenlode's dissatisfaction with some of its metrics and suggesting integrating sustainability metrics into its management's annual bonus scheme, which is an area of focus for the team.
Kumar travelled from the firm's Oxfordshire base to London for a meeting with Victrex's RemCo chair, who told him the company would consider their recommendations and "get back to us about how it affects [its] future remuneration policy".
"The response was positive in the sense that a few months later she said they spoke about it in the board meeting and, while they were not able to integrate it into the remuneration policy for the following year, they have added the flexibility to the policy to potentially integrate it for the coming years," Kumar said.
"Obviously, that is not the exact outcome we wanted, but the fact we were able to affect change by just sending a letter is positive.
"It is not necessarily about affecting change for the next 12 or 24 months; it is about planting that seed every year."
How its investee companies are considering climate-related risks has also been an important area for Kumar.
"Climate issues are long-term risks. They are not just climate-related risks; they are business risks," he explained.
"Transition risk, and any litigation risk coming from that, are particularly important considerations."
Its climate-related at-risk assessment (CARA) analysis integrates "industry-wide frameworks, including the UN sustainable development goals (SDGs) and science-based targets" into the investment process.
Kumar highlighted that, while the firm does not specifically look for firms targeting the SDGs, many of its firms would "naturally be hitting" some.
For instance, its pharmaceutical holdings contribute to health and wellbeing, while publisher RELX ticks off the good-quality education goal.
"We are hoping to see which [SDGs] we are naturally affecting with our investments and seeing how we can better measure the company's social impact indirectly with our investments."
Some of the highest-yielding sectors across the world are focused on ESG-controversial industries, including oil and gas and tobacco, but Elliott said that because they are not asset-light businesses they tend to not fit into the fund's remit.
The most controversial area the firm invests in is alcoholic beverages, but Kumar noted Guinness maker Diageo, for instance, "is doing some great work around alcohol rehabilitation programmes", which it has integrated into its management incentive scheme.
Kumar's hire came amid an ongoing build-out of the team, with Tom Weller joining as innovation analyst in July 2019.
Weller has a science and teaching background and has been charged with assessing the potential impact of disruptive technologies on companies and sectors over the long term.
Elliott said Weller had recently looked at developments in carbon technology, including "renewable plastics that can replace packaging for some of our consumer goods companies".
He has also pondered possibilities for alternatives to the glues used by a company such as Henkel, or lubricants by a company such as Fuchs Petrolub.
"Understanding that longer-term picture is really key," Elliott said.
All these considerations play into the firm's risk-factor framework, which assesses risks faced by each company on nine factors. The firm rates each company on each factor on a scale from A to E, which is used to generate a maximum position size.
"For a company with very strong business risk factors, like Pepsi, we are more likely to give it a good maximum position size of around 6%," Elliott explained.
"A recruiter, like Adecco, would score less well so our maximum position size would be around 2.5%. The idea is we should not ever have too much exposure to any one of these risk factors.
"It is a balanced approach that insulates the portfolio over the long term."