ESG INTEGRATION AND ENGAGEMENT POLICY
Environmental, social, and governance (“ESG”) criteria consider both the ethical and sustainability implications of investment decisions. ESG criteria provide a qualitative framework for evaluating investments, as they are non-financial and not readily quantifiable in monetary terms.
ESG criteria consider, among other relevant matters, the following issues:
- Environmental – energy and climate change, biodiversity and land use, toxic emissions and waste, sustainability, supply chain management, etc.
- Social – human rights concerns, impact on local communities, child labor, workplace diversity, civil liberties, anticompetitive practices, marketing and advertising, privacy and data security, etc.
- Governance – bribery and fraud, controversial investments, executive compensation, management structures, board composition, executive behavior, etc.
ESG is an important part of DSM’s investment process and is fully integrated into its stock selection, monitoring, and selling processes. DSM assigns a proprietary ESG score to every company that it researches. Scores range from 0 to 10 (with 10 being the best), and DSM utilizes MSCI’s ESG Controversies as a starting point to make adjustments to ESG scores across five key categories: environment, customers, human rights / community, labor rights / supply chain, and governance. These categories are then broken down further into over 20 subcategories. Each Analyst/Portfolio Manager at DSM completes in-depth research on ESG issues impacting a company and assigns scores using a consistent in-house methodology. DSM stores all ESG communications and developments in centralized folders so that companies’ ESG histories and DSM’s ESG activities are available to all Analyst/Portfolio Managers. In addition to weekly updates from MSCI, DSM’s investment team utilizes in-depth ongoing monitoring to identify ESG issues not fully captured by MSCI.
ESG scores are included in DSM’s internal summaries and have an impact on DSM’s investment decisions. ESG considerations and the implementation of ESG scores and in-house research have both kept DSM from investing in certain companies and have led to DSM selling portfolio holdings.
At a client’s request, DSM can apply exclusionary restrictions that accommodate responsible investment considerations and restrictions specified by a client that may generally prohibit the purchase of certain securities, either individually or by region, sector or both.
ACTIVE OWNERSHIP – PROXY VOTING AND ENGAGEMENT
It is DSM’s policy that all proxies be voted solely in the best interests of the beneficial owners of the securities. DSM’s proxy voting policy lists positions DSM would typically take on certain proxy proposals. In addition, DSM has contracted with an independent third party, (currently, Institutional Shareholder Services, LLC) (the “Third-Party Administrator”), to provide issue analysis and vote recommendations with respect to proxy proposals. The Third-Party Administrator receives proxies for all of DSM’s holdings and typically votes all proxies received, unless the voting policy recommendation favors withholding on a particular proposal. While it is DSM’s policy to follow the vote recommendations of the Third-Party Administrator, DSM retains the authority to vote differently than the recommendation on any proxy proposal.
DSM’s investment team is responsible for engaging with companies directly by reaching out to investor relations, executive management or the board of directors, when appropriate, in order to better understand ESG matters and potentially influence or identify the need to influence relevant corporate practices. Engagements may take the form of direct in-person meetings, calls, emails, or letters. The length of each engagement will vary based on the materiality of the issue, a company’s response, and how the information gathered is integrated into DSM’s investment process. DSM monitors its engagements on an ongoing basis to evaluate the actions, if any, taken by a company as well as what further action may need to be taken by DSM.
While DSM engages with companies on a regular basis, and in some cases has seen actions taken by companies which reflect its engagement suggestions (such as share buy-backs or dividend initiations), the companies DSM tend to own have strong management teams and governance practices, extensive intellectual property, few or no competitors, sound and sensible employee practices, very few or negligible ESG issues and reasonably long runways to growth. Thus, DSM recognizes that the risks and return potential related to ESG issues are dynamic and may evolve over time and therefore it continues to monitor this activity and the need for active engagement.
PRINCIPLES FOR RESPONSIBLE INVESTMENT
DSM became a signatory to the Principles for Responsible Investment (PRI) in October 2017. The PRI provides a set of investment principles and best practices designed to promote responsible investing. DSM utilizes the PRI’s Collaboration Platform, and DSM will become a signatory to relevant initiatives, such as the 2018 Global Investor Statement to Governments on Climate Change, where appropriate. DSM completes the annual transparency reports which can be provided upon request and are also available for download through the PRI website. DSM’s signatory profile and transparency reports can be viewed at https://www.unpri.org/signatories/dsm-capital- partners-llc/2163.article.
TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES
DSM became a supporter of the Task Force on Climate-related Financial Disclosures (TCFD) in April of 2020. The TCFD sets out to develop effective climate related financial disclosures that consider the physical, liability and transition risks associated with climate change. These disclosures can then be used by companies to provide relevant climate related information to stakeholders. Additional information regarding the TCFD can be found at https://www.fsb-tcfd.org/.