De Lisle Partners has always taken a responsible approach to sustainable investment focusing on US equities with acceptable environmental, social and governance standards. We avoid investing in controversial sectors such as arms manufacture, tobacco and gambling.
We have been able to pursue this strategy because we specialise in small-cap stocks. It is far easier to do the due diligence and assess the ESG performance of a company that does not have too many divisions and where its culture is more easily defined.
The VT De Lisle America Fund holds stock in 120-150 publicly quoted US companies. A significant number of these have been in our portfolio for a decade or more.
Watching the American entrepreneurial spirit at work piloting small dynamic companies as they grow, evolve and become more widely owned is fascinating. By following these small companies closely we have discovered that there is a correlation between good places to work and good performance in the stock market.
Before we invest in a new company we have always taken environmental, social and governance issues into account as part of the decision-making process. However, we recognise that we can play a more active role in ensuring that the companies in our portfolios are aware of the importance we place on measures to reduce their carbon footprint, take care of their employees – including those in their supply chain – and pursue diversity and equality in the workplace.
To help us engage with our holdings on a deeper level we have appointed a dedicated ESG officer, reporting to the fund manager and assisting in building a rigorous ESG analysis into our investment process, as well as preparing detailed reports on the companies already in our portfolios.
It is of great help to us that the US Securities and Exchange Commission (SEC) requires companies to make detailed regular public disclosures of their organisational structure, business risk factors, and financial performance. Executives also have to swear under oath that the information in their annual report is accurate.
These public submissions are a good starting point for assessing governance and sustainability but they only give part of the picture. Smaller US companies are late in coming to grips with the growing importance of sustainable practices and ESG reporting. To encourage them to address these issues in a more rigorous way we also engage directly with companies to get proper answers to questions that are of concern to us, our investors and their agents.
To this end we have created our proprietary questionnaire. It has been designed to assess how the company is run, how it interacts with the environment, and how it treats its staff and the wider community.
It comprises 25 questions covering the key areas of ESG concern. The answers give us a good overview of the company’s current ESG performance and a valuable base line from which to monitor improvements going forward.
As well as obtaining information from public sources, news releases and creditable independent assessments, we engage directly with senior executives within the companies themselves.
The answer to each question is given a score of 1 – 5. From these we produce an average score for each of the three sectors: environment, social and governance. A score of < 2 in any sector means the company’s performance is ‘unacceptable’ and it is excluded as a potential investment.
If a company scores < 3 in any sector (needs improvement) we will regularly ask for updates on measures being taken to produce an improved rating. But as long as the company has higher scores on questions in the other two sectors – 3 (fair), 4 (good), 5 (very good) – it will not fail to be considered for investment on ESG grounds.
We will be reviewing the assessments on an annual basis following the publication of each company’s annual report so that we can monitor progress.
As this is proprietary research we are not publishing the results of these assessments on our website but both short summaries and copies of the full reports, including the reasoning behind the scores awarded, are available to investors in the fund.