FOUR SEASONS ASIA INVESTMENT (“FSAI”) is a signatory to the United Nations Principles of Responsible Investment Initiative (UNPRI, https://www.unpri.org). As a signatory to the Principles, we publicly committed to adopt and implement those principles to be consistent with our fiduciary responsibility.
In accordance with Article 3 of Regulation (EU) 2019/2088 (the Sustainable Finance Disclosure Regulation or SFDR), this disclosure provides information on FOUR SEASONS ASIA INVESTMENT’s policy on the integration of sustainability risks in our investment decision making process.
Sustainability risk is defined in the Sustainable Finance Disclosure Regulation as an environmental, social, or governance event or condition, that if it occurs, could cause an actual or a potential material negative impact on the value of the investment. Our ESG policy and procedure is designed to identify, monitor and manage within our decision making process, those environmental, social and governance events that we consider to be most relevant to the portfolio that FSAI manages and that could have a material impact on the value of the portfolio.
As described in the ESG policy, FSAI do not prepare pre-determined prohibit list of stocks, sector or business, from the viewpoint of ESG issues. Moreover, FSAI’s portfolio strategy is based on clearly defined investment horizon, where short term investment horizon assumes 12months which may make sustainability risk issue be less influential in investment decision making process.
Having said above, historically, FSAI has been avoiding investing in business which may have potential negative factors in terms of long-term corporate value, regardless of investment horizons. Those include business related to (but not limited to) potential abuse of personal data, products of which sole purpose is to kill human being, food ingredient of which influence on human body is unknown or considered to be harmful, entertaining products which encourage addictive usage by children, management team who is suspected to engage in unlawful business practice / process which can not be clearly vindicated.
Below are historical examples of business which we ruled out:
1. Social Network Service providers: they are historically ruled out from our investment universe due to concern over their business model where personal data is abused without consent.
2. Weapon manufacturers: they are historically ruled out as they make products which hurt / kill human being and which is utilized at war.
3. Game application developers on smart phone: they are historically ruled out as their products are perceived to be having negative influence over children’s brain.
4. Chemical ingredient manufacturers for foods: a company is historically ruled out due to concern over negative influence on human body.
5. Pharmaceutical manufacturer whose target growth area is US painkiller segment: a company is historically ruled out as their growth strategy in U.S. is not considered as appropriate in terms of social development as well as fairness.
6. Financial group which owns asset management function: A company is ruled out due to a suspect that they abuse ESG issue, where they suspected to increase sales of fund by simply changing fund name into ESG related one.
In accordance with the SFDR, this section summarizes how FOUR SEASONS ASIA INVESTMENT considers the adverse impacts of its investment decisions on sustainability factors, and the steps it takes to prioritise and mitigate the adverse impacts it considers to be principal.
As an equity investment manager, FOUR SEASONS ASIA INVESTMENT invests in a wide range of business, sectors and region on behalf of clients, and finances a variety of economic activities of positive and negative impacts on environmental, social and governance matters.
As signatory to the responsibility of UN PRI, FOUR SEASONS ASIA INVESMTENT is committed to promoting and exercising effective stewardship among companies presented in client portfolios and to engage with them, in particular on actual and potential adverse impacts of their business activities on environmental, social and governance matters.
FOUR SEASONS ASIA INVESTMENT seeks to mitigate principal adverse impacts by following methods. 1) Engagement, 2) Adjustment of models and return risk estimates. Engagement is made to drive change within the organization to eliminate or reduce the relevant sustainability impacts of their business. If the investee companies do not take remedial action to within assumed investment horizon, portfolio management team will make adjustment on the financial statement forecast models to reflect such adverse impacts. This action will lead to adjustment of target price and downside potential as well as risk return balance of investment. Portfolio action will be taken based on balance of risk return of each individual stock investment, by following portfolio monitoring process.
FOUR SEASONS ASIA INVESTMENT thinks fiduciary duty can be fulfilled by two issues. Investment performance and organizational credibility. ESG plays key role to enhance organizational credibility in pursuing fiduciary duty to our clients.
FOUR SEASONS ASIA INVESTMENT remuneration principles are consistent with the integration of sustainability risks by evaluating performance on a multi-year basis and by ensuring that the variable compensation process considers all elements of risk including sustainability risk holistically rather than formulaically.
DEC 2022
Introduction
This policy details our approach to ESG into our investment process.
As in our investment philosophy, our (FOUR SEASONS ASIA INVESTMENT) equity investments are based on intrinsic business value, and not chasing stock price movement. Environmental, social and corporate governance (ESG) issues are one of essential parts of intrinsic business value and always have potential to affect investment performance of a stock and portfolio we select and manage.
FOUR SEASONS ASIA INVESTMENT always incorporates ESG issues into investment decision making process to enhance return as well as to reduce risk within stated investment horizon for each investment.
Investment Philosophy and ESG Integration
First of all, ESG integration into investment process should not be implemented at sacrifice of return of the investment portfolio. ESG integration is incorporated to lower risk and / or enhance return of the portfolio. This is part of our normal investment research and decision-making process.
Secondly, there is no major change in our investment process. ESG integration is addition to the investment process with enhanced sourcing of information and analysis of ESG information to identify “material ESG risk”, not to rank company / stock according to ESG factors.
Thirdly, our universe is defined by “less crowded” group of stocks. This universe will not be altered by ESG factors by excluding certain sector, business or a stock, in advance. Our very basic assumption on financial market and corporate fundamental is that only constant is “change”. Therefore, we do not develop predetermined prohibition list on a sector, business or a company since they can also change. Changes can be either positive or negative direction. Basic philosophy underlying our investment strategy is to capture “change” for positive direction among neglected opportunities.
Finally, engagement process with companies is always part of our bottom-up fundamental stock research process. Engagement includes exchange of knowledge/ information on best practice, standard applied in other industry, viewpoints in the financial markets as well as solicitation / proposal for action/strategy in order to enhance long term corporate value for shareholders. Effective engagement is only possible with in-depth knowledge on company and business. Better understanding on company/business leads to better engagement and output. For us, bottom-up fundamental research and engagement is inseparable in fundamental stock research process. It is always our responsibility to stay on top of the world including ESG issue and have effective engagement through giving candid feedback to companies. Enhancement of long term corporate value to shareholders is our simple goal of fundamental research process.
Investment Process: Implementation with ESG integration according to investment horizon
Bottom-up fundamental analysis incorporates ESG factors in security selection process. ESG analysis is not separately conducted by ESG analysts but performed by investment team members including portfolio managers and analysts. Most relevant factors (Revenue, Profit, return on capital, capital and operational expenditures, cash flow) are adjusted based on material ESG factors. We may also consider potential ESG impact on overall security valuation by adjusting target multiples though there is risk for redundancy as well as lack of convincing evidence on correlation between ESG issue and valuation premium or discount.
Revenue: Company’s growth and its business position may be affected by ESG related factor. Opportunities and risks are reflected on revenue projection.
Operating Cost & Operating Margin: ESG factors will affect future cost and margin. New strategy/ action plan may also alter future trend of cost and margin.
One of key characteristics of our investment strategy is portfolio diversification by time horizon. Level of ESG integration will clearly differ by investment horizon. In summary, the longer the investment horizon, the higher degree of ESG integration will be, in our research and investment decision making process.
Our investment decision making process focuses on “materiality”. More information does not mean less risk. Given the fact that ESG disclosure issues are not yet matured in corporate reporting practice, we observe that amount of information disclosure varies among corporations with positive correlation with size of organization. It is our responsibility to access ESG sustainability risk in terms of level of materiality, not by level of availability of information.