While Cohesion MK Best Ideas is not principally an Environmental, Social and Governance (ESG) focused fund, we are conscious about our responsibilities towards the world that we all live in. Furthermore, we believe that a strong ESG culture within an investee company is likely to lead to more sustainable relationships with its customers, suppliers and employees and ultimately deliver better shareholder returns.
Given our objective of maximising our risk adjusted returns, we may invest in themes and sectors that are not traditionally viewed as naturally ESG. Nevertheless, we believe that even amongst such sectors it is possible to identify companies that are implementing positive change.
Cohesion formally reviews the ESG Framework annually at Board level. In addition, Cohesion has committed to donating part of our fee annually to selected good causes. A recent example of this may be found here.
Governance
- We believe that good governance practices sit at the heart of all good companies. It would be hard for us to imagine investing in a company with weak governance as the risks would be unacceptable.
- It is essential that there is clear alignment of interests between the promoter (the term used in India to describe the person who controls the company’s actions), its management and minority shareholders. We are very happy to share the success of our investments with the directors and management who create that success.
- We look very closely at the composition of the Board, focusing on their capability and track record but also the diversity of their experiences. We pay particular attention to the Board’s independence and the extent to which effective measurement and challenge can take place against clearly articulated plans. Capital allocation decisions are an important part of this, and we examine these closely.
- Good processes that are effectively implemented are vital in any business. We pay particular attention to related party transactions, promoter and senior management compensation, compliance with regulatory requirements and voluntary disclosures.
- We carefully check the history of the company, its promotor and key management. Amongst other factors we seek to understand previous corporate activism, changes to accounting processes, changes to the company’s auditors, lawyers, brokers or other advisers, any misrepresentations by management or questions over their market guidance.
- We pay close attention to evidence or rumours of malfeasance, compliance or regulatory failings, by any connected company or individual. If any of these appear valid, that would be regarded as an immediate red flag.
Environmental & Social
- We pay attention to the sector to which the company belongs, and whether the nature of its activities is likely to be in line with environmental and social change trends. We believe that companies operating in sectors that have positive ESG factors may benefit from favourable investment trends.
- We seek awareness amongst senior company management on environmental and social issues and a commitment to sustainability in the formulation of key business processes and practices.
- Employees are key to any successful business. Their safety, their rights, and broader well-being are important considerations in our investment decisions, as is the extent to which the company promotes diversity in its senior management.
- We will always explore the company’s policies on dealing with pollution, emissions and environmental waste and whether the company has relevant approvals and environmental clearances in place. We prefer companies having clear effluent treatment or zero discharge related policies and infrastructure in place wherever possible.
- We will discuss with management the steps that are being taken regarding energy security, energy use management, adoption of renewables or alternate energy sources. Looking beyond energy management, we also favour initiatives taken by a company with regards to making a positive contribution to factors that may lead to climate change.
- When assessing Board effectiveness, we seek assurances that the company’s E&S policies are properly formulated, disclosed and monitored. This is especially important when there are complex regulatory and country level environmental and social oversights on issues such as child labour, pollution/emissions, predatory or cartel business practices, and product safety.
ESG in practice
We actively monitor corporates on their ESG commitments and execution against these. In the past we have rejected potential investments and have sold off existing fund holdings, which did not comply with or remain compliant with our expectations on ESG.
There have been numerous examples of us using shareholder engagement to foster change in our investee companies including:
- We suggested and ultimately insisted on senior management and Board level changes to improve overall governance.
- We have counselled promoters as to the importance of aligning interests with minority shareholders.
- On several occasions we have made suggestions for the implementation of buybacks or more transparent and consistent dividend policies.
- We have often reviewed and suggested measures to align business practices with acceptable accounting industry standards and, in particular with regards to revenue recognition.
- We have persuaded the management of investee companies to appoint strategic business consultants for reviewing or validating (and where required, modifying) existing and potential strategy and capital allocation decisions, to ensure such decision making is always done with the best interests of minority shareholders.
- We have encouraged the appointment of external investor relations agencies for better investor engagement and improved disclosures for all stakeholders.
- We have regularly encouraged capital investments in pro ESG initiatives.
- We regularly encourage rightsizing of management incentives in line with profitability and other key stakeholder metrics. We have also advised on ESOP and related policies to create the right long term incentive structures for senior management.
ESG in action
Company A
Environment:
“A” is committed to Water and Carbon Neutrality by 2035 and 2040 respectively. Indeed, its ESG roadmap is aligned and fully integrated into the company’s 5-year strategic plan with a commitment to climate leadership, water stewardship, circular economy, green supply chain, biodiversity, and green offerings.
The company’s portfolio of green businesses, which includes solar, water, green hydrogen presently constitutes more than 30% of the total revenue and this percentage is steadily increasing.
They recently announced that they had avoided the emission of around 40,000 tonnes of CO2 during the year, equivalent to planting 500,000 trees. In addition, their cumulative energy conservation stands at around 150 million units, which is equivalent to powering 70,000 homes for a year. They have embedded a 6R (reduce, reuse, recycle, repair, refurbish and rethink) approach to manage waste and improve material recycling and reuse
Social:
Employee safety is clearly a priority for the company. The company has invested heavily in mobile app technology to monitor the health and safety of their workers. The entire site topography is mapped through drones and light detection and ranging (LiDAR) sensors. Safety measures for workers are communicated through augmented and virtual reality. Such level of digital adoption substantially increases productivity as well as improving quality and safety and is thus a clear example of all stakeholders benefitting simultaneously.
Governance:
The company has an impressive Code of Conduct which is wide ranging and includes a commitment to the culture of the business. It sets targets for women in the workforce that exceeds government guidelines. There are extensive whistleblowing provisions that encourage the reporting of suspected ethical, safety or legal violations or misconduct or fraud, with safeguards against victimisation, fear of punishment or unfair treatment Not only does the company, and its employees have to sign up to this Code, its suppliers have to too, leading to a ripple effect of positive impact.
The company has impressively strong internal controls and, has adopted the globally accepted framework issued by the Committee of Sponsoring Organisations (COSO) of the Treadway Commission for Internal Control.
