Environment, Social and Governance (ESG) policy (extract)

What is ESG?

ESG is an acronym for Environmental, Social and Governance. DNR Capital recognises that     ESG factors are financially material and that companies with good ESG practices can enhance shareholder returns.

DNR Capital has adopted an ESG integration and engagement investment strategy. This strategy is complementary to our investment philosophy, and paired with our research capability, enhances investment decision-making.

DNR Capital has been a signatory of the PRI, the global ESG investment industry governing body, since 2009.  DNR Capital is also a member of the Responsible Investment Association Australasia (RIAA) and the Socially Responsible Portfolio is certified according to the strict criteria of its certification program.

Why is ESG important?

DNR Capital recognise that ESG factors have the potential to impact investment risks and returns. Quality companies with strong ESG capabilities are more likely to make better business decisions across the company, which drive long-term returns.

Furthermore, DNR Capital believes that including ESG issues in its investment process is consistent with its objectives as an active investment manager.

ESG assessment framework

DNR Capital has adopted an ESG integration and engagement strategy to enhance risk-adjusted performance. Our ESG score is one of five components of our proprietary ’quality web’, which is used to assess the quality of companies.  ESG risks, where material, are also factored into our view on company valuation. The outcomes of these assessments inform investment decision-making and portfolio construction.

DNR Capital have a long-term investment horizon and take a long term view on ESG factors. We have a well-resourced, in-house investment team who conduct ESG analysis, the output is collated and interpreted by the ESG investment analyst and is overseen by the SRI Committee.

ESG Score

DNR Capital have developed an ESG scoring system to assess ESG risk at a company level.  We assess a company’s industry ESG risk and its relative performance on a five-point scale for each of the ESG factors listed below, which is aggregated to an overall company ESG score. Analysts base this assessment on company research, company meetings, broker research and access to independent ESG research provider, ISS.

Environmental

  • Climate change
  • Water
  • Eco-efficiency

Social

  • Modern slavery
  • Staff
  • Society

Governance

  • Corporate governance
  • Management quality
  • Business ethics

ESG integration and investment decision making

Once a company is assessed to meet DNR Capital’s quality criteria, detailed company analysis and valuation work is conducted to determine whether sufficient return upside exists.  Consistent with DNR Capital’s ESG integration and engagement investment strategy, ESG risks and opportunities are also factored into this assessment.  Where the ESG valuation impact is material, it is either explicitly factored into a company’s earnings forecasts or balance sheet items, or implicitly through the determination of the company’s terminal value, discount rate or perpetuity growth rate.

The outcomes of the ESG ratings assessment and valuation assessment informs investment decision-making and portfolio construction.

The following environmental, social and governance guidelines are considered in this process:

Environmental guidelines

  • Maintain database of environmental related indicators that is monitored and tracked over time
  • Monitor and track incidents through Norm-Based Research
  • Consider environmental performance, where material, including the following:
    • Environmental governance and strategy;
    • Environmental commitments and targets;
    • Environmental track record;
    • Water, air and waste management plan;
    • Resource efficiency; and
    • Biodiversity
  • Where material environmental risk is identified, we conduct company engagement.

Social guidelines

  • Maintain database of social related indicators that is monitored and tracked over time
  • Monitor and track incidents through Norm-Based Research
  • Consider social performance, where material, including the following:
    • Employee engagement;
    • Diversity & inclusion;
    • Health & safety;
    • Local stakeholder relationships; and
    • Modern slavery
  • Where material social risk is identified, we conduct company engagement.

Governance guidelines

  • Maintain database of governance related indicators that is monitored and tracked over time
  • Monitor and track incidents through Norm-Based Research
  • Consider governance performance, where material, including the following:
    • Board quality;
    • Board composition;
    • Remuneration policy;
    • Management quality;
    • Corporate disclosure.
  • Where material governance risk is identified, we conduct company engagement.

Climate change

DNR Capital supports the global ambition to limit global warming through reduced carbon emissions. Climate change has been identified by the Board as a material risk and is included in DNR Capital’s enterprise Risk Register. Please refer to DNR Capital’s Climate Change Policy for detail on how climate change is incorporated into our investment decision-making.

DNR Capital use the following guidelines to identify and assess climate risk and opportunity at the company and aggregate portfolio level:

  • Maintain database of company climate related indicators that is monitored and tracked over time
  • Monitor and track incidents through Norm-Based Research
  • Maintain database of company net zero commitments
  • Where material climate risk is identified, we conduct a deep dive risk assessment, including:
    • climate governance;
    • climate strategy;
    • climate risk management and strategy implementation;
    • net zero strategy, integrity and reliance on offsets;
    • climate scenario analysis,
    • physical climate risk assessment; and
    • climate disclosure.
  • Conduct biannual ISS Climate Impact Assessment Report for each investment strategy
  • Monitor and track portfolio carbon footprint for each investment strategy over time
  • Maintain database of portfolio climate related indicators that is monitored and tracked over time
  • Where material climate risk is identified, we conduct company engagement.

Modern slavery

Modern slavery has been identified by the Board as a material risk and is included in DNR Capital’s enterprise-wide Risk Register.

For these purposes, ‘Modern Slavery’ means conduct which would constitute an offence under the Modern Slavery Act 2018, and this includes trafficking of persons, illegal forms of child labour, slavery, forced labour, deceptive recruiting, debt bondage or offences involving non- citizens working in Australia without the correct visa.

DNR Capital consider modern slavery risk at the firm level, and at the underlying investment level. Whilst DNR Capital is not a reporting entity under the Modern Slavery Act 2018, and does not therefore propose to issue a Modern Slavery Statement, it is committed to:

  • ensuring that it has processes in place to review its risks on modern slavery practices in operations and supply chains;
  • maintaining a list of its material external service providers which also identifies the countries in which the service or product is procured;
  • engaging with those service providers to ascertain how they identify and handle modern slavery risks; and
  • as part of its commitment to corporate engagement, making due enquiry of its investee companies.

At the investment level, DNR Capital use the following modern slavery guidelines to identify and assess modern slavery risks:

  • Maintain database of modern slavery related indicators that is monitored and tracked over time
  • Monitor and track incidents through Norm-Based Research
  • Where material modern slavery risk is identified, we conduct a deep dive risk assessment, including:
    • Modern slavery governance (remuneration alignment, Board experience, engagement);
    • Modern slavery strategy;
    • Modern slavery risk management and strategy implementation (resourcing); and
    • Modern slavery disclosure.
  • Where material modern slavery risk is identified, we conduct company engagement.

The integration of ESG factors into investment decision-making is supplemented by a stewardship program, including company engagement and proxy voting.

Diversity and inclusion

Diversity and inclusion describes a company’s representation of different race, ethnicity, gender and sexual orientation groups. DNR Capital is developing its approach to diversity and inclusion, with the following initiatives:

  • Diversity and inclusion indicators are included in DNR Capital’s ESG database and are tracked and monitored over time; and
  • Board composition, including diversity, are considerations in DNR Capital’s proxy voting recommendations.

Corporate stewardship

The integration of ESG factors into investment decision-making is supplemented by a corporate stewardship program, including company engagement and proxy voting.

Where material ESG risks and opportunities are identified in the investment decision-making process, DNR Capital engages with the company to understand their ESG governance and risk management strategies and to advocate for best practice.  DNR Capital’s stewardship initiatives are conducted by investment analysts, in conjunction with portfolio managers and the ESG investment analyst. As such, the insight gained from each initiative is incorporated into the research and investment decision making process.

Further details are outlined in DNR Capital’s Corporate Engagement Policy.

Reporting

DNR Capital will report to clients on ESG related investment and engagement initiatives through annual Stewardship Report, client reporting, marketing presentations and bespoke client requests.

Roles and responsibilities

The Board

The Board and executive level management have formal oversight over and accountability for responsible investment at DNR Capital. Responsible investment outcomes will be reflected in executive remuneration.

Socially Responsible Investment (SRI) Committee

DNR Capital’s SRI Committee was established in 2010 and oversees the implementation of our ESG policies and integration of ESG into investment decision-making.

Investments team

DNR Capital’s ESG integration and engagement initiatives are conducted by the investments team.  As such, the insight gained from the process is incorporated into the research and investment decision-making process. Responsible investment outcomes are reflected in remuneration.