We are committed to engaging with our companies on their strategy, operations, financial decisions as well as performance on and management of material Environmental, Social, Governance (“ESG”) factors, among others. Our engagements are intentional, with the purpose of helping our companies to attain and sustain high returns and create value. This goal is further broken down into more specific engagement objectives, including
Engagements often meet multiple objectives described above. Our more defined objectives and best practice views are informed through analysis of the company and the broader market, attained through a variety of sources, including, where appropriate, company disclosures and engagement insights, deep sector knowledge, third party ratings and assessments (provided by rating agencies, credit rating agencies, sell-side, academia and non-profit organisations), peer benchmarks and discussions (internal and with the broader industry).
We will often seek rationale and where appropriate commitments from the issuers to address issues raised.
Our engagements are also underpinned by the following underlying principles:
Our engagement methods vary, and the most suitable approach is selected based on the engagement needs. These methods include:
In our engagements, regardless of the method, we aim to have a dialogue with relevant decision makers that include (but are not limited to): founders, chairperson and independent directors, chief executive officer (CEO), chief financial officer (CFO), chief sustainability officer (CSO) or other sustainability representatives, and investor relations.
At Nikko AM we practice deep and direct ESG integration, where investment teams engage with our companies as part of the investment process, both before and during the period of investment, covering relevant ESG issues in their research and engagements. We do not separate or outsource the engagements as we believe each covering analyst and portfolio manager is best placed and responsible for assessing ESG materiality and engagement for positive return. This approach translates into ESG risk and opportunity management being inherently integrated into our investment process including buy/sell decisions. Through our engagements, issuers understand that ESG forms an integral part of our investment decision making.
As engagements are integral to our investment processes, they are often planned in the course of investment activities. This comprises pro-active and forward-looking engagement plans, for example prioritised by materiality or thematic priorities (such as climate change). This allows flexibility to respond to issues as they come up (reactive approach) for example through voting events or (ESG) news flow.
We identify companies for engagements based on several factors, which can differ by region and asset class. The below quantitative and qualitative factors could be considered for prioritisation:
The investment teams document engagements in their respective research management software applications, to which all relevant investment members have access to. The engagement outcomes further supplement our investment (including ESG) analysis, risk management frameworks and consequently our investment decisions.
We will seek commitments from companies to address any material concerns raised by investment teams. Subsequently we monitor these issues and company progress.
Committed to transparency, we publish outcomes of our global engagement and stewardship activities in our annual Sustainability Reports, client reports and other disclosure materials as may be required by our clients or in compliance with regulatory requirements.
We believe in some instances where one-on-one company engagements deliver insufficient progress, collaborative engagements with like-minded investors can increase shareholders’ influence on companies’ corporate behaviour and ESG performance.
Nikko AM’s regional investment offices select the most suitable and effective engagement methods for their portfolios. Whilst we are seeing increasing investor collaboration efforts across regions, this engagement method is still relatively uncharted in some parts of the world. For example, in some parts of Asia one-on-one engagements can be viewed as more constructive and culturally appropriate to build on trust. Specifically, in Japan, we participate in collaborative engagement while taking into consideration the possibilities associated with joint shareholdings, such as the regulatory requirement of large shareholding reporting as well as being perceived as making a material proposal leading to exemption from simplified reporting.
Mindful of these important regional nuances and our commitment to constructive, positive and pragmatic engagements, we carefully select our engagement methods, whilst committed to supporting collaborative engagements.
Where we engage with companies to shape corporate behaviour and influence positive change, we may escalate the discussions. The escalation methods vary across asset classes and regions, broadly including:
The escalation methods can either (i) inform investment decisions (e.g. additional meetings with management where our concerns were not sufficiently addressed can lead to reduced shareholdings) or (ii) the methods themselves are an investment decision (e.g. divestment).
This process is underpinned by engagement timelines. Where many engagements touch on topics that are inherently long-term and require time for improvement, some topics or breaches need to be reviewed with a more short-term timeline in mind. These considerations are taken into account when we carefully select timeline for and methods of the escalation.
Our engagements and voting feed back into our investment analysis and inform our investment decisions (buy/sell/hold). Depending on the severity of the issue and broader context (e.g. outcomes of previous engagements) we reduce our holdings or divest where we have the discretion and where such exit would be in the best interest of our clients.
This Engagement and Stewardship Strategy will be revised to reflect our continued capability enhancement in the sustainable and responsible investing space.
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