Nikko AM New Zealand’s equity and bond teams have a united voice on ESG issues. We are primarily medium- to long-term investors with a fundamentally driven bottom-up approach. We seek to understand how industry and company ESG factors may impact investments and, ultimately, client portfolios. The ESG risks and opportunities faced by a company form an important element in understanding investments but cannot be managed in isolation. The quality of a management team, for example, must also be carefully assessed.
We use our extensive experience to help us understand and evaluate the materiality of ESG factors. A specific understanding of ESG analysis can help us build a picture of the risks and opportunities faced by a company. However, there is no set formula for quantifying the importance of each ESG factor or adjusting how we value each company.
On a quarterly basis, we screen the investments we hold across all portfolios — together with investments on watch or under active assessment — using the MSCI ESG Research tool. This process assists the team by adding another layer of scrutiny to our knowledge of companies. Many debt issuers are also listed on the NZX and, therefore, also captured during this screening.
The outcome of this process is that companies are rated on a scale from AAA to CCC relative to the standards and performance of their industry peers. We engage with these companies in an effort to raise the bar in relatively weak areas or areas where ongoing improvement is beneficial to stakeholders. These areas could be identified by the MSCI research or our own research. A rating of BB or less does not necessarily make a company un-investable from our perspective but does necessitate active company engagement on the main issues underlying the relatively poor rating.
A higher MSCI rating does not alone dictate a higher investment weight. The primary driver of a company’s weight in our portfolios will still be determined by the relevant portfolio manager, given a range of both quantitative and qualitative factors. The current MSCI rating is explicitly assessed as a quantitative factor consistent with our established investment process. Companies that have higher ratings or are actively improving their ESG standards will ultimately be recognised by market participants, so our process is likely to highlight these opportunities.
The team regards voting as an integral part of being a responsible steward of capital. Analysis of a company’s corporate governance structure helps to form our view of the quality of a management team. We exercise proxy voting rights independently and solely in the interests of our clients and beneficiaries. When we exercise voting rights against company resolutions, it is our policy to write to investee companies to explain our reasons in an endeavour to advance the company’s development.