At DSM, we believe that environmental, social, and governance (“ESG”) considerations and engagement play a critical role in active management and responsible investing. Superior ESG outcomes are an important priority for the firm, our employees, our clients and our community. DSM is committed to maintaining an investment approach that fully integrates ESG in order to potentially reduce risk and adverse outcomes while also identifying opportunities to enhance our client’s long-term returns.
Our ESG framework incorporates ethics and sustainability into our investment decision making. DSM has a proprietary scoring system for all investments in our portfolios. This system has quantitative and qualitative elements to reflect the severity, duration and remedy of ESG issues affecting the companies in which we invest.
ESG criteria evaluated include, but are not limited to, the following issues:
- Environmental – energy and climate change, biodiversity and land use, toxic emissions and waste, sustainability, supply chain management, etc.
- Social – human rights concerns, impact on local communities, child labor, workplace diversity, civil liberties, anticompetitive practices, marketing and advertising, privacy and data security, etc.
- Governance – bribery and fraud, controversial investments, executive compensation, management structures, board composition, executive behavior, etc.
DSM actively identifies, evaluates and seeks to manage ESG risks and returns using proprietary research as well as third-party ESG information sources. In certain instances, ESG analysis may be based on company disclosures or third-party information sources that contain forward looking statements of intent and that are not necessarily fact-based or objectively measurable.
DSM follows a disciplined investment process designed to identify quality companies presenting compelling long-term revenue and earnings growth and selling at prices that offer the potential for attractive returns. ESG considerations are fully integrated into DSM’s stock selection, monitoring, and selling processes. DSM assigns a proprietary ESG score to every company we research. Scores range from CCC to AAA, and DSM utilizes MSCI’s ESG Ratings and Controversies as a starting point to make adjustments to ESG scores across key categories:
- UN Global Compact Compliance – DSM monitors whether companies are designated as Pass, Watchlist or Fail.
- Environment – Companies are evaluated based on (1) whether they have a Net Zero target year and what target date is set, (2) whether they report Scope 1, 2, and 3 greenhouse gas emissions, and (3) a proprietary environmental controversy score.
- Social – Companies are evaluated based on (1) privacy & data policies, (2) human capital management, and (3) a proprietary social controversy score.
- Governance – Companies are evaluated based on (1) whether they report their board diversity and their percentage of diverse board members, (2) board effectiveness, (3) executive compensation, (4) ownership and control, and (5) a proprietary governance controversy score.
Each investment professional at DSM completes in-depth fundamental research on ESG subjects impacting our holdings and then assigns scores using a consistent methodology. DSM stores all ESG scores, communications and developments in centralized folders on Bloomberg so that companies’ ESG histories and DSM’s ESG activities are available to research, Chief Investment Officers (CIO’s) and other employees.
DSM evaluates ESG issues for individual companies and at the portfolio level. ESG scores are included in DSM’s internal research summaries and have an impact on DSM’s investment decisions and our overall assessment of a stock, which affect position sizing and selection. ESG considerations have both kept DSM from investing in certain companies and have led to selling portfolio holdings.
Approach to Exclusions
DSM’s investment strategies are idea driven and built from the bottom-up, and ESG is an integral component in our analysis. Our portfolio management and research team is solely focused on finding companies that offer the right mix of growth, quality, and valuation. Finding this combination of attributes is what enables us to invest on behalf of our clients in concentrated, high conviction portfolios with an intermediate to long-term investment horizon. To this end, we do not currently employ any exclusionary screens as a matter of policy.
At a client’s request or per fund mandate, DSM can apply exclusionary restrictions that accommodate responsible investment considerations and restrictions specified by a client that may generally prohibit the purchase of certain securities, either individually or by region, sector or both.
DSM Capital Partners Funds (DSM’s Luxembourg UCITS Funds) are designated Article 8 under the EU Sustainable Finance Disclosure Regulation (“SFDR”). Additional information regarding their exclusions can be found in the Prospectus and Sustainability Related Disclosures.
DSM’s Green Team is a cross functional team of senior professionals, including our Chief Operating Officer and Co-Deputy CIOs, that leads and coordinates stewardship efforts.
The Green Team implements ESG best practices, establishes and oversees policies, coordinates firm-wide ESG initiatives, and promotes diversity and inclusion efforts. DSM’s Green Team also provides and coordinates ESG training to other members of the firm.
Stewardship initiatives and activities are reported to DSM’s Board of Managers on a quarterly basis.
ACTIVE OWNERSHIP – PROXY VOTING AND ENGAGEMENT
Proxy Voting and Shareholder Rights
It is DSM’s policy that all proxies be voted solely in the best interests of the beneficial owners of the securities. Proxies are an asset of a client that must be treated with the same care, diligence and loyalty as any asset belonging to a client. Towards that end, DSM is responsible for reviewing proxy proposals for all securities held in its investment strategies and for making proxy voting decisions for its clients. DSM’s Proxy Voting Policy indicates criteria to be used when evaluating proxy issues and positions DSM typically takes on certain proxy proposals. While the policy provides general guidelines, DSM might need to materially deviate from the policy.
DSM has a Proxy Voting Committee (the “Committee”) that’s role is to help administer and oversee the application of DSM’s proxy voting policy. The Committee is responsible for (i) developing and implementing this policy and the procedures described herein; (ii) overseeing and administering proxy voting on behalf of clients; (iii) reviewing proxy voting activity annually and as needed; and (iv) engaging and reviewing the Third-Party Administrator (discussed below). The Committee meets quarterly and as necessary to discuss proxy issues.
When reviewing a proxy proposal, DSM may consider information from any and all sources. DSM may engage with the issuer of a proxy to discuss specific items and to obtain additional information on the proxy issue. DSM may also engage with management of these securities on a range of environmental, social or governance issues throughout the year. For additional assistance in reviewing proxies, DSM has contracted with an independent third party (currently, Institutional Shareholder Services Inc.) (the “Third Party Administrator”) to provide issue analysis and vote recommendations with respect to all proxy proposals. In an effort to better align its proxy voting policy with its role as a signatory to the Principles for Responsible Investing (“PRI”) DSM primarily utilizes the Third-Party Administrator’s Sustainability policy.
Engagement and Escalation
DSM’s investment team is responsible for proactively engaging with companies to better understand a company’s approach to ESG and potentially influence ESG related corporate practices. DSM communicates with management and investor relations teams of current and potential portfolio companies, and engagements may take the form of direct in-person meetings, calls, emails, or letters. In determining the prioritization of engagements, DSM considers, among other things: (1) the materiality of the issue; (2) the significance of the portfolio position; (3) the ability to effect change in company practices; and (4) the ability to escalate if necessary. The length of each engagement will vary based on the materiality of the issue, a company’s response, and how the information gathered is integrated into DSM’s investment process.
DSM monitors the progress and outcome of its engagements on an ongoing basis to evaluate the actions, if any, taken by a company as well as what further actions may be necessary. If there are ESG violations by a company that are severe and not being adequately addressed, DSM may escalate the matter through (1) letter writing to the board of directors, (2) relevant proxy voting, (3) or selling the position. However, DSM believes that we are in the best position to improve ESG outcomes when we as shareholders are interacting with management and will first seek to engage with them to influence a positive resolution of the issues in question.
DSM builds upon its stewardship practices and policies through collaboration and active involvement in sustainability initiatives, as discussed below. DSM will become a signatory to other relevant initiatives, such as the 2018, 2021 and 2022 Global Investor Statement to Governments on Climate Change, where appropriate.
Principles for Responsible Investment
DSM became a signatory to the Principles for Responsible Investment (“PRI”) in October 2017. The PRI provides a set of investment principles and best practices designed to promote responsible investing. DSM utilizes the PRI’s Collaboration Platform, and completes annual transparency reports which can be provided upon request and are also available for download through the PRI website on DSM’s signatory profile.
Task Force on Climate-Related Financial Disclosures
DSM became a supporter of the Task Force on Climate-related Financial Disclosures (“TCFD”) in April 2020. The TCFD sets out to develop effective climate related financial disclosures that consider the physical, liability and transition risks associated with climate change. These disclosures can then be used by companies to provide relevant climate related information to stakeholders. Additional information can be found on the TCFD website.