By Ben Ritchie and Georgia Cooper, Investment Managers of Dunedin Income Growth Investment Trust PLC
- There has been a decisive move among investors to incorporate environmental, social and governance (ESG) considerations into corporate analysis.
- Inadequate management of risks related to carbon emissions, water or workers’ rights puts businesses at risk.
- For Dunedin Income Growth Investment Trust, we wanted to formalize the ESG process and make it easier for investors to understand.
Even before the pandemic brought about serious and lasting changes in the world, “chaos” was commonplace. In recent years, the power of technology has changed in a variety of industries such as financial services, healthcare and automotive manufacturing. Many of these structural changes have accelerated since the pandemic, making it even more important for investors to stay ahead.
The Dunedin Income Growth Investment Trust has shifted its focus to these trends over the past five years, bringing high-growth companies to the right of structural economic change. As we see, these companies should be in a good position not only to pay more to investors over time, but also to achieve higher capital growth.
This has exposed trust to trends such as industry digitization, increasing consumer wealth in emerging markets, and rising health care costs. Today, Trust believes that it is in a position to recover, without becoming vulnerable to decline. The important thing is that it is related to a changing world.
However, there is one area where we wanted to be clearer about decision making. Over the last few years, there has been a decisive move among investors to incorporate environmental, social and governance considerations into corporate analysis. It’s more than just “good to have”, but it’s an integral part of risk and performance management.
why? Governments around the world, from the United States to China, are working on low-carbon goals. Companies on the other side of the move have found themselves subject to fines and regulatory sanctions, and their businesses are more closely monitored. Their cost of capital is increasing as banks and other lenders consider them at greater risk. Thus, poor management of risks related to carbon emissions, water or workers’ rights puts businesses at risk.
At the same time, many exciting companies are emerging to address these issues in areas such as renewable energy, waste management and environmental technology. These companies are benefiting from an increasing wave of government and private sector capital. This means that investors need to be careful about their valuations, but there are many new opportunities, especially for some companies involved in emerging technologies.
Consideration for the environment
He has long experience managing ESG risks in the Dunedin Income Growth Investment Trust and all Aberdeen Standard Investments portfolios. All businesses in the portfolio are ESG rated by investment analysts. However, some languages in this area may be marginalized, and investors often do not know what they are getting. Therefore, we wanted to formalize the ESG process and make it easier for investors to understand. That’s why we asked shareholders to support more formal screening of their portfolios. The investment philosophy and dividend policy will not change. It is simply a formalization of our existing research work.
In planning the trust, we didn’t want to make too many value-based decisions. We recognize that the ethical priorities of investors can vary significantly. With this in mind, we focused primarily on the environment, tobacco and weapons. It follows Aberdeen Standard Investments’ Socially Responsible Investment (SRI) approach, which is well-established and rigorously reviewed. They are also considered areas of maximum regulatory pressure. Companies that do not meet these requirements will face cost of capital and / or fines and sanctions. Today we see increasing pressure on oil, major tobacco and arms companies. It can happen in other sectors as well, and if so, we are ready to adapt.
In addition to companies that manufacture weapons and tobacco, oil and gas companies that do not have a meaningful weight on renewables and natural gas are automatically excluded. It also excludes companies that have low scores based on their own ESG quality rankings and are in the bottom 10% of indexes ranked by internal score metrics.
This makes a small difference in our stock world. The sector screen excludes about 6%, the quality analysis excludes an additional 13%, and the internal score excludes an additional 10%. The current analysis excludes 29% of the market, taking duplication into account.
This change will affect the portfolio’s revenue options. Areas such as tobacco are important dividend payers, so excluding them inevitably reduces your options. But if anything, it encourages us to reassign us to other higher-growth ideas. It is convenient to have the flexibility to invest up to 20% overseas. As for the sector, there may be significant fluctuations in the direction of finance and the direction of commodities. However, we believe this impact is more manageable with the investment opportunities we have available.
In our view, the move to formally incorporate environmental, social and governance considerations into investment analysis is an important and long-term change in how financial markets operate. It cannot be ignored and will be more and more reflected in the stock price. We wanted it to be a clear part of the future trust’s mission.
Risk factors to consider before investing:
- The value of the investment and the income from them can be reduced, and investors can regain less than the amount invested.
- Past performance is not a guide to future results.
- Investing in us may not be suitable for investors who plan to withdraw funds within five years.
- We may borrow to raise funds for further investment (gearing). Gearing can cause net asset value (NAV) to fluctuate. In other words, when the value of a company’s assets fluctuates, the NAV fluctuates significantly.
- We may accumulate investment positions that exceed normal trading volumes, making investments difficult and potentially leading to fluctuations in the market price of our stock.
- We may charge capital that may impair the capital value of our investment.
- Derivatives can be used in accordance with the limits set by us to manage risk and generate income. Derivatives markets can fluctuate and the risk of loss is higher than average.
- There is no guarantee that the market price of our stock will fully reflect the underlying net asset value.
- As with any stock exchange investment, the value of our stock purchased will immediately decline due to the difference in trading prices, resulting in a bid offer spread. Bid offer spreads may widen if trading volumes decrease.
- Certain trusts may seek to invest in high-yielding securities such as bonds that are affected by credit risk, market price risk, and interest rate risk. Unlike income from single bonds, the level of income from investment trusts is not fixed and can fluctuate.
- Yields are estimates and are subject to change. There is no guarantee that future dividends will match or exceed past dividends, and certain investors may be subject to additional taxes on dividends.
Other important information:
Published by Aberdeen Asset Managers Limited, which is licensed and regulated by the Financial Conduct Authority of the United Kingdom. Registration office: 10 Queens Terrace, Aberdeen AB101XL. It is registered in Scotland No.108419. Trustees should only be considered as part of a balanced portfolio. Under no circumstances should this information be considered an offer or solicitation to handle an investment.
Dunedin Income Growth Investment Trust: Positioned for a changing world
Source link Dunedin Income Growth Investment Trust: Positioned for a changing world