As the global community confronts pressing challenges, such as climate change, social inequality, and corporate governance issues, we believe integrating Environmental, Social and Governance (ESG) criteria should be a key part of the investment decision-making process alongside more traditional financial measures, to provide a more comprehensive view of the risks and return potential of an investment. Herein lies the dual responsibility of fund managers: to deliver competitive financial returns while simultaneously promoting sustainable and responsible business practices.
Although there is growing awareness of ESG, we have long recognised the importance of shareholder engagement and the relationship between corporate behaviour and long-term value creation. As custodians of your capital, we have always encouraged management teams to promote sustainable and responsible business practices by adopting a long-term approach, balancing the needs of all stakeholders, including employees, customers, suppliers and shareholders.
To reflect the importance of ESG, Whitman have become signatories of the United Nations Principles for Responsible Investment (PRI). The PRI (www.unpri.org) is the world’s leading proponent of responsible investing and, as an independent body, seeks to encourage investors to understand and incorporate ESG factors into their investment and ownership decisions.
1. Environmental
We are passionate about the environment and due to our investment focus on cash generative businesses with high returns on capital, we tend to avoid capital intensive sectors, such natural resources or heavy manufacturing, which have the greatest environmental impact. However, we encourage all management teams to take every step possible to reduce their carbon footprint, especially when there is a positive return on investment.
2. Social
Social risks are relevant to all organisations irrespective of their industry. They manifest in a broad range of areas including health & safety, training & education, diversity & inclusion, community engagement and labour standards. Whilst these measures are often difficult for investors to assess, the reputational risks associated with mismanaging social issues are high. Controversies are increasingly being played out in public and the recent example of Boohoo, who were accused of poor working practices, highlights the negative impact can be direct and immediate.
3. Governance
As long-term investors, we focus on corporate governance and seek to work collaboratively with management teams, in a challenging but supportive manner. Governance assumes a heightened significance on AIM due to the unique characteristics of the market, with a more flexible regulatory system than the Main Market of the London Stock Exchange (LSE). Whilst AIM companies can offer compelling growth prospects, we recognise they may also pose elevated governance-related risks, stemming from limited resources, inexperienced management teams, or lack of regulatory oversight.
At its core, governance refers to the systems and processes through which companies are directed and controlled. It encompasses a range of factors, including board composition, executive remuneration, risk management practices, and transparency in financial reporting. Effective governance ensures that companies operate with integrity, accountability, and openness, thereby safeguarding investor interests and fostering long-term value creation. We are committed to fulfilling our fiduciary duty to vote in the best interest of our clients and if we are unable to influence change, we will exercise our right to vote against management.
The importance of ESG cannot be overstated, as it serves as a robust risk management tool and provides a holistic framework for evaluating the overall health of companies. By assessing environmental risks, such as carbon emissions or water scarcity; social factors, like labour practices and diversity; and governance structures, including board diversity and executive compensation, we can mitigate potential risks. Reflecting the unique regulatory status of AIM, we place the greatest emphasis on governance and believe we can directly influence corporate behaviour, leading to greater long-term shareholder returns.
