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ESG engagement key to small cap value: Perennial Value Management

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The Sustainability Report – Rachel Alembakis

Engaging with small and mid-cap companies around key environmental, social and corporate governance (ESG) issues is key to uncovering high quality companies making a positive impact on sustainable outcomes, according to Perennial Value Management.

Damian Cottier, portfolio manager, Perennial Value Management

Perennial Value Management integrates ESG considerations into its investment process through fundamental research, and ESG is a part of the portfolio management process in its Perennial Smaller Companies Sustainable Future Trust, according to Damian Cottier, portfolio manager.

Perennial notes that last year, their nine-person team conducted 1185 ex-100 company visits both nationally and internationally, and Cottier said direct engagement is a particularly useful tool for assessing smaller companies on ESG criteria.

“One of the advantages of having a large team is having a lot of meetings with companies,” he said. “One of the ways we can make a difference in the small cap space is speaking with companies around ESG and engaging with them on the ESG issues they face.”

Smaller companies can have fewer resources, which can have impacts on the management and disclosure of ESG-related issues, Cottier said.

“It’s a space where they have smaller teams in the ESG space, and typically have fewer resources and they’re often lagging in a few areas,” he said. “By engaging with them, we can assist in improving their practices and we’re also getting to the stage where we get companies asking us, saying things like we have this issue, what should we be doing about it and that sort of thing.”

Through engagement, Perennial has observed that there is a distribution of how small cap companies approach both the policies and the implementation related to ESG issues.

“There are companies that have policies in place and they’re off the shelf,” he said. “You notice when speaking with them that they have policies but don’t have it integrated into their philosophy. Then you have companies that have integrated policies and are focused on the area, but they’re not as good as explaining to people. So you have ones that are ticking the boxes but aren’t engaged, and then on the other hand, you have the ones who are engaged but haven’t gotten around to filling in the details.”

The Perennial Smaller Companies Sustainable Future Trust applies several screens to the portfolio – one screen is a minimum market cap of $50 million. Perennial then applies a negative screen, eliminating fossil fuels, alcohol, tobacco, weapons, forestry activities, gambling activities, and unhealthy fast food. The team then applies its internal ESG score to the resulting universe, which is typically 30-45 stocks.

“ESG is quite central to our process,” he said. “We invest in companies that we call ‘sustainable future enablers’ – the ones making a contribution to a positive future. They’re [Sustainable Development Goal] inspired – they typically fall into healthcare, education, renewable energy, greenhouse gas emissions reduction, clean water and those types of things. …

“We’re careful to not invest in things where we think there’s reputational risk, and we avoid industries where there’s ongoing decline.”

Since inception in February 2018, the trust has delivered a +12.7% p.a. return net of fees, outperforming the benchmark by +7.1% p.a, Perennial Value Management noted.

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