Construction of portfolios at Escala is based on our Chief Investment Officer (CIO) team’s robust investment process, which includes continual engagement with all its fund managers to identify any Environmental, Social & Governance (ESG) issues with their underlying holdings and ensure there is no exposure to unacceptable activities such as tobacco, gaming, animal testing, and controversial weapons.

    While careful fund manager selection means transgressions are uncommon, our engagement and oversight revealed small holdings in tobacco and e-cigarette stocks had been added to the portfolios of two of our managed funds, their main reasons being valuation and wanting some defensive exposure.

    Having ongoing high-level engagement with the managers of the funds, our CIO, Tracey McNaughton immediately raised concerns that this did not fit with our firm’s ESG policy and sought a solution. The options came down to removal of the stocks or that some Escala clients would not be investing in the funds as tobacco does not align with the client’s values.

    Through our firm position on ESG and the strength of our good relationship with the managers, a mutual process of resolution of the issue saw the tobacco holdings being excluded from both funds.  Importantly, this exclusion is not only for Escala clients but for all investors in the Australian unit trusts of these managed funds; tobacco stocks are now an excluded investment from the respective manager’s portfolios.

    Tracey McNaughton says, ‘Our clients expect us to engage with fund managers on their behalf and to hold fund managers to a high ethical standard. We nurture our relationships with our fund managers with the aim of working in tandem with them for the betterment of our client portfolios’.

    This is in line with compelling evidence that ESG factors influence returns over the long term and should be taken into account when assessing risk and return opportunities. A robust ESG process will highlight risks that could lead to capital erosion in the future.

    We have curated a list of practices that we consider to be a best-in-class approach to ESG by fund managers. For instance, criteria include whether they are a signatory to an ESG charter or a member of the Principles for Responsible Investment network supported by the United Nations (PRI). We expect the managers to hold their underlying portfolio companies to the same standards.

    The goal of this vigilant approach by our CIO team is to align our clients’ ESG objectives with investments in companies that will create value long into the future.

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