2023 Responsible Investing Update

Introduction

As we encourage companies to enhance their transparency, we work to do the same. We are pleased to share our first iteration of the Responsible Investment (RI) report for our Sustainable Global Emerging Markets Equity Fund (Sustainable GEM), which will review our progress and initiatives from our RI efforts pertaining to the strategy over the last year. This report includes highlights from our stewardship, engagement, and integration activities as they relate to financially material ESG issues.

This past year, financial market participants have observed more scrutiny regarding the relevance and efficacy of ESG factors. As a result, certain jurisdictions are restricting the consideration of ESG factors in investment decisions. At the same time, we note various regulators moving forward with requirements and rules focused on enhancing disclosure from both investors and public issuers.

As an asset manager, we take our fiduciary responsibility seriously, evidenced through our fundamental stock selection and comprehensive RI approach. At NS Partners, we believe that ESG factors can have a material impact on investment performance and present both unique risks and opportunities for our investee companies. As such ESG factors that are financially material are considered, alongside traditional financial factors, as part of our bottom-up research and stock selection. Given our stance, NS Partners considers itself well positioned to navigate the changing regulatory landscape and other developments relevant to our business.

Collaboration

International Corporate Governance Network

As an affiliate of CC&L Financial Group, NS Partners is a member of the International Corporate Governance Network (ICGN).  In June 2023, the ICGN submitted a feedback letter to the Chair and Vice-Chair of the International Sustainability Standards Board (ISSB), supporting the development of globally aligned sustainability-related disclosures, built upon the TCFD recommendations and the SASB standards. NS Partners supported this letter and welcomed the ISSB’s publication of the IFRS S1 and IFRS S2 standards which are designed to help users understand the governance processes, controls, and procedures an entity uses to monitor, manage, and oversee sustainability-related risks and opportunities.

In supporting the ICGN’s letter to the ISSB, NS Partners holds the view that verifiable and reliable corporate sustainability disclosures are needed to make informed stewardship and investment decisions. NS Partners shares the ICGN’s belief that IFRS1 and IFRS S2 should be endorsed by the International Organization of Securities Commission Organizations (IOSCO) and that regulatory authorities should adopt the ISSB standards to contribute to greater reporting transparency and management of sustainability risks and opportunities.

Climate Change

At NS Partners we recognize that climate change can present risks and opportunities that can have material financial impacts on companies in which we invest. Governments globally have enacted legislation to reduce greenhouse gas emissions, have increased investment in energy security and energy transition programs, and established climate reporting obligations for issuers. Companies are recognizing the new investment opportunities associated with climate change as regulations and incentives increasingly reward those that are driving greater energy efficiency, investing in renewable energy sources, sustainable infrastructure, and circularity. At NS Partners, we believe that all else equal, better governance and action with respect to mitigating exposure to climate risk may result in improved financial outcomes for corporates.

Carbon Footprint Reports

In addition to NS Partners ESG integration process, the Sustainable GEM fund excludes companies that derive a meaningful portion of revenue from fossil fuel investments, among other screens for issuers with high externalities or social costs.

Chart 1: Portfolio vs Benchmark Carbon Intensity

*Source: ISS for the reporting period 10/01/2022 to 09/30/2023.

Chart 2: Portfolio vs Benchmark Weighted Average Carbon Intensity

*Source: ISS for the reporting period 10/01/2022 to 09/30/2023.

In addition to the fund’s overall lower carbon footprint, the Sustainable GEM fund has lower emissions versus the benchmark in every sector. This is shown in the chart below by the positive issuer selection effects across all sectors in Q3 2023. Similarly positive selection effects across most sectors were also seen over the previous three quarters.

Chart 3: Issuer Selection Effect by Sector for Q3 2023

*Source: ISS for the reporting period 10/01/2022 to 09/30/2023.

Proxy Voting

At NS Partners, our proxy voting decisions are guided by our customized proxy voting policy. We continue to use our voting rights as a means to escalate concerns with companies’ approach to ESG, among other issues. We seek to vote proxies in a manner that enhances shareholder value on behalf of our clients.

As part of our governance approach, NS Partners’ proxy voting policy is reviewed annually and was recently updated in April 2023 to enhance disclosure regarding our approach to voting on environmental and social shareholder resolutions.

Over the past year, the fund voted at 86 company meetings, voting against management on 16% of the 729 proposals we were eligible to vote on, as seen in Chart 4.

Chart 4: Total Proxy Votes

*Source: ISS for the reporting period 10/01/2022 to 09/30/2023.

Details regarding the breakdown of votes against management are summarized in the table below.

Table 1: Proxy Votes Against Management

*Source: ISS for the reporting period 10/01/2022 to 09/30/2023.

As seen in Table 1, of the proposals we were entitled to vote over the last year, nearly 100% of the proposals were governance related.

Proxy Engagement Examples

Sona BLW Precision Forgings Ltd

In July 2023, the automotive systems manufacturer had an AGM proposal that requested shareholders to approve the grant of stock options to the eligible employees of the company’s subsidiary or its associate company in India or outside India. Our proxy voting policy flagged the proposal and recommended a vote against management. NS Partners noted some concerns surrounding the lack of a compelling rationale to approve the grant of stock options to the employees of the associate companies.  We believe that non-executive director remuneration should be structured in a way that ensures independence, objectivity, and an alignment with the interests of shareholders. As such, stock options are considered to encourage excessive risk-taking and can impair objectivity of directors. With that in mind, we elected to vote against the proposal.

HDFC Bank Ltd

In August 2023, we engaged with HDFC Bank Ltd on the topic of electing Keki Mistry as Director due to concerns with his over boarding. The company shared that Mistry sits on five other boards outside of HDFC Bank’s board in a non-executive capacity.  Our proxy voting policy dictates that a director is considered over-boarded if they sit on more than a total of five public company boards. Thus, we elected to vote against Mistry’s election.

Bharti Airtel Limited

In August 2023, we engaged with Bharti Airtel Limited to discuss the company’s remuneration plan for Chair Mr. Mittal.  Our proxy voting policy recommended a vote against management due to the company’s lack of disclosure, particularly the failure to clarify whether his remuneration would have a monetary cap and if it would be paid from overseas subsidiaries.  The company shared that the chairman had been instrumental in guiding domestic and overseas business, and while he had seen his responsibilities and duties enhanced, his remuneration had remained the same. However, NS Partners noted a lack of disclosure around the threshold and performance target level required for Mr. Mittal to achieve payouts.   Governance practices often advocate that disclosure and achievement of performance targets should be made retrospectively. In addition to this, we expressed concerns on the practice of paying remuneration through subsidiaries and group companies, as this can lead to an evasion of shareholder approval requirements. Taking all these concerns into consideration, we elected to vote against the proposed remuneration plan for Mr. Mittal.

Indiabulls Real Estate Limited

In September 2023, we engaged with Indiabulls Real Estate Limited to discuss the re-appointment of Mr. Shah, as there were concerns surrounding his role as an insider nominee sitting on a key committee.  Our proxy voting policy generally advocates to vote against non-independent directors sitting on key committees. However, the company explained that Mr. Shah had been appointed in early February of this year and thus his removal from the board could have material negative impact on shareholder value. Given the company’s response and taking into consideration Shah’s short tenure and stated value to the company, we elected to vote in line with management. Nonetheless, we noted to monitor progress in the next year and encouraged the company to consider implementing an audit committee comprised of only independent directors.

Engagement Examples

Mindray

In May 2023, we engaged with Investor Relations at Mindray on the topic of their Russian exposure, which contributed to approximately 3% of FY22 revenue, and other ESG matters. The company shared that they have no plans to cease supplies to Russia, given the nature of their products, which include patient monitoring devices and other medical equipment. We believe this is a humanitarian issue and should not have a negative ESG impact. On the topic of MSCI’s ESG rating of Mindray, the company mentioned that they had not been engaged by MSCI and noted that they had no Chinese-speaking analysts who could carry out in-depth company-specific analysis, and as such, were only able to formulate a rating by reviewing their translated Annual Report. Mindray has since actively reached out to MSCI and improved its ESG disclosure, leading to an upgrade from BB to AA in June, the highest rating among A-share listed companies.

Hyundai

NS Partners has engaged with the Hyundai group management on several occasions to push for some solutions and/or improvements in their circular holding structure. For legacy reasons, a circular holding structure is in place for KIA, Hyundai and Mobis. Whilst this has enabled the auto original equipment manufacturer, Hyundai, and KIA, to secure auto parts supply, NS Partners noted concerns from a good governance perspective regarding the crossholding structure. In Q2, we met in person with management from all three companies during their roadshow. At each meeting, we asked questions regarding the cross-holding structure and expressed our concerns, requesting that management accelerate resolutions on this issue. Management acknowledged investors’ concerns and shared that they are working towards solutions.

TSMC

In March 2023, we engaged with TSMC on our field trip to Taiwan. One of the topics discussed during the meeting was the company’s water use. TSMC shared that they have targets to reduce unit water consumption by 30% versus their 2010 baseline but have not yet set short-term targets. On the topic of emissions, the company is actively engaging with the Taiwanese government to increase their use of renewable energy sources. The company shared that by 2030, their renewable energy mix should rise from 25% to 40%. Additionally, TSMC shared progress at their new plant in Arizona, where they are undertaking due diligence on the resource usage and engaging with the local state to ensure access to sustainable water supply over the next 5 years. TSMC shared that they are confident in their ability to achieve neutral water discharge status.

Governance Summary

As advocates for good corporate governance, we continue to monitor various governance metrics and performance of our investee companies. Here we look at the progression in female representation on Boards, average Board independence, and the proportion of companies with separate CEO and Chair roles.

Average female representation on boards of companies in the Sustainable GEM fund saw no growth from 2021 to 2023. However, there was significant progression in both the percentage of independent directors and percentage with a separate chairman and CEO.

Chart 5: Board Statistics over Time

Source: MSCI as of 09/30/2023.

MSCI ESG Ratings

An analysis of our SGEM portfolio based on MSCI ESG ratings suggests scoring of representative mandate across all rating categories is better than its respective benchmark.  In addition, the proportion of ‘ESG Leaders’ in our representative portfolio is higher than that of its respective benchmark.

Chart 6: Weighted Average ESG Score

*Source: MSCI Data for the reporting period 10/01/2022 to 09/30/2023.

Chart 7: ESG Ratings Distribution

*Source: MSCI Data for the reporting period 10/01/2022 to 09/30/2023.