ESG at Velox - The responsibility to be better
The Velox team believe that, for any company to deliver long-term, sustainable value creation, it needs to consider all stakeholders - including regulators, shareholders, employees, partners, clients, suppliers, the environment and the local community. Simply put, to be as focused on its business practices as on its financial performance.
We trust that the integration of ESG factors within the organisation and investment strategy allow us to better handle risks and opportunities, and that sustainable business practices drive long-term value creation in much the same way as revenues or costs. As such, we have a specific responsibility to act in the interests of these stakeholders. Since late 2018 we have been working diligently on delivering our responsibility to these practices through ESG Integration and ESG Exclusions strategies.
Implementation started in June 2019, cementing our journey through our Mission Statement, Core Values and Commitments. This includes having programmes in place to address diversity, having a robust and fully transparent investment process, having solid policies in place to ensure the health and safety of employees, and divesting capital away from industries we deem unethical.
2020 - ESG IS INTEGRATED INTO OUR EXISTING INVESTMENT PROCESS
Our core investment process revolves around integrating technicals, fundamentals, sentiment and catalysts in order to identify repeatable patterns of market behaviour within a controlled environment of risk disciplines. From the start of 2020 we integrated ESG as an additional layer of information and insight.
We have created a bespoke Traffic Light System consisting of industry specific material risk factors, which is integrated across the entire investment process, including research notes. Accessibility to data is maximised through our proprietary app, ViA, which analyses and exhibits the material ESG risks of companies.
WHAT ARE WE EXCLUDING?
In addition to our integration efforts, as stewards of capital we have a duty to direct capital to companies that are good corporate citizens. We exclude long investments in all of the industries below as we deem them unethical. In certain industries where we feel short interest can encourage better practices, we allow shorting.
CLIMATE CHANGE: we tackle climate change by turning its focus to Coal, Nuclear Power and Palm Oil.
OTHER EXCLUSIONS: Gambling (shorts permitted), Tobacco, Cannabis, Weapons, Adult Entertainment and Predatory Lending (shorts permitted).
THE TRAFFIC LIGHT SYSTEM EXPLAINED
This is the backbone of our ESG investment process. Working in tandem with the current investment process, it gives our investment team another layer of information to mitigate risks arising from ESG on any potential holding by assigning Red, Green and Amber flags to all companies in the investment universe.
RED: more than half of material key issues rank in the bottom quartile. Longs prohibited.
AMBER: securities neither Red nor Green fall into this category. Research analysts are mandated to consider any risks associated with material ESG issues.
GREEN: no material key issues rank in the bottom quartile and at least 3/4 of key issues in the top 2 quartiles.
WHAT ELSE ARE WE DOING?
We strongly believe in the importance of active engagement, which we implement predominately through our Core strategies. By engaging in dialogue with companies on their business practices, we enhance our understanding of a company’s exposure to key ESG risks and opportunities, providing us with an additional layer of insight that feeds into our investment decision making.
We follow the SASB framework to direct companies to provide standardised, industry-specific, and materiality-based disclosures as we believe that in order to better evaluate ESG related risks and opportunities within our investment universe, more complete and reliable information is necessary. These efforts help us direct capital to influence more sustainable business practices.
We are committed to providing timely and relevant communication and reporting of its ESG integration efforts both externally (e.g. to key stakeholders such as clients) as well as internally (e.g. to teams, committees and management).
We support international initiatives and guidelines to promote and support sustainable enterprises. We have adopted the UN’s Principles for Responsible Investments (PRI). Together with the Velox team’s Core Values and Commitments, such international initiatives, standards and guidelines are an important foundation for the integration of ESG principles through the organisation and investment process.
IMPORTANT NOTE: The Velox Fund is a sub-fund of the Melchior Selected Trust, a Luxembourg domiciled UCITS. As securities are not physically held by the Fund it cannot partake in proxy voting.
A KEY QUESTION - WHAT ARE WE AIMING TO ACHIEVE FOR THE VELOX STRATEGY?
In short, to maximise risk adjusted returns. Our Traffic Light System has been designed to capture ESG related risks that have a material impact on price performance. Whilst we did not have the Traffic Light System integrated in 2018 and 2019, our analysis shows us that during these periods the Reds in our investment universe were the most volatile. Removing these displayed a downward shift on portfolio volatility. With our next steps we hope to identify alpha opportunities coming from the shift in capital towards sustainable investment.
We believe that these are exciting times for the Velox strategy.