Environmental, Social and Governance (ESG)

Responsible Investment Policy

Objective

1. Strengthen the risk/reward nature of our portfolios
2. Support the building of a sustainable economic and financial system
3. Adhere to the UN Principles of Responsible Investment (Ocean Dial became a signatory in April 2021)

Investment Approach & Integration of E.S.G Principles

We are long term investors and our approach is to identify companies that can deliver sustainable and profitable growth well into the future. We are focused on capital preservation and index benchmarks play no role in our stock selection process. Experience tell us that sound governance is an essential element of a company’s survivability and that detailed analysis beyond the financial data is required to understand the true characteristics of the business. Hence our research of the issues surrounding governance have long formed the major element of our process. This includes but is not limited to, conviction in the alignment of interest between the owners, managers and minority shareholders of a business, the nature and extent of the true independence of the Board and its specialist sub- committees, capital allocation and dividend policies, tax treatment, key man risk and succession planning. In short, we see ourselves as proportionate owners of a business.

Insomuch that governance plays a central role in our investment philosophy, we naturally veer away from certain sectors where practical issues of “getting business done” within India can undermine good governance. These sectors tend to be capital intensive, rely on multiple bureaucratic approvals for authorisation and are often cash flow negative. Hence we do not invest in commodities, energy production (coal, oil or natural gas) or mining or indeed companies in infrastructure sector where similar principles apply. We also choose to avoid industries that are considered harmful to the wellbeing of society not least because they are often on the wrong end of regulation and tax considerations that can create unforeseen financial uncertainty. These include tobacco and alcohol, as well as defence equipment manufacturers of all description.

We also recognise that Boards and their management teams are increasingly prioritising (to a greater or lesser degree) the environmental and social issues surrounding business. We give as equal importance to these additional non-financial elements of our analysis as we do to our financial modelling. We also recognise that India is at an earlier stage of evolution than its developed peers and currently lacks the oversight of a regulator, peer group pressure or indeed consumer activism to drive transformation. We believe that the responsibility is therefore on shareholders as good corporate citizens, to understand the extent to which generic issues around this subject are being addressed. These include but are not restricted to topics such as gender diversity, environmental impact on production, carbon footprint, work place health and local community engagement. We accept also that there is no exhaustive list of ESG questions and more importantly there will be specific topics relevant at a sub industry level that will require deeper analysis. A standard ESG “toolbox” approach to these matters can therefore miss the point. As such we find the support of a third party research specialist, whose work on specific companies is used to complement our own, helps us to understand issues in more detail and increases the probability of reaching the desired outcome. As our process and understanding of these subjects develops and as reporting standards and transparency improves, we may adapt our engagement with external research providers.

To conclude, ESG is not a style factor or an addition to our methodology. It is an inherent component of an evolving investment process that seeks to discover long term equity winners in the overall context of India’s risk-reward opportunity set.