A key component of the investment process employed by our team is our proprietary and dynamic ESG scoring system, which is applied to all companies under coverage. This added layer of input and discussion improves our analysts’ financial modelling and influences their stock recommendation, both of which determine the portfolio’s weight.
A key characteristic of our ESG scoring system is that each component (Environment, Social and Governance) is equal-weighted when determining a company’s final score. Gender diversity and board independence are two of the quantitative inputs used in the Governance formula, as below.
To achieve the maximum score for board diversity, female representation on a company’s board must be between 40-70%. An upper limit is included to ensure boards hold equal representation of both genders.
Out of all the companies covered in our proprietary ESG scoring system, just under 22% have already achieved the 40% board diversity objective, with an increasing number making commitments to achieve this as soon as possible.
Comparing our flagship fund, the Wholesale Australian Share Fund, against the investment universe reinforces our stance on gender equality and highlights the progress made to date. Results from our scoring system show that the portfolio has a higher skew to companies with diverse management teams, as we believe it leads to improved decision-making and better outcomes for shareholders.
Percentage of companies with at least 40% gender representation
Source: First Sentier Investors
However, advocating for gender diversity isn’t as simple as only investing in companies with acceptable board structures. Our policy on ESG is “engagement ahead of exclusion”, meaning we don’t ignore companies and opportunities simply because they don’t have the perfect board structure. We are open-minded about investing in “low scoring” companies, assuming our fundamental analysis indicates that an attractive investment opportunity exists and the company has a willingness to actively engage. Positive change will only occur through engagement.
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