As long-term investors, we are focused on identifying companies that are intelligently driving sustainable outcomes.

The pursuit of immediate gains through short-sighted business plans and reckless conduct, or the exploitation of labour, tax loopholes or the environment, is the opposite to our definition of quality.

Since 1988

Since the team was established in 1988, we have been consistent in our belief that the integration of environmental, social, governance (ESG) and sustainability factors into the investment process is essential. We consider it to be careful, far-sighted risk management and a fundamental part of our obligations to clients. As a firm, we have been signatories to the Principles of Responsible Investment (PRI) since 2007 (we view it as a minimum standard).  

Stewardship1

We shaped our approach to responsible investing with an emphasis on stewardship. In addition, we believe that having good managers and leaders in place is the best way for these companies to address the environmental and social concerns they face – it is a part of good governance. We recognise that our investment activities can have an impact on society and the environment. That said, we realise it is a complex subject and there is no single approach or path that investors or companies must take – rather, it is the direction of travel that is more important.

Team approach

At FSSA we believe it is everyone’s responsibility to think about ESG issues during daily decision-making and interactions with company management. Just as we wouldn’t outsource or confine our analysis of the quality of a company’s accounts to a team of accountants, we believe there is no reason to separate the ESG and sustainability elements from our research process. These issues are intertwined and a complete assessment of quality is necessary.

The use of investor rights and influence to protect and enhance overall long-term value for clients and beneficiaries, including the common economic, social and environmental assets on which their interests depend.

 

Investment Insights

Stewardship and ESG integration

A key part of our approach is to seek founders and management teams with high governance standards who look after the interests of smaller shareholders. These are businesses that have the ability to deliver sustainable and predictable returns on their investment even in a poor economic climate.

In practice:

Every member of our team looks at ESG matters when researching companies and assessing its quality. We meet with companies and their management teams regularly, and consider each meeting an opportunity to improve our understanding of their business and sustainability objectives. By evaluating ESG factors, we can assess what might improve or even destroy the reasons for investing in a particular business. With this information, we aim to improve the quality of our research, strengthen relationships with the management and improve the positioning of our companies. We believe that a company’s direction of travel is most important, and thus we closely track the management team’s response to ESG concerns. 

Climate change and environment

Climate change is a key consideration in FSSA’s investment process. We accept the evidence of climate change and the need to reduce greenhouse gas emissions globally. We consider it our duty to assess the related risks and opportunities in our investment decision-making and ownership practices, and look to invest in companies that are actively taking steps to reduce the impacts of climate change.

In practice:

As shareholders of quick-service and fast casual restaurants, we are concerned about the environmental impacts of how they source their products and deliver it to the customer. We look at sourcing standards as well as the level of greenhouse gas emissions produced. We actively engaged on these risks and have seen improvements through adopting RSPO-certified palm oil (RSPO is a global certification system for sustainable palm oil), environmental risk management databases, water reduction projects and procurement contracts that prioritise the environment. For companies with complex supply chains, we encourage them to track and disclose emissions from their suppliers (scope 3 emissions²) as well as within their own business, as this is a crucial step in identifying and tackling climate-related risks.

² Scope 3 emissions is an optional reporting category that allows for the treatment of all other indirect emissions. Scope 3 emissions are a consequence of the activities and operation of the reporting company within its value chain.

Social

A company’s social licence to operate is an important part of our quality-focused investment process. This means we only invest in companies where we believe the management team operates the business effectively and in the interest of all its stakeholders, including its customers, employees, suppliers and the larger community. A company that does not weigh stakeholder interests as highly as its own, in our view, will not be rewarding for long-term investors.

In practice:

Social considerations are a complex and broad set of issues we engage with businesses on, ranging from data privacy to workplace diversity at the board, management and employee level. Gender equality is also a vital topic that we frequently discuss with companies, and as we express the benefits and share international standards, we have been impressed by the willingness and progress of companies in our investment portfolios in promoting gender equality in their businesses. Addiction to certain products and services is another area of focus and has recently received more attention. Companies that are proactive in addressing upcoming regulatory and consumer changes benefit from those developments.

Corporate governance³

We recognise that as a long-term shareholder, we are in a position to influence the ESG performance of companies via constructive discussions with management teams and boards of directors, and by voting on resolutions that companies propose to their shareholders.

In practice:

An essential part of understanding corporate governance is our ability to assess the quality of management through frequent company meetings. These conversations also reveal details of shareholders’ rights, levels of transparency and disclosure of information provided by the company, their relationship with key related parties, such as company insiders, affiliates or business partners, the effectiveness of oversight mechanisms, such as board composition, independent directors and audit committees, and various other aspects. We believe voting on company resolutions is an important investor right and should be exercised in the best interest of our clients at the time of voting. Where we disagree with a proposal by a company, we first aim to resolve our concerns through constructive conversations with the management team and cast negative votes only as a secondary or last step in our process of engaging with the company. This approach tends to result in a low number of votes against management and means that we can build good relationships with the high-quality companies in our investment portfolios.

³ Deals with a company’s leadership, executive pay, internal controls and shareholder rights.

Exclusions

We expect the companies we invest in to contribute positively to society and take the necessary steps to protect the environment, as determined through our quality criteria process. We use the following to guide us:

  • Support and uphold fundamental principles of human rights. These are rights belonging to all human beings, regardless of race, sex, nationality, ethnicity, language, religion or any other status,
  • Support international norms and standards in widely adopted treaties, conventions and codes of practice, and
  • Uphold the highest standards of environmental stewardship

Our process naturally excludes a number of industries, either in their entirety, or partially, where we apply thresholds on the level of investment in that industry. Applying thresholds enables us to engage with the company on the less sustainable parts of their business as long as we are confident in their ability to improve and we believe their business model is fundamentally purposeful.

Please see our Exclusion Policy for more details.

In practice:

Some companies benefit in times of crises – such as personal protective equipment (PPE) suppliers during the Covid-19 pandemic. While these necessary products have positive impacts on society, a look at the supply chains for PPE products revealed concerning practices linked to modern slavery, a human rights violation that has severe consequences for the health and wellbeing of its victims. Besides communicating our concerns, we often share global best practices, resources and examples of companies that have shown improvement. We check on a company’s progress to ensure that any concerns have been resolved and communicate when more should be done.

Case study: 

Protecting minority interests and assessing modern slavery risks

Century Pacific Food operates market-leading canned food and dairy product brands in the Philippines. Since its listing in 2014 we observed that its majority shareholders, the Po family, were managing the business with high governance standards and had hired experienced professional managers from PepsiCo, Unilever and Procter & Gamble to run the company’s operations. Our conviction in the chairman’s efforts to build a stronger and more sustainable franchise has grown over time.

In recent years the company formalised its sustainability strategy focused on “Protein, Planet and People”. Its new products included affordable milk products fortified with immunity boosters and plant-based meat alternatives, which have helped the company gain market share 

in these categories. Additionally, Century Pacific was among the first corporates in the Philippines to achieve plastic neutrality and has consistently increased its use of renewable energy sources.4

In 2021 the company’s management contacted us for feedback after it acquired a refrigerated food products business previously owned privately by the Po family. Being a related-party transaction, our engagement focused on the deal’s strategic merit and valuation, and its impact on our alignment with the majority shareholders.

After several discussions with the management, we were reassured that the acquisition would be beneficial to the group. The acquired company provided entry into the under-penetrated and fast-growing refrigerated food category and its product portfolio was expected to improve Century Pacific’s profitability significantly. We thought the valuation of 1x price-to-book represented an attractive price for the business.

Throughout the process, it was clear that the interests of minority shareholders were being protected and we appreciated the management’s proactive engagement with stakeholders. The experience was encouraging and led us to believe that the management would be constructive towards other areas of engagement.

As such, when recent conversations with NGOs and experts on modern slavery risks in Asia revealed the magnitude of the issue in the fisheries industry, to which Century Pacific is heavily exposed, we felt able to voice our concerns. Specifically, its reliance on migrant workers and contractual labour, short lead times and low wages could provide scope for worker exploitation.

We wrote a letter to the chairman and made recommendations related to global best practices, such as establishing a grievance mechanism to improve working conditions, and training its supply chain members to prevent malpractices. We were again encouraged by the company’s receptive feedback to our letter and willingness to learn about potential solutions.

We plan to reengage with the procurement director and investor relations team on developments from these topic-expert introductions, in particular to check its progress on developing internal grievance mechanisms and its plans for additional auditing and disclosure.

Our discussions with Century Pacific’s management have consistently shown their intent to uphold high standards of governance as well as their efforts to improve the company’s environmental and social footprint. In turn, this has increased our conviction in the management’s ability to address the challenges and opportunities the company will likely face over the long term.

https://centurypacific.com.ph/century-pacific-brands-now-certified-plastic-neutral/