Shareholder Rights Directive Disclosure
This document sets out the Shareholder Rights Directive Engagement Policy of Talomon Capital Limited (TCL/the Firm) which TCL is required to make publicly available under the FCA’s Conduct of Business Rules.
The engagement policy must describe how the firm integrates shareholder engagement in its investment strategy, how it monitors investee companies, conducts dialogue with them, exercises voting rights, cooperates with other shareholders, communicates with company stakeholders and manages actual and potential conflicts of interest.
TCL acts as a manager of alternative investment funds (which invest in equities subject to the requirements), and also as discretionary manager to the accounts of large financial institutions which invest in similar instruments.
The regulatory requirements, and this engagement policy, apply to investments in investee companies which are listed on recognised European Economic Area (EEA) exchanges and comparable markets outside the EEA (as defined by the Financial Conduct Authority).
This Engagement Policy is reviewed at least annually by the Firm and updated and revised where necessary to reflect changes to its engagement process or the regulatory requirements.
Interaction with the Environmental, Social and Governance investing principles
ESG (Environmental, Social and Governance) investing refers to a class of investing that is also known as “sustainable investing.” This is an umbrella term for investments that seek positive returns and long-term impact on society, environment and the performance of the business. There are several different categories of sustainable investing. They include impact investing, socially responsible investing (SRI), ESG and values-based investing. Another school of thought puts ESG under the umbrella term of SRI. Under SRI are ethical investing, ESG investing and impact investing.
ESG investing looks at “extra-financial” variables or factors. Responsible investors evaluate companies using ESG criteria as a framework to screen investments or to assess risks in investment decision-making. Environmental factors determine a company’s stewardship of environment and focus on waste and pollution, resource depletion, greenhouse gas emissions, deforestation, and climate change. Social factors look at how a company treats people and focuses on employee relations and diversity, working conditions, local communities, health and safety, and conflict. Governance factors analyse corporate policies and how a company is governed. They focus on tax strategy, executive remuneration, donations and political lobbying, corruption and bribery, and board diversity and structure.
ESG investing can take various forms. The S&P Dow Jones Index splits sustainability into two categories: ESG and green or low carbon. The ESG framework of investing tends to capture more factors, while green is more focused. Environmental factors include waste management, water management, environmental resource use, environmental disclosure, environmental impact, and reduction of pollution and emissions. Social factors include stakeholder analysis, workplace mentality, human rights, diversity community relationships, corporate citizenship, and philanthropy. Governance factors include board structure, management compensation, stakeholder impact, stakeholder rights and the relationship between management and stakeholders.
ESG also refers to environmental, social and governance issues that an investor may consider when making an investment. The following are examples of ESG issues:
Environmental risks created by business activities have actual or potential negative impact on air, land, water, ecosystems and human health. Company environmental activities considered ESG factors include managing resources and preventing pollution, reducing emissions and climate impact, and executing environmental reporting or disclosure. Environmental positive outcomes include avoiding or minimizing environmental liabilities, lowering costs and increasing profitability through energy and other efficiencies, and reducing regulatory, litigation and reputational risk.
Social risks refer to the impact that companies can have on society. They are addressed by company social activities such as promoting health and safety, encouraging labour-management relations, protecting human rights and focusing on product integrity. Social positive outcomes include increasing productivity and morale, reducing turnover and absenteeism, and improving brand loyalty.
Governance risks concern the way companies are run. It addresses areas such as corporate brand independence and diversity, corporate risk management and excessive executive compensation, through company governance activities such as increasing diversity and accountability of the board, protecting shareholders and their rights, and reporting and disclosing information. Governance positive outcomes include aligning interests of shareowners and management while avoiding unpleasant financial surprises.
TCL has a detailed statement of its approach to ESG compliance which can be found here.
How TCL integrates shareholder engagement into its investment strategy
TCL operates equity long only and equity long/short strategies based upon detailed fundamental research, which take long-term positions in companies based on a view of their long-term prospects to deliver growth. The Firm believes that the ESG Principles are a key driver of long-term shareholder value and reflect the Firm’s belief that the most successful companies behave in an ethical and sustainable manner.
The Firm manages relatively concentrated portfolios and trades relatively infrequently, either to acquire or dispose of a position, to help to meet fund subscriptions or redemptions, to rebalance the overall risk of the portfolio, or to reflect changes in the performance of a company that might have an impact on the original investment thesis under which investment was undertaken.
Focus on companies with market capitalisation typically between €500m and €10bn
Concentration best ideas portfolio: 2-5 year view investment horizon
The ESG approach of the Firm is as follows:
Undertake ESG due diligence for all our investments;
Document the findings on ESG-related issues for consideration in our investment decision-making;
Monitor investments closely and address any surfacing ESG issues directly with the company’s board and management and engage where relevant; and
Flags / identified ESG issues are considered material investment risks and significantly decrease the likelihood of Talomon investing in a company on a long basis.
How TCL monitors investee companies
Set out below is a description of the various aspects of investee company activities and how TCL monitors these as part of its engagement strategy.
In general, TCL takes a number of approaches to monitoring investee companies. These are, primarily:
Direct engagement with senior management of the company;
Engagement with other institutional shareholders in the company;
Internal analysis by TCL’s researchers;
Analysis and opinion from external experts, either sourced from external “expert networks” or from TCL’s advisory partners who are senior industry figures with a wealth of commercial experience and in-depth sectoral knowledge.
TCL takes a 2-5 year view on every company in which it invests
Financial and non-financial performance and risk
Social and environmental impact and corporate governance
Inclusion, diversity and equality are becoming more important considerations in relation to the way in which businesses operate and can generate competitive advantage; with these areas attracting increasing scrutiny from a range of stakeholders. In particular, there are increasing commercial benefits for businesses which have inclusive and diverse work ethics and practices; and we look at the impact a company has on its employees, local communities and society. Key themes we assess include, but are not limited, to:
Employee training and satisfaction
Sustainable, traceable and ethical supply chain
Health and safety
Affordability and access
The depletion of natural resources and the threat of climate change have raised concerns about the environment and the potential financial impact on businesses. Sustainable options are increasingly being considered as part of investment choices. Key themes we assess include, but are not limited, to:
Corporate governance covers the rights and responsibilities of the management of a company – its structures, corporate values and accountability processes. Key themes we assess include, but are not limited, to:
Board: structure, diversity and effectiveness
Bribery and corruption
Political lobbying and donations
How TCL conducts dialogues with investee companies
Our engagement with companies may take various forms dependant on the situation. We may engage via letters, emails, in-person or virtual meetings, and site visits, among other options. Depending on the topic, we will look to engage with board representatives, chairman, CEO, or IR managers. We may look to engage as Talomon Capital Limited or via a collaborative engagement – our approach will be considered on a case by case basis.
How TCL exercises voting rights and other rights attached to shares
TCL will generally exercise its voting rights in a manner which is consistent with its investment stance on the investee company and the application of the ESG Principles to which it subscribes. TCL will publish its voting record annually on its website.
There are a variety of ESG factors that are considered when making voting decisions. Such factors will be reviewed together with our wider internal investment work. It is important for us to refer to relevant corporate governance guidelines (i.e. ICGN guidelines, OECD Principles of Corporate Governance etc.).
Voting decisions are made internally by the investment team based on our internal investment work, and without the use of proxy voting advisors. The Chief Compliance Officer/Chief Operating Officer then ensures voting decisions are conducted as instructed in line with the Proxy Voting policy.
Voting is conducted via proxy. We reserve the option to engage with the company prior to or following the vote being cast. We reserve the right to recall all securities for voting on all ballot items.
All voting activities are documented internally. Our voting activities are then noted in our ESG transparency reporting which is completed biannually and available on request.
TCL is not required to disclose its voting record where the matter is insignificant due to its:
The size of the holding
For (a) above, this would mean normal, uncontested administrative votes (e.g. the annual accounts) unless there are exceptional circumstances where there is a meaningful challenge to the process (e.g. credible shareholders alleging mis-statement of the accounts). It would NOT mean the approval of Board appointments or remuneration which are key to any credible ESG investing strategy.
For (b) above, the Firm only considers its holding to be significant where alone, or in concert with one or more other shareholders, it holds an amount of shares at least equivalent to the first disclosable shareholding threshold for the jurisdiction/exchange on which the company is listed. This means that, due to differences in local regulations, what might be deemed significant in one jurisdiction might not be considered significant in another.
How TCL cooperates with other shareholders
TCL is open to co-operation with other shareholders in investee companies where
How TCL communicates with relevant stakeholders of the investee companies
How TCL manages actual and potential conflicts of interests in relation to the firm’s engagement.
TCL has a robust internal conflict of interest policy, including a regularly updated register of conflicts of interest. In line with the FCA’s Principle 8 for the management of conflicts, the Firm has processes
TCL requires its staff, contractors and advisers to disclose all business interests and attest to them regularly as well as declaring any new conflicts as they arise.
In particular, the Firm operates a very strict policy which prevents staff from taking positions in equity instruments (or any instruments that derive their price from these instruments). Staff are only permitted to exit existing positions subject to the prior written approval of the Firm’s Compliance Officer.
The Firm also operates a Restricted List policy which is managed by the Compliance Officer and this prevents the Firm from investing in companies where, in the determination of the Compliance Officer, there is a conflict of interest.
The Firm has strict controls around the handling of company sensitive data and the use of industry experts and expert networks which is carefully and extensively monitored. The Firm uses external consultants to advise on its control framework and conduct third-party testing on the effectiveness of controls.
TCL operates a comprehensive ongoing training programme for staff in respect of conflicts of interest, financial crime, insider dealing, bribery and tax evasion offences, gifts and inducements and other business interests.
TCL will make an annual disclosure of all relevant matters in a statement which will be freely available on its website.
For further information on TCL’s approach to the exercise of shareholder rights, please contact [INSERT CONTACT DETAILS]
Appendix 1 – Shareholder Rights Directive Institutional Investors (SRD Institutional Investors)
On an annual basis TCL will disclose to any SRD Institutional Investor as to how its investment strategy and the implementation of it:
(a) complies with the arrangement rules; and
(b) contributes to the medium- to long-term performance of the assets of the SRD institutional investor or of the fund.
The disclosure will include reporting on:
(a) the key material medium- to long-term risks associated with the investments;
(b) portfolio composition;
(c) turnover and turnover costs;
(d) the use of proxy advisors for the purpose of engagement activities;
(e) the firm’s policy on securities lending and how that policy is applied to supports the firm’s engagement activities if applicable, particularly at the time of the general meeting of the investee companies;
(f) whether and, if so, how, the firm makes investment decisions based on evaluation of medium- to long-term performance of an investee company, including non-financial performance; and
(g) whether and, if so, which conflicts of interests have arisen in connection with engagement activities and how the firm has dealt with these conflicts.