Henderson International Income | ESG

The board believes that integrating environmental, social and governance factors or “ESG” into investment decision-making and ownership practices is an important factor for delivering the investment outcomes shareholders seek. ESG considerations are an embedded component of the investment process employed by the fund manager, and the wider Janus Henderson investment teams. The Company integrates ESG but does not pursue a sustainable investment objective or otherwise take ESG factors into account in a binding manner. ESG integration is the practice of incorporating material environmental/social and governance information or insights in a non-binding manner alongside traditional measures into the investment decision process to improve long-term financial outcomes of portfolios. ESG related research is one of many factors considered within the investment process.

ESG considerations are a component of the investment process employed by the fund manager. The precise approach to and depth of ESG integration is down to the discretion and judgement of the investment team, who apply their differentiated perspectives, insight and experience to identify business practices that can generate long-term value for investors. While the evaluation of Janus Henderson’s implementation of ESG criteria is carried out at the strategy level, their central Responsibility team supports the investment team in their ESG integration with data, tools, stewardship, and ESG research. Integrating financially material ESG factors is instrumental to fulfilling the firm’s fiduciary duty. By integrating these financially material ESG considerations into their investment decisions and stewardship processes it allows the investment team to better manage these risks to achieve the best outcomes for investors.

When employing fundamental security analysis, the investment team takes a long-term view, seeking to identify companies differentiated by their sustainable competitive advantage, strong earnings potential and shareholder friendly management teams. Resilience of business models is crucial to the Company’s investment strategy. As such, a considerable amount of time is spent by the fund managers identifying fundamental factors, including financial material ESG factors, which may impact profits, cash flow and dividends and ensuring that investee companies have robust policies and processes in place to manage these. Janus Henderson leverages its deep history with fundamental research to approach integration in a thoughtful, practical, research-driven and forward-looking manner. The primary aim of this analysis is to improve the risk adjusted returns of the portfolio. It is worth noting that the portfolio is global in its nature and as a result level of disclosure and attitudes to environmental and social factors can vary depending on the sector and the region in which a company operates. Nonetheless, each material ESG factor, in addition to the quantitative and qualitative assessments, is an important consideration when evaluating the opportunity and the portfolio’s investments.

The analysis of ESG factors before investments are made can lead to certain stocks or sectors being excluded or not invested in. Material ESG factors can also lead to the disposal of positions where the investment team believes that the risks have increased.

The investment team seeks to understand how investee companies are managing material ESG risks and opportunities through their policies and processes, and where their investments are targeted to evolve their business models to remain sustainable over the long term. 

Janus Henderson engages actively with companies and their management teams and uses a variety of sources to help identify and monitor material ESG risks and opportunities, including research from their fund managers, analysts, and input from the Janus Henderson responsible investment and governance  team and third-party data providers. The manager is also able to benefit from Janus Henderson’s new ESG data tool, ESG Explore. In addition, the fund manager is able to engage MSCI, a leading firm researching and rating ESG factors globally, to support investment research.

Companies with weaker ESG risk profiles are not automatically excluded from the portfolio provided they are making progress in mitigating these risks. These companies can be good investments if they can address the ESG issues they face, and often low ESG ratings can relate to historic issues that have been remedied. The team does avoid or disinvest from companies where the ESG risk is material and where the company is not willing or able to mitigate these risks, and hence remains on a deteriorating trajectory.

Stewardship is a fundamental part of the investment team’s long-term, active approach to investment management. Strong ownership practices, including engagement with management and boards, can help protect and enhance long-term shareholder value. Janus Henderson supports the UK Stewardship Code. Additionally, Janus Henderson is a supporter of a number of broader ESG initiatives such as the Access to Medicine Index which aims to improve availability of health care in developed and emerging markets and Climate Action 100+, an investor-led initiative to engage with heavily emitting companies to reduce their greenhouse gas emissions.

As a part of the research process portfolio managers and analysts meet frequently with company management, senior executives and boards, with Janus Henderson conducting thousands of meetings per year. These meetings typically occur prior to initiating a position and throughout the holding period. The portfolio managers naturally develop long-term relationships with the management of firms in which they invest. Should concerns arise over a firm’s practices or performance, they would seek to leverage these constructive relationships by engaging with company management or express their views through voting on management or shareholder proposals. Escalation of engagement activities depends upon a company’s individual circumstances.

The board believes that voting at general meetings is an important aspect of corporate stewardship, and a means of signalling shareholder views on board policy, practices and performance. Responsibility for voting the rights attached to the shares held in the Company’s portfolio has been delegated to the manager, who actively votes at shareholder meetings and engages with companies as part of the voting process. 

Key voting decisions are made by the portfolio managers, with support provided by in-house corporate governance specialists. Janus Henderson has a Proxy Voting Committee, which is responsible for establishing positions on major voting issues and creating guidelines to oversee the voting process. The Committee is comprised of representatives with experience in investment portfolio management, corporate governance, accounting, legal, and compliance. Public links to the voting records are available on company websites in applicable jurisdictions. Janus Henderson’s Proxy Voting Policy is available on the manager’s website.

To retain oversight of the process, the directors regularly receive reports on how the manager has voted the shares held in the Company’s portfolio, and they review the ESG Investment Principles at least annually.

As an active manager, Janus Henderson’s preference is to engage with management and boards to resolve issues of concern rather than to vote against shareholder meeting proposals. In their experience, this approach is more likely to be effective in influencing company behaviour. They therefore actively seek to engage with companies throughout the year and in the build up to the annual shareholder meeting to discuss any potentially controversial agenda items. However, where they believe proposals are not in shareholders’ interests or where engagement proves unsuccessful, they will vote against.