Brandes Investment Partners, L.P. (“Brandes”) believes that responsible corporate behavior, the promotion of sustainability, and sound governance practices contribute to the long-term performance of public companies. Such practices and behaviors address the interests of a broad range of a company’s stakeholders including shareholders, creditors, employees, customers, suppliers, and the communities in which it operates. Accordingly, as part of fulfilling our fiduciary duties and seeking to maximize risk adjusted returns for our clients, our long-term, fundamental investment research has always included the evaluation and integration of material environmental, social, and governance (“ESG”) issues into our investment process and the allocation of client capital.
The Brandes ESG Oversight Committee establishes and annually reviews broad objectives and practices to ensure that our investment staff has the adequate resources and ongoing training to stay current on relevant developments related to ESG issues. Additionally, as industry-wide ESG-related practices, standards, and laws change in the future, we expect our own policies and procedures on how ESG issues are systematically incorporated into our investment process will evolve accordingly. In recognition of our commitment to the integration of material ESG factors into our research and investment process, Brandes became a signatory to United Nations-supported Principles for Responsible Investment Initiative in 2016.
Brandes is guided by a singular long-term valuation driven investment philosophy and seeks to integrate all material value drivers and risk-factors, including those related to ESG issues, into our investment process. As a fundamental, bottom-up manager, detailed company level research is at the core of our investment approach. The objective of this research is to establish an intrinsic value estimate for each company and to build portfolios consisting of companies trading at discounts to conservative intrinsic value estimates.
Given the depth of due diligence conducted, combined with years of company and industry knowledge, our research analysts are in the best position to understand and integrate ESG issues into their company valuations. Integral to our research process is a detailed written initiation report that includes an assessment of all material factors. A component of the core initiation report is an ESG summary (supported by third-party research provided by ISS) that serves to identify and address ESG issues materially impacting the company and industry in which it operates. Brandes’ fundamental research analysts utilize proprietary company analysis, third-party reports, and supplementary data and research where relevant, in order to best incorporate material ESG factors into company valuations. Additionally, Brandes company valuation reports, and the ESG summary within them, serve to identify ESG-related risks and opportunities to be considered by the Brandes investment committees when constructing and managing portfolios.
As a long-term investor in companies, we strive to think and act like owners of the business. Accordingly, we pay particular attention to a company’s governance structure. Fundamentally, we believe properly governed companies are in the best position to adequately address the risks and opportunities related to environmental and social factors.
While we strive to invest in companies that have already established proper governance and risk mitigating practices, as a value-oriented investor, it is not unusual to be attracted to opportunities where the market has harshly discounted a company’s valuation due to short-term issues, some of which may be ESG-related. In such cases, we may still decide to invest in the company if we believe the risk factors are adequately accounted for in the share price, with further upside if we believe the company may take the proper steps to address the issues or, in some cases, if we can help spur positive changes through active ownership and constructive engagement.
Both prior to and during the period of ownership, Brandes research analysts directly engage with investee companies on a wide range of issues. The goal of such engagement is to better understand issues such as capital allocation, long-term strategy, and management of material risks and opportunities, including those ESG-related, facing the company and industry. Our main method of engagement is through routine dialogue with company management via visits, regular meetings, and conference calls.
When our views, particularly regarding governance structures and practices, differ with those of the company, we will more actively engage with the company’s management and/ or board of directors if we believe such activities will benefit our clients. The goal of such engagement is to ensure that important decisions and actions are being made in the best interest of long-term shareholders of the company. Materiality of the issues and the company’s response and progress on addressing them are typically the main drivers of engagement prioritization and escalation.
While our preference is for individual, confidential engagement with a company’s management and board of directors, we will occasionally, where permitted by laws and regulations, collaborate with other shareholders on engagement activities. The decision to collaborate with other shareholders on an engagement is based on the size and nature of the respective shareholdings and whether there is clear agreement on the goal of the engagement.
Brandes investment professionals communicate internally on the status of engagement activities and the eventual results. On a case-by-case basis, we use examples of our engagement activities with companies in order to provide case studies to illustrate our approach of enhancing shareholder value through engagement. Such case studies are provided to clients on request.
One of the most significant rights of shareholders is to vote at a company’s annual and extraordinary meetings. Our clients typically delegate to Brandes the authority to vote proxies for the securities held in their accounts. Brandes’ policy is to vote proxies in a way that serves the best interests of our clients as long-term shareholders. Details of our voting history and a summary of our overall voting statistics are made publicly available.
We believe our research analysts are in the best position to evaluate the impact of proxy proposals on the long-term value of the companies they cover. Therefore, our analysts are responsible for providing recommendations on all proxy proposals voted on behalf of our clients. We do not believe it is possible to reflect the ESG-related preferences of each of our clients in a single ESG voting policy. Accordingly, we evaluate ESG-related proposals on a case-by-case basis and vote in a way that we believe has the best chance to enhance the long-term value of our clients’ shareholdings. Please see Brandes Proxy Voting Approach for more information.
While we typically look to express our views through private engagement and voting on company sponsored proxy proposals, occasionally we will sponsor our own proxy proposals in cases where we believe private engagement has not been successful and it would be more effective to allow all shareholders to express their views through the proxy voting process.
As part of our investment process and integrated approach to ESG, we do not automatically avoid investment in industries or companies based solely on their ESG practices. However, we do accommodate client directed ESG restrictions, and we systematically utilize third-party screens and /or exclusion lists in order to meet the client specified restrictions.
Along with our own internal research and company / industry disclosures and data, Brandes uses the following third-party research providers to enhance and supplement our fundamental research in the evaluation of ESG issues:
While we utilize this research to aid in our understanding of material ESG factors, we ultimately make our own independent evaluation of such factors and assessment on how they impact the risk and opportunity profile of each company.
The Brandes Fixed Income Team is guided by a singular long-term valuation driven investment philosophy and seeks to integrate all material value drivers and risk factors, including those related to ESG issues, into our investment process. As a team dedicated to deep and fundamental research, our objective is to look beyond the financial statements for risks that may not be accurately reflected in the reported numbers. These risks could include a history of poor labor relations, aggressive accounting practices, poor disclosure policies, and contingencies such as environmental fines, production stoppages, or reduced customer demand. These risks could lead to greater leverage due to impaired operating income, lower enterprise valuation - impacting asset coverage of debt, greater risk to a company’s ability to access capital markets for debt refinancing, or a combination of any or all of these risks to a company’s ability to pay its debt obligations.
As creditors, we are primarily focused on the potential downside risks posed by environmental, social, and governance issues. Unless client directed, we do not use ESG as a screening or filtering tool. Our approach is to determine whether a factor has the capacity to materially alter the credit profile. If ESG risks have the capacity to affect the probability of default, the loss given default, or the performance of the bond they are considered as we aim to appropriately price each risk in our credit evaluation. The consideration of such is documented through the inclusion of an ESG section in fixed income research reports, which highlights relevant ESG factors that may affect the overall credit profile and our adjustments to account for those factors. Third party research providers utilized to address material ESG factors include ISS, Bloomberg ESG, and CreditSights ESG.
Brandes is committed to encouraging responsible investment and improving sustainability practices within the asset management industry. We continue to refine our ESG practices and strive to promote better standards for all stakeholders. Brandes is a member of, or a signatory to, several initiatives and organizations that strive for greater ESG consideration or sustainable investment promotion, including:
We believe well-governed companies should apply prudent principles to their corporate governance structure and demonstrate consistency with them through the decisions they make. Fundamental to a well-governed company is an appropriately structured and functioning board that is comprised of qualified and engaged directors. Accordingly, we believe all corporate boards of directors should display the following traits:
The Spirit of Voting
One of the most significant rights as shareholders is the right to vote their shares at a company’s annual and extraordinary meetings. In doing so, we ensure that our client’s votes are cast in a manner that is most consistent with our Proxy Voting Guidelines, and which are based on the underlying guiding principle of voting in the best economic interests of shareholders over the long term. Our assessment process consists of consulting a variety of sources, including all relevant company filings and research materials provided by proxy advisors, as well as engagement with company management.
Principles-Based Voting Guidelines
Our Corporate Governance Principles and Proxy Voting Guidelines were developed to encourage companies to take the actions that we believe, in the long run, are in the best economic interest of the shareholders. We apply these fundamental principles when evaluating our guidelines:
We will analyze and consider individual company circumstances and their alignment with our Corporate Governance Principles. These Principles and Proxy Voting Guidelines are reviewed and updated on an annual basis by our Corporate Governance Committee.
While proxy voting is a basic and important fundamental right, it is only one area of focus for us as shareholders. We are also committed to continuing to monitor a company's financial and non-financial performance after each investment has been made. In doing so, we embrace the concept of being an active, engaged, and responsible owner of the companies we invest in on behalf of our clients.
Accordingly, we participate in a number of activities on a case-by-case basis, including: