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June 2020

Engagement Policy

The Shareholders Rights Directive II (SRD II) aims to promote effective stewardship and long-term investment decision making, by enhancing the transparency of asset manager investment and engagement strategies. As an investment firm providing portfolio management services to clients, Charles Stanley is considered an asset manager. This document sets out our engagement policy, in line with the requirements of SRD II.

Charles Stanley is also a signatory of the Stewardship Code of the Financial Reporting Council (‘Stewardship Code’ or ‘Code’). This 2012 Code has been updated, with signatory firms obliged to comply with the requirements of the new 2020 Code by March 2021. This policy complies with the requirements of the 2012 Code, and Charles Stanley is reviewing current practice against the requirements of the 2020 Code. 

At Charles Stanley we pride ourselves on providing personalised investment management and advice, assuming responsibility for helping our clients to grow their wealth and achieve their financial goals. While some clients may want to retain investment control, only requiring Charles Stanley to assist them in executing their investment decisions, approximately half of our total assets under management comprise discretionary managed clients, which is now the core of our business. Discretionary managed clients each have their own investment manager, who is entrusted to make investment decisions on their behalf based on their specific needs. For such clients, the investment manager will consider a range of issues such as the client’s objectives, time horizon, risk appetite and ethical views when managing client portfolios. In order to provide this truly bespoke service to clients, our managers operate under an autonomous business model, whereby they have complete independence over investment decisions.

ESG in our investment process

Charles Stanley takes a broad approach when evaluating the merits of an investment. In addition to financial considerations, we recognise that non-financial factors – including environmental, social and governance factors (ESG) - can bear just as much influence on the performance of a company. We take a multi-faceted approach to incorporating responsible investment into our investment process, which includes observing the Stewardship Code, considering ESG in our investment analysis and voting relevant client holdings where we deem it appropriate.

We believe employing a combination of these methods helps us to better achieve our central purpose, which is to maximise returns for our clients by seeking out companies with sustainable business models that can deliver long term growth. We take a bottom-up approach to ESG analysis and the incorporation of ESG into the investment process is carried out by our research analysts. ESG is one of many factors an analyst may consider in forming a view of the risks and opportunities to which individual companies and their respective industries are exposed. Where an investee company has serious ESG issues which are believed to have a potentially material impact on the company’s performance, this will be expressed in an analyst’s research output made available to all investment managers.  In keeping with the services we offer, however, investment managers are not bound to follow the recommendations of research analysts.

Consequently, our investment managers have discretion over how best to include ESG analysis into their investment processes. It should be emphasized that ESG is not an investment objective in its own right and is just one of the factors we may consider when determining the potential risks and returns of an investment. We do not carry out negative or values-based screening, therefore, unless a client wishes to construct their portfolio using these approaches.

Our Approach to Stewardship

The Stewardship Code is overseen and published by the Financial Reporting Council, an independent regulator overseeing financial reporting, accounting and auditing and corporate governance. The Code sets the benchmark for institutional investors to meet ownership obligations in respect of UK companies, and the FRC requires it to be applied on a “comply or explain” basis, meaning that where a firm chooses not to comply with a particular principle on the Code, it is compliant with the overall Code as long as this is properly disclosed and explained.

Charles Stanley primarily manages the assets of retail investors; we have a limited number of institutional investor clients. However, we think it is in the interests of all our clients that we disclose our policy in terms of how we exercise voting rights relating to investments held on their behalf. For such clients, as appropriate, Charles Stanley may seek to engage and vote on any issue affecting the long-term value of a company in which we have invested on our clients’ behalf. Our position in relation to the Stewardship Code and SRD II is set out below.

Discharging our stewardship responsibilities

As a financial services organisation, our primary responsibility is to maximise the investment returns of our clients in accordance with our contractual relationships, and in our view this is always best achieved through the consistent identification of quality investment opportunities for our clients' funds, and to dispose of investment holdings where we are dissatisfied with that investment's prospects for share price appreciation. In this way, we see stewardship of investee companies as an integral part of the wider investment process and employ various methods of engaging and monitoring to achieve this.

Under Charles Stanley’s terms of business, our firm has the contractual right to vote only on behalf of clients where we have a discretionary investment management mandate. We do not have a similar contractual right to vote on behalf of investments held by our advisory and execution-only clients, where they are solely responsible for exercising their right to vote. As Charles Stanley is a whole of market firm, offering a broad range of investment services and asset classes, the typical aggregate holding size tends to be smaller. This reduces the scope for direct engagement with the governance of investee companies. The favoured approach, however, is based on the identification of quality investment opportunities, and the disposal of such investments where there is dissatisfaction with an investment’s prospects for share price appreciation.

However, Charles Stanley recognises that the maximisation of client investment returns may sometimes require a greater level of engagement with investee companies, including entering into an active dialogue with investee company management, and the resources used for each such engagement will be managed according to the circumstances of each case.

We do not outsource our stewardship responsibilities, albeit our voting decisions may be based on the research and recommendations of external proxy voting service providers, as set out in this policy.  

Our guidelines on when and how we escalate our stewardship activities

Where we have significant direct holdings in individual companies, we may seek to act in the best interest of the clients by exercising any votes controlled by our firm. Where we have significant direct holdings in companies, we may meet company management on a regular basis and would use these opportunities to ascertain that the company has satisfactory policies and governance arrangements in place. If we consider that a company has environmental, social or governance arrangements that are not in the best interests of shareholders, we may seek to inform the company management of this fact or disinvest from the company.

Where we wish to escalate matters, we can exercise the rights to vote on behalf of our discretionary clients.

We employ the services of a proxy voting service provider, however due to the wide range of securities available to our discretionary clients, we only vote routinely those shares in our largest one hundred holdings by aggregate value. For these shares we will tend to vote in accordance with the recommendations of the proxy voting service provider, although we reserve the right to vote differently.

In addition, there are occasions when our research team may encourage investment managers to vote in a way they deem to be in the best interests of shareholders, for example where major corporate events are taking place, such as a merger or takeover. Investment managers are free to decide how to vote the shares held by clients whose portfolios they manage.

Many investments held for our clients take the form of passive or collective investments, however. These may each hold a large number of underlying companies, but where there is less scope for Charles Stanley to influence directly the governance of these companies. Our team of collectives analysts carries out regular interviews with the managers of many collective funds. Their ongoing analysis and monitoring approach include ascertaining whether the fund manager complies with the Stewardship Code and their approach to voting shares held in its funds. Compliance with the Code is recorded as part of each fund update report so that Charles Stanley investment managers can assess whether the funds they hold on behalf of clients meet this criterion.

How we approach conflicts of interest

Our policy summary regarding conflicts of interest is regularly reviewed and any changes approved by the Board. It is set out in Our Services and Business Terms.

Where Charles Stanley exercises its contractual right to vote the holdings of discretionary investment management clients, the votes would be exercised in the interests of clients.

Inevitably, conflicts of interest may arise from time to time, for example where there is voting on matters affecting both clients and Charles Stanley itself.

Examples of potential conflicts may exist where:

  • Charles Stanley is the manager of a collective investment fund in which the firm’s discretionary investment management clients are invested.
  • The firm’s discretionary investment management clients are invested in shares of Charles Stanley Group PLC. Charles Stanley is a wholly owned subsidiary of Charles Stanley Group PLC, a company whose shares are listed on the London Stock Exchange.

Where there is such a conflict that in our view cannot be readily resolved, the matter would be escalated to senior management for an independent decision on whether and how such shares should be voted.

Engagement

How we actively engage with companies in which we invest

While we maintain an autonomous business model, investment managers are able to rely on guidance from our in-house research division, which provides specialist advice on asset allocation, stock selection and collective vehicle selection and therefore engagement and monitoring will essentially be a function of the centralised investment research process. As a long-established UK investment firm, Charles Stanley has frequent opportunities to meet with the management of actual and prospective investee companies. Monitoring occurs around company financial reporting, in conjunction with news and announcements and when research is being conducted into investment ideas.

We meet regularly with investee companies and fund managers and both capital structure and corporate governance are key areas considered among a wide range of issues such as strategy and investment performance. Where a company does not comply with the spirit of the UK Corporate Governance Code, in our opinion, we will consider its explanation as one factor in forming our overall view on whether the company represents a quality investment opportunity for our client.  Views are clearly expressed in their research output, which is made available to all investment managers. In the case of collective investments such as funds, we routinely identify fund managers who are compliant with the Stewardship Code and UN Principles for Responsible Investment and this is detailed in our internal research for investment managers. However, investment managers have discretion over whether to follow the recommendations of the Research team

As outlined above, where the higher costs of additional engagement appear justified in the context of those aggregate client holdings where we control the votes, we may seek to engage the board or management of the investee company.

From time to time, issuers of securities and their advisers may seek to engage with our firm in relation to a new issue of shares where there may be an element of inside information. All such enquiries must be directed through our New Issues Desk, which has processes for evaluating approaches and coordinating our firm’s response as appropriate.

Our approach to collective engagement with other investors

Where we deem it appropriate and effective, we will seek to engage collectively with other investors, and to escalate our activities in collaboration with them. Any such engagement would be on a case-by-case basis.

Through our membership of the UN Principles of Responsible Investment’s (UN PRI) Collaborative Engagement Platform, we have worked with other members to exert influence over industries in which our clients have direct or indirect exposure when we believe there is scope for improvement in the standard of business practice as we view this to be in the long term interests of our clients. A key engagement we have been involved in is the Human Rights in the Extractive Industry initiative where the core aim is to assess how well target companies recognise the degree of human rights risks given the nature of their business, and propose ways in which they can improve disclosure of their human rights practices to encourage better standards within the industry.

In general, we welcome any opportunity to work with our peers to engage with companies in which we invest to allow us greater influence in raising governance standards. Please contact compliance.

Voting

How we vote on behalf of our clients

We believe voting is an effective method of engagement and support our clients in exercising their right to vote where possible.

We use the services of proxy voting service provider Institutional Shareholder Services (ISS) to advise us on corporate governance issues and provide voting recommendations on our top one hundred holdings of equity and fund securities.

The advice of our proxy voting service provider is based on the UK Corporate Governance Code and its own set of voting principles built on a collection of industry best practice guidelines, which are designed to protect and enhance shareholders’ interests. ISS has a long-standing relationship with many of the UK-listed issuers within its coverage universe and regularly engages with the senior management teams of such issuers. ISS has a set of benchmark policy recommendations and proxy voting guidelines. These comprise of four main areas; operational items, board of directors, remuneration and capital structure. There is also another set of guidelines for ESG related matters. ISS conducts rigorous analysis and investigation in line with these policies for the investee companies it intends to recommend a vote on.

With its knowledge of the UK Corporate Governance Code and a long history of corporate engagement, we believe the provision of advice from our proxy voting service provider enhances our engagement with investee companies. However, we are not bound to follow the advice of ISS and retain the ultimate say on which way to vote on each item raised at general and extraordinary shareholders meetings, based on what we believe is in the best interests of our clients.

Where we believe it would assist shareholder interests, we may inform the company in advance of our voting intentions.

We do not engage in securities lending with client holdings.

Reporting on our stewardship and voting activities

It is not the current policy of Charles Stanley to report routinely to clients in relation to their holdings or any other client’s holdings.

On an annual basis by 30th June each year, we report on the implementation of the principles of this policy and disclose publicly our most significant votes during the previous calendar year. ‘Most significant votes’ is defined as the size of our shareholding as a proportion of an issuer’s total voting rights. In practice, we would expect to report on our voting record for at least shareholdings of 3% or more of the issuer’s voting rights. Our annual disclosure can be found on this page.

We regard our clients as the only stakeholder to whom we owe a duty of reporting, where requested. We are happy to disclose and report further details of voting matters on request, at frequencies to be agreed. Such disclosure would relate solely to votes exercised on behalf of the requesting client.

We do not seek independent assurance of our stewardship activities and voting performance, on the basis that the level of engagement and the scale of the firm’s activities for clients would not justify the additional expense to clients.