Responsible Investing at Summit Creek
For investors, the term Responsible Investing refers to the consideration of values and standards beyond the usual financial metrics of an investment. Specifically, environmental, social, and governance (or “ESG”) factors are used to evaluate a potential investment opportunity based on how a company aligns with best practices for a healthy community, equitable society, and sustainable planet. Therefore, responsible investors are those who choose to invest in companies with positive or improving ESG profiles. At Summit Creek, we have always felt our focus on consistent growth, high quality companies correlates well with responsible investing practices.
Assessing a company’s ESG profile has the potential to drive returns by recognizing good corporate governance structures or positive labor practices. Alternatively, awareness of a firm’s environmental impact or negative externalities can be instrumental in understanding a company’s overall risk profile and potential red flags. However, even companies in relatively environmentally intensive industries can be evaluated against their peers and assessed based on how well they are improving in reducing their carbon footprint.
Summit Creek Advisors (“SCA”) understands the importance of ESG factors in choosing long-term investments. The ways in which we analyze ESG criteria for our portfolio are through screening, integration, and engagement. By screening potential holdings before we consider them for investment, we can uncover red flags in their ESG profiles which may be detrimental to a company’s long-term value prospects. Integration describes the ongoing research process involved in monitoring portfolio holdings, inclusive of evaluating firms’ ESG risks and improvements over time. Engagement involves working with company management teams to improve ESG disclosures and practices.
SCA’s research process begins with the premise that responsible investing is an integral part of our fiduciary duty. With this in mind, SCA takes a holistic approach to security analysis and portfolio management, incorporating ESG factors into our overall research process, from the initial screening of a company through the entire life cycle of an investment.
This approach is accomplished through extensive due diligence prior to investing in any company. Exclusionary screening for significant ESG issues is the first step in narrowing SCA’s investable universe. Prospective companies are then evaluated by generating an ESG risk profile, which can highlight red flags in a company’s practices. An internal matrix of ESG factors is developed using both publicly available data and third-party research. This matrix is reviewed and updated by investment staff for each holding as company metrics change or with each new
company engagement. This is an ongoing research process which seeks to utilize and assess the most current ESG metrics available for our evaluation.
During SCA’s quarterly Compliance Committee meetings, the committee members discuss relevant ESG issues for any portfolio holdings or progress made from any previously discussed issues. The investment staff also review companies’ sustainability reports and any updates to them as they are published.
There are several third-party vendors that publish reports and score companies on their ESG profiles, but many of these firms use dated information and have a large-cap bias, causing potentially large gaps in their data and its usefulness for smaller companies. SCA prefers to utilize established sources of information to piece together its risk and ESG profiles of prospective companies and holdings. The following resources are the primary sources of information for SCA’s ESG analyses:
• Company reports
• Engagement activities
• Sell-side research
• Glass Lewis research
The ESG landscape is changing fast, and we continue to see a willingness from company managements to improve their sustainability metrics and reporting. We will continue to source additional risk metrics and information useful to our analyses as smaller companies become more transparent with their reporting and as third-party vendors improve their data offerings.
There are many environmental, social and governance factors SCA considers when choosing companies in which to invest for the long-term. Some of the best practices which we consider important and encourage companies to improve upon, within each category, are listed below.
• Improving sustainability practices
• Reducing environmental impact
• Development of sustainability policies and progress reports
• Safe and inclusive work environment
• Positive reputation among competitors
• Strong community engagement and impact
• Reasonable and aligned executive compensation
• Transparency from leadership and board
• Strong shareholder rights
As active small-cap and smid-cap managers, we believe engagement and dialogue with companies is important in evaluating their ESG profiles throughout the life of an investment. SCA’s investment staff frequently engage with the management of companies to assess their investment outlook and to evaluate their ESG practices.
Prior to each meeting with management, our investment team identifies any ESG issues with the company that may need to be addressed or remediated. Regardless of whether there are issues with the company, ESG factors will be discussed, if relevant. SCA encourages management to improve upon their ESG metrics and report on their progress. One way this can be achieved is through setting sustainability goals and/or publishing a sustainability report.
SCA utilizes industry-leading research from Glass Lewis in voting proxies for its clients’ holdings. SCA believes we should seek to promote governance structures that protect shareholders, support effective ESG oversight and reporting, encourage director accountability, and back reasonable and aligned executive compensation. Glass Lewis’s research and vote recommendations attempt to accomplish these goals. They also publish ESG scores alongside proxy voting research, when available, which provide investors with relative benchmarking against other companies. SCA reviews all Glass Lewis proxy research reports prior to voting each proxy; however, SCA does not vote exclusively with Glass Lewis’s recommendations. We consider all proposals on a case-by-case basis and will analyze the likely impact of any ESG issues and proposals against the long-term value of each company.