ESG (Environment-Social-Governance)

Our Commitment

ESG – Environmental, Social and Governance

ESG stands for Environmental, Social and Governance often as called sustainability. In a business context, sustainability is about the company’s business model, i.e. how its products and services contribute to sustainable development. It is also about a company’s risk management, i.e. how it manages its own operations to minimise negative impact. United Nations Principles of Responsible Investment (UNPRI) defines responsible investment as a strategy and practice to incorporate environmental, social and governance (ESG) factors in investment decisions and active ownership.

Kotak Mahindra Asset Management (KMAMC) takes into account the principles of Environmental, Social and Governance (ESG) factors and Responsible Investing (RI). These principles are an integral part of the investment process at KMAMC. Embedding these principles in our investment philosophy allows us to be a key influencer for long term sustainable shareholder returns. With KMAMC focus on long term investing, we combine multiple factors in addition to financial outlook to measure risk and opportunities of an investee company.

Kotak Mahindra Asset Management is a signatory to United Nations Principles of Responsible Investing (UNPRI) and is the first Indian asset management company to do so for its entire asset management business. Kotak Mahindra Asset Management is also a signatory to Climate Action 100+. This demonstrates our focus towards securing commitments from the corporate sector. The underlying sustainability agenda is that the Indian corporate sector, individually and collectively, take action to reduce greenhouse gas emissions consistent with the Paris Agreement’s goals.

Our ESG investment process and philosophy

Fundamental analysis is the bedrock of our investment decisions. Our investment philosophy of Business, Management and Valuation (BMV) focuses on sustainability of business and corporate governance. We also believe that ESG issues can influence investment risk and return. Therefore, we incorporate ESG considerations within our fundamental analysis and seek to gain an understanding of the relevant ESG issues applicable to our investments.

Our ESG investment process and philosophy

Our ESG framework includes the following:

Articulation of the firm wide strategy and vision

Instituting governance and oversight framework

Integration of ESG factors into portfolio management and scenario analysis

Investment stewardship and engagement with investee companies

Reporting and disclosures

Putting in place the talent and infrastructure needed for ESG integration

Our approach to ESG: The 3 E strategy

Our approach to ESG is that of positive / best in class screening with a primary focus on engagement and evaluation. We also have ESG related exclusions which are mandate specific. ESG research and integration is an outcome of collaboration between portfolio managers and research analysts.We use the BMV model in our approach to investment. Within this model we seek to incorporate various ESG parameters including the ESG scores provided by the third party service providers in order to finally arrive at our investment decisions.

ESG Integration into the Investment Process

• Business, Management & Valuation
• Governance, Environmental Impact & Social Factors*
• Using 3rd party Research to evaluate companies on ESG

• Focused Questionnaire to potential and investee companies on various E, S & G parameters
• Meeting top management twice a year and discuss ESG issues
• Voting to promote ESG in the company

• Sectoral Exclusions like Tobacco, Gambling, Coal, controversial weapons
• Companies scoring poorly on ESG factors

Some of the key ESG factors which we consider in our investment decision are as follows:

Governance

Capital allocation policies
Shareholder structure
Board composition: Size and structure / tenure etc.
Independence of the Board
Executive remuneration

Environment

We are aware that climate change and transition to a low carbon economy would present risks and opportunities for investments. The impact of such transition would vary across sectors and industries and would occur over a period of time. Some of the key things we monitor include:

Carbon emission and its environmental impact
Energy consumption and focus on resource efficiency - Usage of alternate energy sources

Social Factors

Safety of employees
Employee retention policies / attrition levels
Participation of women in the work force / diversity
Presence of unionized staff
CSR (Corporate Social Responsibility) spends
Involvement in the production or development of cluster bombs, land mines or weapons for mass destruction like chemical or biological weapons

Engagement and voting

·Engaging with companies on their ESG related policies: The investment team regularly interacts with all stakeholders of an investee company and endeavours to engage with the senior management of the companies on a regular basis and we send ESG focused questionnaire to key companies under coverage. We believe in the need to adopt a positive engagement approach whereby we engage with all our investee companies especially whenever we experience shortfalls on principles of ESG.

Third party research provider

We have entered into an Agreement with a third service party provider- For their inputs on various companies and their ESG score. The ESG research from the service providers also help us in engaging with companies on their ESG policies.
KMAMC has appointed a proxy advisor for voting advice. While we do engage proxy advisors, the decisions on voting for Board resolutions is taken by the Voting Committee.

The research team ensures engagement with corporates and research over and above what is provided by the service provider.

Exclusion (mandate specific)

Exclusions are based on the following Environmental and social factors

Environment – focus on fossil fuels
Social – Focus on Tobacco and gambling
Controversy – controversial weapons, weapons of mass destruction

For Kotak ESG Exclusionary Strategy Fund: “Based on SEBI circular SEBI/HO/OW/IMD-II/DOF3/P/5249/2022 dated 8th February 2022, in respect to Kotak ESG Exclusionary Strategy Fund, KMAMC shall only invest in securities which have Business Responsibility and Sustainability Report (BRSR) disclosures. In case of overseas investment, any global equivalent of the BRSR disclosures as specific by AMFI shall be considered.

Based on SEBI circular SEBI/HO/IMD/IMD-I –PoD1/P/CIR/2023/125 dated 20th July 2023, with effect from 1st October 2024, Kotak ESG Exclusionary Strategy Fund shall invest at least 65% of its AUM in companies which are reporting on comprehensive BRSR and are also providing assurance on BRSR Core disclosures. The balance AUM of the scheme shall be invested in companies having BRSR disclosures. In case the scheme is not in compliance with aforesaid requirement as on 1st October 2024, it shall ensure compliance with the requirement by 30th September 2025. During the said period of one year, the scheme shall not undertake any fresh investments in companies without assurance on BRSR Core.”

Monitoring and over sight

We evaluate companies on ESG parameters not only on a current basis but also monitor the changes that these companies incorporate over time. Changing regulatory requirements will also guide our investment process, engagement and monitoring of our investee companies.

As active managers, we continuously monitor the companies in which we invest and their ESG scores.
The Investment Committee sets the guidelines for investments and helps formulates and approves policies including ESG related policies and these are periodically reviewed.

Due Diligence methodology and its limitations

The ESG scores assigned by the third party research provider is on the basis of only publicly available information and data. Further, any controversies relating to companies under coverage during the year are tracked and shared regularly by the service provider in order to determine their materiality and impact on the rating of the company, if any. Since the scores are based on publicly available information, they would depend on the public disclosures made by companies on their ESG practices.

ESG research team

Our Research team consists of analysts who are a combination of sector specialists and mid-market/ small-cap focussed. ESG is an integral part of the overall research methodology of the research analysts.
We have designated our Head of Equity Research as ESG coordinator for KMAMC.
Additionally, we have also strengthened the team with a dedicated ESG analyst.