Driehaus Capital Management LLC (“DCM”) believes material environmental, social and governance (“ESG”) factors will affect the sustainability of companies’ future earnings and profitability, as well as the risk and return potential of its investments. DCM also believes the linkage between ESG factors and corporate fundamental operating metrics will likely persist, if not increase, in the future. Therefore, DCM believes it is important to consider ESG factors as part of the fiduciary duty to its clients in order to create a more complete picture of the risks facing companies today and in the future.
In line with these beliefs, DCM considers material ESG factors within its investment process for listed equity investments held by all DCM strategies.
DCM’s ESG Policy defines its approach to integrating ESG considerations into investment decisions.
Year heritage of providing active management to professional investors.
Investment professionals at DCM incorporate the consideration of material ESG factors into its investment process through quantitative and qualitative analysis, internal monitoring, and reporting.
DCM layers ESG metrics from external sources into the quantitative aspects of the research process. The type of factor and DCM’s decision on its materiality to a company will vary by industry, region, and type of investment. By analyzing the ESG scores of companies, DCM seeks to identify risks that may not always be obvious through traditional fundamental analysis.
Qualitative fundamental analysis is also conducted on investments, including an assessment of a particular company’s ESG footprint through a review of commentary derived from external ESG rating agencies. This analysis seeks to identify material ESG risk factors and their correlation to a company’s potential future earnings and profitability. More specific examples are as follows:
Consistent with DCM’s risk management process, the purpose of this analysis is to seek to identify and understand ESG-related risks to the extent practical. DCM may disregard ESG scores or external analysis, for instance, if DCM does not view the ESG commentary as material or disagrees with the analysis. To be clear, as a single factor in DCM’s investment process, ESG considerations are not likely to be a defining factor in any investment decision.
ESG factors are one part of the overall investment analysis DCM investment teams conduct
when determining the potential for companies to deliver differentiated earnings growth.
Rigid constraints, guidelines and negative screening are not applied within DCM’s investment strategies.
DCM may, however, manage custom mandates with ESG or Socially Responsible Investment constraints that meet client-specific guidelines and policies.
DCM’s engagement efforts with companies serve as a tool to further evaluate and explore risks, including material ESG risks, however, the engagement efforts do not focus solely on ESG engagement.
While DCM recognizes the benefits of investor activism, it does not delay in exiting investments where DCM is uncomfortable with the asymmetric return potential. Much of DCM’s engagement efforts are generated on a case-by-case basis and centered around the most relevant or material risks for a given company. DCM’s ESG engagement priorities are generally set forth as follows but may change based on the investment team, the company, region, industry and country and other factors:
Discussions with company management allow the investment team to learn about a company’s perspectives and approaches, provide said company with feedback, and raise any issues (including ESG issues) that have been identified during the research process.
Additionally, when a client authorizes DCM to vote proxies on their behalf, DCM will generally vote in accordance with a third-party proxy solicitation service’s voting guidelines, which are focused on financial returns, in part by considering material ESG risk factors. Please see DCM’s Proxy Voting Policy here for more information.
Consideration of ESG factors in the investment process is performed by the various investment teams in partnership with the risk management team. Each investment team’s consideration of ESG factors may vary. Direct oversight and accountability for ESG activities falls under the purview of the Investment Policy Committee (“IPC”). The IPC is responsible for ensuring the investment teams adhere to this policy. DCM’s President and CEO exercises ultimate accountability and authority over DCM’s investment teams and adherence to their investment processes.
Development and maintenance of this policy is the responsibility of DCM’s ESG Committee. The ESG Committee is responsible for reviewing the policy at least annually and amending it as necessary in light of regulatory and industry guidance. The ESG Committee is comprised of legal, investment, risk, and marketing professionals.
DCM is a signatory of the Principals of Responsible Investment (“PRI”) and an endorser of the Investor Stewardship Group. While DCM performs ESG integration across its investment strategies, it also manage strategies for clients who wish to make sustainability a core objective of their investment strategy. Those sustainability-focused strategies may include exclusionary screens and/or specific investment criteria.