Pier Capital, LLC (Pier) selects stocks through a bottom-up, fundamental research process and believes that complementing these traditional financial metrics along with Environmental, Social and Governance (ESG) risk analysis measures can serve as a valuable additional risk metric in the overall investment process.
A combined risk ranking result of all three E-S-G criteria is considered in the final stages of the research and stock selection process, after an investment is selected based on Pier’s qualitative and quantitative analysis. This overall ESG risk ranking result, provided by Sustainalytics, determines if Pier will apply additional inclusionary or exclusionary steps or if no additional steps are necessary.
Incorporating ESG into the Investment Process:
Pier believes that a reasonable approach to ESG implementation should include both inclusionary and exclusionary investment parameters. Pier also recognizes that outperforming on all ESG criteria can be difficult to accomplish for most companies and therefore uses the overall ESG risk score provided by Sustainalytics to determine if inclusionary or exclusionary steps are required.
Inclusionary practices:
The strategy will overweigh investments with exposure to companies that receive the strongest overall ESG risk scores from Sustainalytics (currently referred to as “Negligible” and “Low” risk categories). The overweight amount will be determined by the Portfolio Manager at the time of the initial investment. Subject to the Portfolio Manager’s discretion, existing positions that improve to a “Negligible” or “Low” ESG risk category may be further over-weighted if not in conflict with the underlying fundamentals and valuation.
Exclusionary practices:
In contrast, investments in companies that receive the poorest ESG ranking from Sustainalytics (currently referred to as “Severe” risk category or “Controversy” category level 4 or 5) that fail to make measurable progress toward improving their practices will be reduced or excluded from the strategy. When that occurs, these companies will be put on Pier’s “ESG Watch List” and monitored for a period of time during which Pier will attempt to engage with the issuer to encourage action toward ESG ranking improvement. If a company fails to make any measurable progress on ESG practices within one year, the position will be reduced. Further to this, if in the year following the reduction, the company still fails to demonstrate progress on ESG practices, the position will become a candidate for elimination from the strategy.
Further exclusionary screens are utilized prohibiting the purchase of companies with controversies related to accounting scandals, child labor, harassment, blood money, pornography, tobacco, firearms or illegal substances.
It is important to understand that less mature, smaller companies tend to focus their resources on near-term growth and profitability and less so on ESG issues. Frequently ESG ranking for such companies is affected negatively by missing controls and/or ESG disclosures, which are not necessarily a determinate for exclusion. As such, the ESG risk scores for smaller companies are inherently of lower quality than those of their larger, more established competitors. As Pier’s investment universe is primarily limited to smaller, less mature companies, Pier believes it is reasonable to allow them the time and opportunity to improve their ESG ranking.
ESG Risk Scores Provided by a Third-Party Vendor:
Pier relies upon Sustainalytics, an unaffiliated third-party vendor, to conduct the underlying ESG risk ranking analysis for all securities purchased.
Portfolio holdings are periodically reviewed to obtain updated overall ESG risk scores and to monitor changes to ESG related controversies. Additionally, alerts within the Sustainalytics system are utilized to generate automated notifications when the provider makes a change to company’s ESG risk score or records a new controversy.
The ESG risk ratings provided by Sustainalytics are based on the vendor’s established evaluation approach that differentiates between companies based on their degree of unmanaged ESG risk. This analysis is performed by Sustainalytics through the lens of financial materiality, which means that the vendor focuses on ESG issues that are considered to have a significant impact on the financial value of a company.
Limitations:
ESG risk ranking integration into Pier’s investment process does not change strategy’s investment objective, does not constrain the investment manager’s investable universe, does not impact the selection of investments, or alter the initial screening for companies that meet the strategy’s investment criteria.
Inclusionary and exclusory action is taken only on companies with top and bottom ESG risk scores and no inclusionary or exclusory steps are taken on companies with all other ESG risk level scores.
Pier does not consider or market any of its strategies as ESG products. Therefore, Pier’s strategies would not be suitable for clients/investors seeking a product with an investment objective that includes material ESG considerations.
ESG determinations may not be conclusive. Securities of companies or issuers may be purchased and retained, without limit, by the investment manager regardless of their potential ESG impact. The effect of ESG integration on a financial product’s performance is not specifically measurable as investment decisions are discretionary regardless of ESG considerations.
The ESG risk scores utilized by Pier are provided by Sustainalytics, a third-party unaffiliated vendor. Pier does not conduct an independent analysis of ESG risk scores provided by Sustainalytics nor does it conduct its own analysis of such risks. The ESG criteria and ESG rating systems used by third-party providers can differ significantly. There is no standard ESG scoring system, and the methodology and conclusions reached by third-party providers may differ significantly from those that would be reached by other third-party providers. In addition, evaluations by third-party providers may be based on data sets and assumptions that may be insufficient of poor quality or contain biased information.
Pier’s ESG procedures is a summary. Please refer or request Pier’s full ESG policy to full details.
