Environmental, Social and Corporate Governance Investing
At Hudson Bay we recognize and respect the fact that this is a very important issue and have created the ability of Environmental, Social and Corporate Governance (“ESG”) sensitive organizations to invest with us. Investors that are subject to an ESG or Socially Responsible Investing (“SRI”) mandate are offered the option to acquire bespoke tranches (the “SRI Tranches”) of Hudson Bay Fund LP or Hudson Bay International Fund Ltd. (each, a “Fund”) that enable them to invest in the Fund in a manner that respects their particular ESG mandates. This is accomplished by allocating profits and losses attributable to portfolio investments that would violate their ESG mandate away from their accounts (the “Allocation Away Methodology”). In this regard, SRI Tranches are customizable based on the SRI Investor’s specific ESG mandates. For example, an SRI Investor may desire to avoid all exposure to investments in the securities of fossil fuel-related companies. In this case, profits and losses from fossil fuel investments in our portfolio will not be allocated to the SRI Investor. Details of the Allocation Away Methodology are set forth in the Funds’ Confidential Private Placement Memoranda.
As discussed above, SRI Tranches are customizable based on the SRI Investor’s specific ESG mandate. ESG factors are therefore considered based on the particular SRI Investor’s sensitivities and request. While there is no impact on portfolio design, the investment return of a particular SRI Investor’s may differ from those investors who are not SRI Investors as the applicable SRI Tranche will not be allocated certain profits and losses related to certain portfolio positions which would violate that investor’s ESG mandate. The terms of the SRI Tranches are further discussed in the Funds’ Private Placement Memoranda.
In addition, while at a firm level we do not specifically impose ESG policies on our investment professionals, many of our PMs may take ESG into account when evaluating whether to invest in a particular issuer. Understanding “G” (governance, management and shareholder incentive alignments) is an extremely important and core part of the research process for several of our PM teams. For example, within the event space, we are invested in several discount to NAV, holding company transactions within the Liberty Media complex, and corporate governance and incentive alignment with shareholders is a key factor in our evaluation and analysis of the risks, opportunities, and potential outcomes of the trade.
While “E” and “S” concerns are more situational and case by case depending on the PM, several PMs do take these factors into account when investing both from a philosophical perspective as well as from the perspective of how these factors will affect issuer performance. For example, within the TMT sector, while it’s not often that a media, telco, or Internet company would have any environmental impact, it’s certainly possible to imagine a social platform having an indirect impact, or perhaps an infrastructure or e-commerce player having a gradually increasing impact, which could raise the brow of regulators and impact stock prices. Social is an emerging consideration in the sector, as many digital platforms (social networking, e-commerce, and search) will be increasingly under scrutiny by regulators for consumer protections (pricing and privacy both come to mind). Therefore, our team takes that into account when evaluating companies.
ESG considerations are becoming an increasingly important consideration in the credit space. Issuers have started to issue “Green Bonds” where the use of proceeds is ear marked for ESG purposes. These bonds typically trade better than normal issues because they have scarcity value and because investors need them to fulfill quotas for ESG dedicated funds. As a result, our PM’s have started to incorporate whether an issue is a Green Bond into their investment process.
More broadly we have started to see investors include ESG into their investment mandates and issuer risk evaluations. Companies with poor ESG profiles may have less support from the investment community, which then becomes a headwind to their credit valuation. Therefore, all else being equal, we would rather own a company with a good ESG profile than a poor one from an investment perspective.
ESG is also an important consideration when it comes to credit quality itself – companies with negative environmental impact (i.e. oil and gas), negative social implications (i.e. tobacco), or poor governance (i.e. companies with high executive payout and poor track records) – are potentially companies that have a higher risk profile in general. It therefore becomes an important consideration as part of the broader investment/risk process.
We are very open to accommodating investor specific SRI and ESG concerns and would welcome potential investors to approach us to discuss the various options that we can provide.