OUR PROCESS

At Cohen & Steers, we review each company in our investment universe across environmental, social and governance (ESG) factors specific to the unique dynamics of its industry and asset class. Our size and depth of expertise, along with the frequency of our company interactions, allows us to carefully assess management credibility and strategy. We combine these insights with third-party data to form a comprehensive view that is expressed both explicitly and implicitly in our investment decisions. Our integration process is segmented into the following four steps:

1. Identify ESG factors and assign weights by asset class sectors.
2. Generate proprietary ESG scores.
3. Integrate scores into investment decision.
4. Engage companies to gain insight and drive positive change.

1. Identify ESG factors and assign weights by asset class sector

Different asset classes tend to have distinct “cores” for extracting and realizing value. For example, real estate is a capital allocation business, elevating the importance of governance. By contrast, some industries within natural resource equities and infrastructure can be more operations focused, where safe working conditions are a matter of life and death.

Therefore, the first step in our process is to define the key E, S and G factors that are most relevant to sectors within each asset class. We quantify these issues by assigning a sector-specific weight to each factor based on our extensive knowledge of the asset classes, combined with third-party research. This begins with data from MSCI, a leading ESG research provider with broad coverage of the companies in our target asset classes, providing what we view as a good starting point for overlaying our proprietary analysis.

Key governance issues tend to apply broadly across sectors and asset classes. These include:

• Management acumen
• Transparency
• Board structure, tenure, refreshment, alignment
• Shareholder rights
• Executive compensation
• Audit and risk oversight
• Insider/management ownership and shareholder structure
• Systemically important financial risk (specific to preferred securities and infrastructure)
• Corruption and political/social instability (specific to natural resource equities)

By contrast, environmental and social factors tend to vary meaningfully across sectors, demanding a customized approach to ESG integration across our strategies.

Key environmental and social factors by asset class

Real estate

Environmental

• Green building opportunities
• Energy management
• Green bond issuance
• Waste management
• Water management
• Green leases
• Physical climate impacts

Social

• Human capital management
• Diversity and inclusion
• Health and wellness
• Community impact

Infrastructure and Midstream Energy

Environmental

• CO2 emissions, costs of associated credits
• Physical climate impacts
• Subsidies for green power offtake, risks to environmental policies and regulation
• Water stress, land use
• Nuclear liabilities

Social

• Customer satisfaction scores, staff training programs and sponsorships
• Service interruption, operational safety, employees’ incidence rate
• Initiatives to support customers in financial need
• Data security

Natural Resource Equities

Environmental

• Robust operations with safeguards for unforeseen events
• New technology developments which create risks/opportunities for fossil fuels
• Proper handling of waste materials/water used in the production process

Social

• Gender pay gaps, complex political and social issues in developing countries where possible investments can be located, specifically in the Metals & Mining sector

Preferred securities

Environmental

• Climate change vulnerability
• Financing environmental impact

Social

• Human capital management
• Privacy data and security
• Financial product appropriateness
• Responsible Investment
• Insuring health and demographic risk
• Providing financing to underserved markets

Commodities

Environmental

• Climate change
• Scarcity of finite resources

Social

• Human rights
• Working conditions
• Impacts on local/indigenous communities

2. Generate proprietary ESG scores

Using the factors determined above, we generate ESG scores for each company relative to its industry. MSCI’s ESG scores serve as a starting point, and analysts then adjust these scores where necessary based on our proprietary research. Resources for making these adjustments include other respected ESG research providers (ISS, Sustainalytics, RobecoSam), sell-side research reports, company filings, Bloomberg metrics and, our most significant driver of scores, our interaction with company management. Scores are typically assessed on a quarterly basis, but may be adjusted more frequently if there are material changes in circumstances.

Our proprietary overlay is a key differentiator of our approach to ESG integration, as we leverage the depth and scale of our platform and scope of our information gathering to enhance third-party research. Accordingly, we actively encourage our analysts to make appropriate wholesale adjustments as necessary when using external ratings, focusing on companies’ more strategic versus temporary actions.

3. Integrate scores into investment decisions

Our investment teams incorporate ESG risks and opportunities into the fundamental research process by implicitly and explicitly integrating our ESG scores into investment decision making. Due to the inherent differences in valuation approaches by asset class, ESG scores are integrated in distinct ways, as shown below.

Customizing ESG score integration by asset class

Real Estate, Infrastructure, Midstream Energy, and Natural Resource Equities

• Adjust cash flow forecasts and discount rates to reflect risks

Preferred Securities

• Incorporate into relative value analysis, assigning premiums for weak ESG scores and discounts for strong scores
• May impact level of ownership and some issuers may be deemed uninvestable

Commodities

• Align with commodities ESG best practices (such as not taking physical delivery and avoiding investment in rare earth or minor metals) to promote well-functioning markets

At August 31, 2020. Source: Cohen & Steers.

4. Engage companies to gain insight and drive positive change

We take an active ownership and engagement approach with companies in our investment universe, advocating for sound ESG principles that we believe can help optimize investment performance.

This engagement is an integral part of our fundamental research process, providing a framework for dialogue between us and our portfolio companies, influence or change a company’s ESG practices in ways that we believe may have a material impact on its ability to preserve or grow its economic value.

Our engagement process involves four main components:

Individual engagement

Our primary method involves direct dialogue with senior management or boards of directors. This can be a particularly effective tool when we hold a significant ownership position.

Proxy voting

We take an active approach to proxy voting based on our view that our investment professionals—not third-party service providers—have the best insight into our portfolio companies and are best-positioned to vote proxies on behalf of our clients. Our proxy voting decisions take ESG factors into consideration and seek to protect our clients’ long-term economic interests.

Collaborative engagement

In certain instances, we may collaborate with other investors and stakeholders, where appropriate and permitted by applicable law and regulation, to ensure that companies protect the rights of all shareholders and consider how actions may impact all stakeholders.

Industry advocacy

To encourage companies to adopt ESG best practices at an industry level, we work with industry associations, including:

• Principles for Responsible Investment (signatories since 2013)
• GRESB (formerly “Global Real Estate Sustainability Benchmark,” the organization now also covers infrastructure)
• European Public Real Estate Reporting & Accounting Committee

This work fosters collaboration and allows us to discuss and assess ESG matters with industry peers and leading industry constituents.

This ongoing engagement helps us understand risks and opportunities and adjust our proprietary valuations to refine our investment decisions. In addition, we utilize engagement to encourage companies to improve transparency and disclosure, as well as make better business decisions. We believe these discussions can lead to strategic decisions that may enhance financial and operating performance, reduce the risk of reputational damage and improve long-term shareholder returns.

What distinguishes our approach to ESG?

Resourcing

We believe the size and experience of our investment teams, together with the frequency and depth of their interactions with companies, enable a deep understanding of management credibility and strategy, allowing us to assess material ESG considerations beyond the scope of third-party research firms.

Scale

Our leadership position in listed real assets and alternative income amplifies our voice and influence when we engage with companies—whether we currently invest in them or not. We believe this helps our ESG advocacy have maximum impact.