Ariel integrates environmental, social, and governance (ESG) considerations across our investment process as part of the broader review of material risks and opportunities for a given investment. Our tailored approach to investing recognizes ESG issues as potentially material to business outcomes and views management teams as collaborative partners in strengthening ESG performance. As part of our bottom-up fundamental research process, our investment teams assign a Proprietary ESG-risk rating for a company based on the team’s assessment of industry exposure, disclosure and management of material industry-specific ESG risk factors. We integrate ESG risk ratings into the discount rates used in financial valuations. Such financial modeling and valuation work can directly impact portfolio construction. Ariel seeks to engage with management teams on ESG topics. As long-term investors we understand that many interactions do not fit neatly into short-term binary outcomes, but rather are part of a longer-term dialogue.
The ESG Committee (the “Committee”) is responsible for reviewing Ariel Investments ESG policies annually. The Committee meets quarterly and documents its proceedings in the form of agendas and meeting minutes. The Committee is chaired by the Director of ESG Investing and is comprised of senior investment professionals from the Domestic and International/Global research teams. The Committee also includes senior leaders from Client Relations, Consultant Relations, and Legal & Compliance. In addition, the Committee is responsible for reviewing the ESG policies of Ariel Investments’ affiliate, Ariel Alternatives, and includes a representative from Ariel Alternatives.
The Committee facilitates reporting and communication among ESG Committee members and the broader Ariel Investments community related to ongoing ESG related investing and engagement topics, third party research, training opportunities, trends in the marketplace, and the regulatory landscape. In addition, the Committee facilitates an annual review of each investment team's ESG approach by Ariel Investments’ board of directors.
The Committee’s other responsibilities include:
- Coordinating disclosure practices;
- Assessing firm-wide current and prospective commitments, affiliations, and policy/advocacy statements relevant to ESG investing; and
- Reviewing recommendations identified from third party or internal compliance reviews.
The Committee recognizes that each respective investment team, led by each team’s chief investment officer, has the responsibility for executing ESG integration activities into the respective investment processes. Our compliance team conducts periodic reviews of our ESG processes and disclosure practices in order to evaluate compliance with SEC rules and regulations.
As part of our bottom-up fundamental research process, our investment teams assign a Proprietary ESG-risk rating (Low / Moderate / Elevated / High) for a company. Such assessments can be based on objective data or subjective judgment, including industry risk exposure, quality of ESG disclosure, our forward-looking assessments of management performance, as well as other factors.
We integrate ESG risk ratings into the discount rates used in financial valuations. As a result, ESG factors incorporated into our financial modeling and valuation work can directly impact portfolio construction. ESG is one of many factors that may impact an investment decision. In addition, our portfolio-level dashboards monitor ESG issues across our strategies, which can help to inform our overall ESG risk management, future research priorities and continued learning and engagement opportunities.
Our ESG analysis is supported by Ariel’s proprietary ESG platforms, providing decision-useful insights obtained from third-party sources, such as Bloomberg, ISS, MSCI, Refinitiv, and Sustainalytics, alongside data points from our proprietary research. Our proprietary research is informed by company disclosures such as company websites, sustainability reports, and SEC filings, direct dialogue with management teams, and other ESG-focused organizations, such as Sustainability Accounting Standards Board (SASB).
Our proprietary ESG data platforms are made accessible to the respective investments teams and inform company-specific ESG research. Each of our investment teams maintains a customized approach to curating and integrating ESG data into their respective investment processes. In general, rather than employing a one-size-fits-all formula, we view individual data points on a case-by-case basis as part of a broader mosaic approach.
ESG Risk Factors
The relevance and materiality of ESG factors varies by industry and geography and their impact on our investment thesis. We therefore don’t have a “one-size-fits-all” approach but a case-by-case assessment of materiality and relevance, as determined by the investment teams. For example, we may consider the Social factors to be highly relevant for a financial services company with a retail client base, while Environmental issues may be more relevant for a utility or energy services company because they enable the transition to a low-carbon economy. Finally, corporate Governance is relevant if management engages in behavior or decision-making that would harm shareholders over the long-term. As patient investors who invest with a long-term investment horizon (generally 3-5 years), we consider the materiality of ESG exposures from both a short- and long-term point of view.
We consider the following ESG-related factors to better understand a company's risk exposure, risk management, quality of disclosure, performance, and potential for improvement:
Waste and Hazardous Materials Management
Greenhouse Gas (GHG) Emissions
Water and Wastewater Management
Physical Impacts of Climate Change
SocialDiversity and Inclusion
Product Design and Lifecycle Management
Product Quality and Safety
Selling Practices and Product Labeling
Employee Health and Safety
Materials Sourcing and Efficiency
Supply Chain Management
Access and Affordability
Human Rights and Community Relations
Management of the Legal and Regulatory Environment
Systemic Risk Management
Critical Incident Risk Management
Business Model Resilience
Ariel’s portfolio managers are responsible for investing each client’s portfolio in accordance with the client’s respective investment guidelines and in accordance with regulatory restrictions communicated to them by clients and/or the legal and compliance department. While Ariel does not employ strict exclusionary practices across all strategies, our domestic strategies avoid companies whose primary (greater than 50%) source of revenue) is derived from the production or sale of tobacco products, the manufacture of firearms, or the operation of for-profit prisons. The portfolio managers of these strategies believe these industries are more likely to face shrinking growth prospects, draining litigation cost and legal liabilities that cannot be quantified. The I/G team considers exclusions of certain sectors or securities, for ESG or other regulatory reasons, at client request.
Engagement and Active Ownership
Our approach to ESG engagement is grounded in principles of inclusion and improvement via engagement and dialogue. We have a long history of engaging management teams with the goal of creating shared value over the long-term timeframe of our investment. Ariel seeks dialogue with management teams to encourage improvement on ESG disclosure and performance across financially material ESG issues. The materiality of ESG factors varies by industry, geography, and impact on our investment thesis. In general, as part of our ESG engagement, we seek to focus our discussions on key ESG improvements that will drive the greatest financial impact and/or where our efforts or support can have a higher probability of success, such as instances in which we are large and/or long-standing investors.
Our investment teams employ a variety of methods in ESG engagements. For example, direct engagement typically includes conversations and other interactions with management teams, board members, and key business unit or organizational leaders on specific issues, letters on thematic ESG topics, company-tailored recommendations for diverse board members, and other forms of direct dialogue. Individual investment teams may also engage in dialogue with subject matter experts, regulators, suppliers, and third-party vendors. The engagement method and frequency of interaction varies depending on the individual context for a given investment portfolio company.
We track our interactions with portfolio companies. As long-term shareholders we understand that many engagements do not fit neatly into short-term binary outcomes, but rather are part of a longer-term dialogue.
While our approach to ESG engagement typically focuses on supporting or partnering with management teams on their efforts to strengthen management and disclosure of material and relevant ESG issues, we may employ escalation tactics on a case-by-basis when we believe material ESG issues are not being adequately addressed by management teams. We do not employ a one-size-fits-all approach to escalation. Approaches will vary depending on the relationship and history with management, the industry or business model, and/or the nature and materiality of the ESG issue. As long-term investors, we recognize that meaningful change does not happen overnight. Our forms of engagement may vary from identifying and engaging with key business unit or organizational leaders with responsibility for a given topic, articulating or sending a letter to management outlining our concern, vote against management on a proxy voting proposal, and/or consider selling a position.
On occasion, we may consider participation in ‘collaborative engagement’ initiatives, such as through joint letters, in partnership with other investors or third-party organizations. Such opportunities are evaluated on a case-by-case basis and executed in a manner consistent with applicable laws and regulations.
We integrate ESG considerations into our proxy voting decisions. Ariel’s proxy voting guidelines for its investment strategies are detailed in our Proxy Voting Guidelines which are made available upon request to clientserviceIR@arielinvestments.com.
Ariel Investments, as a company, plays an active role in the broader ESG community to encourage greater adoption of ESG best practices among investors and corporations. We participate in or support various investor initiatives and partnerships.
Firm Climate Strategy
Ariel Investments, as a company, is committed to assessing and managing our exposure to climate-related risks and opportunities. Our investment teams incorporate physical or transition climate risk and opportunity assessments into their analysis and/or direct company engagement when relevant and material as part of the broader review of an investment. Our ESG databases track progress on portfolio company adoption of Science Based targets, SASB-aligned disclosure, and Task Force on Climate-Related Financial Disclosures aligned reporting. In addition, we perform a quarterly climate risk analysis across our strategies to monitor carbon footprint and carbon intensity metrics relative to the strategies’ respective benchmarks. At the firm level, we track metrics related to the firm’s overall environmental footprint.
Ariel produces an annual publicly available ESG Report detailing our approach to ESG integration, engagement activities, participation in industry groups, policy discussions, and leading ESG performance as a firm.