Longwave ESG enhancements

In 2023 we have introduced a number of new elements to our ESG scorecards.  These include enhanced data capture about small-cap companies climate change transition plans, alignment to the 40:40 vision and efforts on indigenous engagement.

Integrating ESG to an investment process

In the initial stages of developing and implementing the fundamental part of our process when we founded Longwave, we made the decision to integrate in-house ESG scoring into our valuation methodology.

As fundamental investors, we had long been reading through the front of Annual reports to get an understanding of the more qualitative elements that may at some point impact future shareholder value.  We’d also always been interested in understanding what may be personally motivating management to do, or report certain things (Remuneration structures), and what checks and balances existed to protect us as shareholders (Governance).

Capturing this matrix of information along with analysis and scoring of the individual elements was the next obvious step.  Once armed with comprehensive views and scores, it was a relatively simple process to integrate our ESG scores into our valuation methodology in a way that our ESG views are materially expressed in the upside or downside we see for a stock.

Capturing high quality, internally-generated ESG information ultimately allows us to focus in on the real job of effecting change where we see it would be beneficial to shareholder interests.  We do this by constructively engaging with companies on various issues, be it Renumeration structures, board independence, emerging social issues or encouraging companies to do more on their environmental footprint.

In the years since we first designed our scorecards, company reporting on various environmental and social issues has evolved.  Environmental reports have become more comprehensive as companies do more work to measure scope 1, 2 and recently 3 emissions and start to make concrete plans for their participation in climate change transition.  Reporting around female participation in the workplace has become more comprehensive and now often encompasses senior management and other categories of employees.

As a result of this, we’ve recently gone through a process of enhancing our data collection in our ESG scorecards with a focus on additional data to aid our understanding of climate change transition plans, along with additional gender diversity and indigenous engagement information.


During our governance research process we complete a governance assessment that captures quantitative information on inside ownership (alignment), percentage of independent directors and whether executive compensation is linked to ESG outcomes.

The purpose of director independence is to ensure that the actions of management are always aligned to shareholder interests.  Independent directors should protect against agency risk in the form of executives with no ‘skin in the game’ through a majority of shareholder representatives on the board. Because the nature of small-caps is different to large-caps, we do see situations where a board is only quasi-independent and dominated by significant shareholders.  In most cases, If a director is not independent but has significant share ownership, we believe this is likely to provide the correct incentive.

We evaluate an individual company’s overall governance on the following criteria:

  • Does it foster a culture of open disclosure and transparency in its business practices and financial reporting?
  • Is its board of directors diverse, independent and accountable?
  • Does its board of directors have a demonstrated track record of representing the interests of minority shareholders?
  • Are its compensation practices transparent and aligned with long-term shareholder value creation?

Compensation practices are particularly insightful to what we think of as real underlying motivations of both management and board members.  Despite years of both shareholder and regulator focus, renumeration reports still require a significant amount of time and analytical strength to unpick.  In small-caps disclosure has been slowly improving, but we still don’t see best-practice implemented 100% of the time.

As a result, around AGM-season (when we vote on all AGM resolutions including renumeration reports), we conduct a thorough assessment of a company’s renumeration practices and reach a conclusion as to whether the right balance has been reached between shareholder interests and appropriate and transparent reward for executives.

Due to the diverse nature of industries and business models across the market, no one incentive structure is appropriate for all businesses.  Thus, truly understanding the fairness or balance of a structure requires a relatively strong understanding of the earnings power of the business and future trajectory of the earnings and value.

More recently in our governance scorecard, we have started to track whether we have voted against Management in the past 12 months.  We are unafraid to make our views known to management and to vote against resolutions when we believe its in the shareholder interests to do so.  No one, not even companies can improve without frank and robust feedback from all stakeholders, and we are happy to participate constructively in that feedback process.


Companies impact the environment through many different parts of their activities and supply chain, but we approach our analysis of environmental effort by looking at two buckets. The first is contribution to climate change via CO2 emissions.  This is naturally the most urgent, measurable area of focus today, but as the planet supports more people into the future, companies will increasingly have to look at their total sustainability (land, water and biodiversity) and do more to minimise their impact in everything that they do.

Companies across the ASX have been improving their focus on the environment for some time now.   We continue to believe that the best way to ensure this continues is to link compensation to achievement of environment outcomes, but also for investors to continue engagement.

“We have forgotten how to be good guests, how to walk lightly on the earth as its other creatures do” (Barbara Ward)

We evaluate an individual company’s overall environmental performance on the following criteria:

  • Does it take a proactive approach to matters of environmental concern with respect to their product design, business practices, distribution and procurement?
  • Does it provide clear disclosure of its environmental practices and examples of continuous improvement?
  • Does it incorporate “environmental impact” into its long-term business planning and articulate how this is achieved?
  • Does it incorporate internal benchmarks to ensure its environmental practices are aligned with minimum industry standards, e.g. CO2 emissions, use of renewable energy sources, implementation of ISO 14001, etc.?

Broadly speaking we are looking for companies to demonstrate best practice in identifying, measuring and setting targets to:

  • Participate proactively and practically in the transition to a net zero future.
  • Reduce or reuse resources like energy, water and other inputs to their business activities
  • Minimize waste
  • Promote sustainable procurement

It’s important to note that we assess companies relative to their sector peers, rather than to an absolute benchmark.  We do this for a couple of reasons. Firstly, being in a low carbon-footprint sector can encourage complacency and finger pointing at the big emitters. Secondly, some of the companies operating in industries with a large environmental footprint should be encouraged to do all they can to improve.

Environmental impact is clearly an area we are seeing progress from companies.  This is partly in response to a changing regulatory environment globally (flagged EU regulations in particular mean forward- thinking companies are starting to turn their mind to how they can produce zero-emissions products or components to a supply chain); but also due to companies responding to sustained engagement and pressure from shareholders and customers.

We are also mindful that we, as investors, need to ensure that our portfolios are on track to decarbonise in-line with a net-zero pathway to 2050.  Outside of divesting companies with heavy carbon footprints, our meaningful point of influence is via engagement with companies to encourage them to put shareholder capital to work on the very real and sometimes difficult sunk capital replacement projects required to ensure activities across the economy are decarbonised in time.

Effective and good engagement starts with a solid understanding of the facts (what companies are doing today).  Because of the flexibility of our research management system, we’re able to capture information in a variety of ways to enhance our understanding of company and portfolio-level.

To this end, we have increased our capture of information on small-cap net-zero plans.  Our goal is to be able to see, at a glance, how many companies in our portfolio have a net zero plan in place, but also whether they have interim targets, interim target achievement dates, the baseline year and whether targets are measured on an absolute or intensity basis.

Importantly we are also including analysis of the quality of a company’s net zero plan.  This is particularly important, and where we are able to add insight.  We will be assessing net zero plans on a 1 – 5 basis.  We are looking for honest, well thought-out net zero plans that demonstrate:

  • Clear outline of the source of emissions and technology pathways for decarbonisation
  • Clearly identified projects to implement decarbonisation in the asset base
  • Timing pathways for project assessment
  • Where concrete decarbonisation technology doesn’t exist, meaningful pilot programs with proponents of new decarbonisation technology.We’re also interested in whether companies are purchasing carbon credits to offset emissions now, along with information about the source and cost of those carbon credits, reflecting work we completed earlier this year.


We evaluate an individual company’s overall social performance on the following criteria:

  • Is it a respected employer that recognises the rights of workers, customers and suppliers?
  • Does it take a proactive approach to workplace relations, employee diversity, promote the health and welfare of its employees and provide examples of continuous improvement in these endeavours?
  • Is its main product or service harmful to human health and wellbeing (e.g. tobacco)?
  • Does it engage in charitable and/or other community welfare activities?
  • Is it sensitive to cultural norms in the countries in which it operates?

As with environmental goals, we want to see linkage of executive compensation to social outcomes – particularly employee safety.  Learning happens through pain and executives need skin in the game to at least feel financial pain.  The families of injured workers suffer far worse emotional pain.

This year we have made enhancements to our social scores by adding elements to track:

  • whether companies are reporting their gender statistics to WGEA,
  • whether they are signatories to the 40:40 vision and,
  • what measures companies are taking to promote indigenous interests (we are looking for concrete measures like procurement from indigenous owned companies, indigenous employment pathways and where applicable, good practices in respecting indigenous heritage, land access and native title rights).

We have been tracking whether companies are publishing a modern slavery statement and what we consider to be their residual risk since 2021.  This year we have introduced some additional analytical guidelines for our Modern Slavery Statement assessment.  We had noticed a large divergence in what we think of as the modern slavery statement quality.  In order to capture this more methodically we are looking for the following things:

  • Risk assessment quality: the company’s method and rigour to identify Modern Slavery risk. Country and supplier due diligence rigour (whether they have used 3rd party NGO’s, comprehensive self-assessment, limited assessment)
  • Mitigation strategy: what does a company do to reduce the risk of modern slavery? We think supplier code of conduct and self-assessments are weak. We are looking for stronger mitigation strategies such as spot checks, external audit, and internal audit.
  • Remediation process: Ideally we are looking for remediation policies along with a clearly spelt out strategy for safeguarding for individuals, reporting perpetrators, and providing ongoing support to return individual to previous state.
  • Has any Modern Slavery been identified since the statement or reporting was established?

Gender diversity continues to be a focus for us.  We have recently started capturing information about whether our portfolio companies are reporting their gender diversity data to WGEA (Workplace Gender Equality Agency), along with whether companies are aligning themselves with the 40:40 vision (40% of women in senior leadership by 4040).  The 40:40 vision clearly spells out the obvious next step for achieving workplace gender equality and we look forward to seeing tangible disclosure and progress on this front.

The WGEA dataset is very detailed, and we are curious to see whether we can automate insights into trends in the companies held in our portfolio or across the market more broadly.  We plan on reporting back about this in 2024.

This year for the first time we have started to capture information about whether a company is disclosing its Indigenous engagement activities and what those consist of.  We find the initial process of observing what companies are disclosing and doing can yield broad insights into the range of practices.  We are hoping this will inform the development of a more nuanced or rigorous approach in coming years.

Voting Observations:

In the year to 30th June 2023 we cast 637 ballots for 123 company AGM’s.  Of those, 12% were AGAINST votes, but this hides the fact that we voted against at least one resolution in 36% of the AGM’s (44 AGM’s in total) we voted on.

Many of these AGAINST votes (again) related to Remuneration practices (both Remuneration reports and Equity issuance to executives or board members).


This communication is prepared by Longwave Capital Partners (‘Longwave’) (ABN 17 629 034 902), a corporate authorised representative (No. 1269404) of Pinnacle Investment Management Limited (‘Pinnacle’) (ABN 66 109 659 109, AFSL 322140) as the investment manager of Longwave Australian Small Companies Fund (ARSN 630 979 449) (‘the Fund’). Pinnacle Fund Services Limited (‘PFSL’) (ABN 29 082 494 362, AFSL 238371) is the product issuer of the Fund. PFSL is not licensed to provide financial product advice. PFSL is a wholly-owned subsidiary of the Pinnacle Investment Management Group Limited (‘Pinnacle’) (ABN 22 100 325 184). The Product Disclosure Statement (‘PDS’) and Target Market Determination (‘TMD’) of the Fund are available via the links below. Any potential investor should consider the PDS and TMD before deciding whether to acquire, or continue to hold units in, the Fund.

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