PHILOSOPHY

Solstein Capital, LLC (“Solstein”) endeavors to provide clients with investment strategies that achieve their overall objectives.  As fiduciaries of clients’ assets, Solstein employs a disciplined investment process that seeks to identify opportunities and evaluate their potential risks while delivering outperformance relative to clients’ investment guidelines.

As global investors across asset classes, the team recognizes that responsible investing may incorporate idiosyncratic factors across geographies, industries, asset classes, security, style, and other categories that impact investment risk and return.  With founders that worked together previously for many years at a governance-driven firm before founding Solstein, ESG analysis and active ownership have been implicit aspects of the team’s investment framework.

PURPOSE

The purpose of the Solstein Capital Responsible Investment Policy is to define our commitment to and capabilities in the context of responsible investing at Solstein.

The United Nations-supported Principles for Responsible Investment (PRI) Association defines responsible investment as “a strategy and practice to incorporate environmental, social and governance (ESG) factors in investment decisions and active ownership.”

APPROACH

• Integration. Solstein considers ESG criteria as potentially meaningful components of the investment opportunity identification and risk mitigation processes and utilizes different ESG rating systems in identifying such opportunities and risks across all existing and potentially new securities.

• Exclusions.  Solstein services clients that provide specific ESG factors and exclusionary boundaries. Solstein’s separately managed accounts enable clients to provide written restrictions that can be altered over time, which must be agreed to by Solstein.

• Inclusions. Solstein services clients that provide client-directed ESG mandates. Solstein’s separately managed accounts enable clients to provide written inclusions that can be altered over time, which must be agreed to by Solstein.

SCOPE

The vast majority of Solstein assets are managed via separately-managed accounts.  As of March 2023, all institutional, long-only accounts have client-directed mandates.  Hedged and semi-hedged accounts and one co-mingled vehicle do not have client-directed mandates.  More than half of the firm’s assets incorporate ESG into the decision-making process.

INTEGRATION

• Fundamental Research.  Solstein considers fundamental factors in its due diligence process.  Solstein endeavors to invest (in long positions) in high-quality businesses led by shareholder-oriented management teams with sustainable business models, operating in attractive areas of growth and innovation.  The team values companies that embrace a long-term perspective and are thoughtful stewards of financial and non-financial resources that can include environmental and social aspects of the business.  In particular, the team believes that effective governance and responsible corporate strategy are key components for long-term value creation.  For short positions, the team may consider the opposite factors.  Examples that may be considered include:

  • Quality of the Management team

  • Executive compensation and alignment of incentive structures with long-term objectives and shareholder value creation

  • Board independence, skills and experience

  • Capital structure, ownership control, and shareholder protections and rights

  • Human capital management

  • Supply chain management

  • Product safety and impact

  • Environmental policy and water intensive industries

  • Sensitivity to regulation

  • Quality of disclosures and transparency into financial and non-financial matters

• ·Materiality.  Responsible investing factors vary in importance and can depend on a host of variables, as previously described.  As such, the team strives to focus on the most important variables for the investment being reviewed that could affect the sustainability of a company’s value-creating potential or risk.

• Objectivity.  Solstein’s internal team also reviews independent, external ratings to complement its analysis.  The team utilizes MSCI Ratings, Bloomberg Ratings, S&P Ratings, and other ratings from its data providers.

EVALUATION

• Overall.  Solstein values a variety of factors when considering an overall assessment of a company.  It produces a Solstein Score which incorporates (i) the absolute scores of a company across ESG factors from multiple sources, (ii) whether the company is improving its overall score, (iii) how its score compares to that of peer companies, (iv) whether the company scores particularly well in one of Environmental, Social or Governance categories on an absolute or a relative basis to peers, and (v) whether a company is improving its score in at least two of the three categories.

• Environmental.  Solstein secures scores to evaluate (i) the absolute score of a company across Environmental factors, (ii) whether the company is improving its Environmental score, (iii) and how its Environmental score compares to that of peer companies.  The goal is to encourage positions with strong scores across Environmental factors as well as positions that outperform peers or are improving on an independent basis.

• Social.  Solstein secures scores to evaluate (i) the absolute score of a company across Social factors, (ii) whether the company is improving its Social score, (iii) and how its Social score compares to that of peer companies. The goal is to encourage positions with strong scores across Environmental factors as well as positions that outperform peers or are improving on an independent basis.

• Governance.  Solstein secures scores to evaluate (i) the absolute score of a company across Governance factors, (ii) whether the company is improving its Governance score, (iii) and how its Governance score compares to that of peer companies. The goal is to encourage positions with strong scores across Environmental factors as well as positions that outperform peers or are improving on an independent basis.

• Remarks.  The team believes that the method enables a higher likelihood of consistent data across existing and potential positions, a fairer assessment across sectors, industries, and geographies, as well as a focus on absolute, improving, and relative scores to encourage not only strong results but also improving or relatively attractive results.

STEWARDSHIP + ENGAGEMENT

• Stewardship.  Solstein is committed to promoting and exercising effective stewardship among the companies represented in the portfolios the team manages.  Solstein regards stewardship as the responsible allocation, management and oversight of capital to perform against client-driven objectives.  All market participants play a part in advancing practices that can benefit our society as a whole.  Along with proxy voting and opportunities for engagement, Solstein considers how it can contribute to industry research and engage with standard setters such as PRI.

• Engagement.  Although the founding team at Solstein came from a governance firm, Solstein is not an activist firm.  The team believes that activism requires significantly more capital and financial and legal wherewithal to accomplish successfully.  Instead, the team may decide to discuss unresolved concerns identified in its research process with management to understand potential risks and opportunities without formal, activist engagement.

• Proxy Voting.  Solstein performs proxy voting for a subset of its clients, as certain clients prefer to manage their own proxy voting initiatives.  Solstein looks to ensure that proxies are voted in the best interest of clients and endeavors to safeguard against conflicts of interest.

• Transparency.  The team welcomes client questions about the extent to which we have incorporated our understanding of relevant ESG factors into an investment case.

POLICY OVERSIGHT + GOVERNANCE

Solstein recognizes that responsible investing factors extend to the firm as well.  The firm’s Responsible Investment Policy is overseen by the Managing Members of the firm, and it is reviewed and reported on annually per calendar year, although updates may be made and approved throughout the year.  As a UNPRI signatory, the firm is required to report on its status annually.

The Investment Team has investment oversight and accountability for responsible investment.  The Investment Team is the equivalent of an Investment Committee at larger organizations.

This Policy represents a statement of intent and is not intended to create legally enforceable obligations.