Specific Considerations

Climate Change

Commodity fundamentals are clearly being shaped by the growing global commitment to address anthropogenic carbon dioxide and its impact on the climate. These considerations are incorporated in our commodity specific supply/demand models and also help inform our view of emerging technologies which may increase risks to certain commodities while creating opportunities in others. While there are divergent views on how C02 should be curtailed, our objective is to limit exposures to climate-change related risks through the elimination of specific commodities in our portfolio. Over the past several years, we have increased exposures to natural gas, copper and other commodities and power sources which are integral to the energy transition while avoiding thermal coal and coal-fired power generation.

Environmental Stewardship

As part of our initial due diligence, we research both the company and the current management team’s track record of environmental compliance and transparency. We review compensation plans and engage in discussion with management and the board to understand a company’s perspective and culture around environmental stewardship.

On an asset-specific basis, ESG factors are examined through on-site visits, where risks related to infrastructure, water access, existing power sources, changes in sea level, regulatory frameworks, etc. are assessed. It has been our experience that lower cost, more capital efficient assets have a much smaller environmental impact per unit of production than operations higher on the cost curve, which simply serves to reinforce the economic imperative of our project-level due diligence.

Finally, our customized proxy voting guidelines include explicit policies related to climate change/greenhouse gas (“GHG”) emissions, energy efficiency, hydraulic fracturing, sustainability initiatives, and water usage. In general, these guidelines are supportive of resolutions requesting that companies disclose information about the GHG-related risks of their operations and investments.

Safety and Labor Practices

As part of our initial due diligence, we research both the company and the current management team’s track record of labor relations and operational safety, as well as its commitment to compliance and transparency. We review compensation plans and engage in discussion with management and the board to understand a company’s perspective and culture around safety and labor relations.

On an asset-specific basis, ESG factors are examined through on-site visits, where the operating environment related to safety and labor relations are clearly evident. We believe that companies that are actively engaged in creating a safe, sustainable working environment and who view their employees as partners have much higher levels of operating efficiencies and productivity.

Local Relations

Many of our portfolio companies own assets which provide the majority of employment and economic activity in a region, if not the entire country. As such, it is critical that the operation is viewed as a responsible member of the community, without crossing the line into misconduct or allowing itself to be mistreated. This is a constant balancing act, and one which must be monitored. Again, site visits, developing relationships with local and federal governmental agencies and leaders, monitoring a host country’s economic health, etc. are all important components of managing this unique aspect of social risk.

Governance

We consider ourselves to be fractional owners of our portfolio companies and as such are actively engaged with management teams and boards around issues related to corporate governance. We have created customized proxy voting guidelines that are updated annually and which we send out to our portfolio companies as well as to our investors. These guidelines are available on our website at https://sailingstonecapital.com/esg.html.

Given our investment time frame, we are focused on working collaboratively with management teams and boards around long-term value creation. This includes governance-related topics such as board composition, diversity and refreshment cycles, board and management compensation plans, standards-based reporting and transparency initiatives, and strategic capital allocation, among others. This engagement is intended to both protect and enhance the cash flow and return characteristics of the underlying assets as a means to create sustainable economic value over time. Importantly, we are not activists seeking change for a short-term profit. However, we do believe that it is our fiduciary duty as owners to be clear about our expectations, to work cooperatively when enhancements can be made, and to seek change when those expectations are not met.

Divestment

While many investors have taken the stance that divesting from the natural resource space is the only responsible way to address climate change, we believe that this approach is completely inconsistent with achieving those objectives. Reducing carbon emissions can come in one of two ways – by halting economic progress on a global basis, and thereby condemning billions of people to a life of poverty, a lack of basic healthcare and limited to no education, or by investing in technologies and infrastructure that reduce energy demand as well as the emissions that come from its production and consumption. It is our contention that the appropriate and considered capitalization of those upstream commodities and projects, that are necessary to allow a global reduction in emissions, while improving access to energy, healthcare and education, is the ONLY responsible path for ESG-minded investors.

Stranded Assets

In general, we look for assets with long reserve lives as they are typically mis-valued. However, for commodities which may face demand concerns over the longer term (10 years plus), we are cognizant that, in fact, those reserves may be considerably less valuable in the future than they would be if produced today. Often those demand concerns are ESG-related, as is currently the case for oil. In these situations, when we find investable assets with operators that meet our hurdles for environmental and safety practices, we will require very high free cash flow and dividend yields such that our investment is recouped prior to the time when we expect any demand-related concerns to impact physical supply/demand balances.