What happens when a portfolio company appears to breach a responsible investment policy?

As fund managers of the CAF ESG Fund Range, our role is clear: to manage portfolios in line with the responsible investment policy established by CAF, acting on behalf of the underlying charity investors. Responsible investment is not an optional overlay. It is embedded in portfolio construction, risk management and day to day investment decisions.

When people think about stewardship, the focus is often on screening, i.e. excluding companies or activities that fall outside agreed values or thresholds. Screening is an important part of the process and ensures, for example, that capital is not allocated to activities inconsistent with the policy framework.

However, responsible investment does not end at the point of purchase. Policies must also be applied dynamically, reflecting the fact that companies evolve over time. Business strategies shift, mergers and acquisitions can alter revenue exposure, and disclosure practices improve or sometimes deteriorate. Applying a responsible investment policy therefore requires ongoing monitoring, not simply an initial screening.

Identifying and assessing potential breaches

Across a diversified portfolio, effective monitoring requires both a combination of in house expertise and specialist third party tools. At LGT, these include platforms such as MSCI ESG Manager, which help identify potential controversies, revenue exposures, or policy breaches across the portfolio. These systems are invaluable because they enable us to analyse large volumes of data efficiently and provide an early warning system if something appears to fall outside policy limits.

However, data quality remains dependent on corporate disclosure. Companies report revenues, geographies and business activities differently. For example, while many European companies provide detailed regional revenue breakdowns, US companies often report simply “US” and “non US” earnings. These distinctions matter when applying exposure thresholds within a responsible investment policy.

Quantitative data is therefore essential, but never sufficient on its own. Qualitative judgement, informed by a deep understanding of portfolio companies, is critical before any investment decision is taken.

What happens when a potential breach is identified?

When a potential policy breach is identified, our first step is not to sell immediately. Instead, we pause and investigate the underlying issue in detail.

This involves:

• Understanding precisely what has triggered the flag.
• Assessing whether there has been a genuine change in company activity or exposure.
• Engaging directly with the company to clarify the underlying facts.
• Determining whether the data reflects economic reality or a reporting anomaly.

Where a breach is confirmed, we act decisively and in accordance with the policy. Where it is not, we work to ensure the underlying record is corrected. A recent case study illustrates why this measured approach matters.

Case study: Compass Group

Compass Group is a global leader in food and support services, operating across a broad portfolio of business to business brands including workplaces, hospitals, schools, and other institutions. The company has issued sustainability bonds, and within the CAF ESG Funds we hold Compass Group’s 4.375% bond maturing in 2032.

The stated objective of Compass Group’s sustainable bond issuance is to support environmentally sustainable land use and the responsible management of living natural resources. This includes initiatives aimed at increasing procurement from more sustainable sources.

In May 2026, we received an automated notification that this holding had breached the CAF responsible investment policy’s alcohol exposure restriction. At the time, there had been no relevant corporate announcements, and our prior analysis suggested that any exposure remained below the policy threshold.

Rather than taking immediate action, we engaged directly with Compass Group representatives within 24 hours to investigate further. Those discussions confirmed that the alert resulted from erroneous data, rather than a change in underlying business activities.

As fund manager, we were then able to coordinate communication between Compass Group and the data provider to correct the classification and improve the accuracy of future reporting. Once this process was complete, the breach flag was removed.

Why this matters for charitable investors

This example highlights an important point for charity investors: responsible investment is not a mechanical exercise. Technology and third party data providers do much of the heavy lifting and are essential to managing portfolios efficiently and consistently.

By investing directly in companies and maintaining active relationships with management teams, we have strong transparency over what we own. This enables us to distinguish between genuine policy breaches and artefacts of imperfect data.

In practice, this approach supports better outcomes. It helps avoid unnecessary trading, ensures capital continues to support high quality businesses, and maintains alignment with both the letter and the spirit of the responsible investment policy.

In conclusion

Responsible investment is a continuous process that combines policy discipline, high quality data, active monitoring and informed human judgement. While systems and screens play a vital role, they cannot replace a detailed understanding of portfolio companies or the ability to engage directly with management teams when issues arise. .

For the CAF ESG Funds, this integrated approach underpins our aim: to deliver strong long-term outcomes for investors, consistent with clearly defined responsible investment standards, so that charities can pursue their missions with confidence and integrity.