Summary
The Portfolio integrates environmental, social and corporate governance factors (ESG) into the investment process with the help of the Investment Manager’s sustainability screening and selection model, which assesses underlying companies’ ability to manage sustainability risks and opportunities as described in more detail below, in the section “Methodologies”. The Portfolio mainly promotes environmental characteristics, but also social characteristics. The Portfolio qualifies under Article 8 SFDR.
Environment
There are different levels of how production and usage of different goods or services could have detrimental environmental impact: global, regional or local. Combustion of fossil fuels impacts the climate through increased concentration in the atmosphere of CO2, methane and other green house gases, irrespective of where they take place. Mitigation of, or adoption to, climate change is given high priority. Below the strategy for screening and selection for the most relevant areas for more thorough analysis is outlined:
Power generation
In generation of power there are today cost-effective alternatives like wind and solar. However, they are intermittent, and their output is not plannable. To meet big fluctuations in demand over time, there are today in many geographies no clear alternatives to natural gas for generation at peaks. Natural gas could therefore be accepted in a transition phase, as a transition fuel. There are some prerequisites: a significant trend of falling carbon intensity through high investments in low emitting generation is one. Plans to complement wind/solar with long term storage is another. Power generation based on coal is only accepted as reserve capacity or if a strict phase out plan is in place.
It is of importance that the natural gas comes from sources with very limited emissions of methane, given the latter´s considerably higher warming potency.
As further detailed below, the Portfolio is endorsing technologies for primarily mitigation, and secondarily adoption to climate change. Long term storage, in for example batteries or hydrogen, will make systems based on wind and solar less intermittent and reduce swings in power prices, to the benefit of further investments in renewables. Expansion of transmission and distribution will improve the efficiency of the power system and enable electrification of heating, transports and industrial processes.
Transports
In transports electrification of cars and trucks is already making big progress. Most automotive suppliers have quantified targets for the transition from internal combustion engines (ICE) to electric vehicles (EV). One criterion for investments is that such plans are underpinned by investments and sourcing agreements regarding critical components such as batteries.
Metals & mining
There is always a negative local impact on the environment from mining. It is important that this is well managed, on a site-by-site basis. The Portfolio might invest in companies active in metals and mining, with an emphasis on companies with exposure to metals required for electrified transports and stationary storage of electricity. The Investment Manager will use data from renowned screening providers like MSCI ESG, for the analysis of practices and local environmental impact. In this segment social issues such as working conditions will be analyzed together with issues regarding the local environmental impact.
Industrial processes
Many industrial processes are very energy consuming and also hard to abate. The two biggest emitters are steel production and cement production and we use steel production as an example here. Traditionally coal is an unavoidable input in steel making, which creates significant emissions of carbon dioxide. Increased recycling, carbon capture, usage and storage (CCUS) or replacement of coal dependent blast furnaces with electric arc furnaces and/or hydrogen-based processes are ways to make steel significantly less carbon intense. Investments in companies in the steel manufacturing sector are acceptable only if there is a stringent plan to lower the CO2 emissions significantly by conversion to recycling, electrification, hydrogen-based processes and/or tangible implementation of CCUS. To make such plans credible they need to be reflected in the capex decisions.
In other carbon intense industrial processes, a verified transition towards less carbon intense methods is also a prerequisite for investments. Where electrification is a potential solution, this an important indicator.
Agriculture/forestry and related consumer goods – climate change and biodiversity
How to analyze GHG emissions from use of land is a complex matter, given the potential impact on coal and methane sinks. The latent effect on biodiversity adds incremental uncertainty. Larger scale food production could be challenged by limitations on land use, with implications for related companies in the consumer goods sector. The Portfolio is likely to invest less in this sector, given the constraints on availability of agricultural input at low cost produced with methods preserving sustainability. Positions are expected to be based on land use strategies that endorse growth in sinks and food production with reduced ecological footprint. Positions could also be based on food production with lower carbon dioxide emissions, such as plant-based proteins, and could also be based on strategies to adopt to climate change.
Technology and resource efficiency enables sustainability
The Portfolio sees technology and digitalization as enablers of a sustainable transition. Digital communication substitute physical transports of people and goods. Software and electronics replace mechanics and make systems smarter, thereby improving resource efficiency.
Social
Social issues are less related to a type of industry than environmental issues. Working conditions and security is of high importance. In industries with long supply chains, it’s important to certify a high level of standards through the whole chain. The Investment Manager relies here more on third party screening and exclusions from renowned data providers.
Governance
To build and maintain sound business principles corporate governance is of major importance. In the screening of companies the investment manager is focusing on e.g.:
- Compliance with laws and regulations
- Transparency
- Independence of board
- Competitive behavior
- Remuneration principles
- Diversity
No sustainable investment objective
The Portfolio promotes environmental or social characteristics, but does not have as its objective sustainable investment.
The sustainable investments are aligned to its environmental and social characteristics, where the inclusion of investments is focusing primarily on the environment and secondary on social consideration. The objective is to over long-time maintain or increase the sustainable investments in line with the SFDR article 2 (17) definition of sustainable investments. Over time this is expected to lead to lower emissions of greenhouse gases for society through promoting businesses that are acting within this field. It is also expected that the Portfolio will contribute to better social standards as the Portfolio will partly make sustainable investments that includes all of the three pillars (environmental, social and corporate governance, “ESG”).The Portfolio commits to make a minimum of 15% of the NAV in sustainable investments, as defined by SFDR article 2 (17) including Do No Significant Harm.
The sustainable investments have passed a test determining that they do not significantly harm any other social or environmental objectives (DNSH test). The test is done via an acknowledged external data providers´ tool, currently that provider is MSCI ESG.
Principal Adverse impact (“PAI”) indicators
The Portfolio considers PAI on sustainablility factors within the investment process.
The mandatory PAI indicators are the following:
The Investment Manager is within the investment process internally assessing primarily the PAI indicators for greenhouse gas emission using quantative PAI data on company level from an external well-known data provider, MSCI ESG, to find sustainable investments. These include the following PAI indicators as defined in the Commission Delegated Regulation (EU) 2022/1288:
PAI 1 GHG emissions (Scope 1-3 GHG emissions)
PAI 2 Carbon footprint
PAI 3 GHG intensity of investee companies
PAI 4 Exposure to companies active in the fossil fuel sector
PAI 5 Share of non-renewable energy consumption and production
PAI 6 Energy consumption intensity per high impact climate sector
The relevant optional PAI indicators are the following:
The Investment Manager will also, within the sustainable investment part of the portfolio, consider the remaining mandatory PAI indicators (list and definitions can be found in Commission Delegated Regulation (EU) 2022/1288, Annex 1).
Furthermore, on portfolio level, the Investment Manager will track the PAI indicators over time, in order to produce a trend of decreasing or stable risk.
Alignment with international standards
The Investment Manager is screening the Portfolio for alignment with the UN Global Compact Principles on Business and Human Rights.
Alignment with the the UN Global Compact Principles are tested and assured as a part of the investment process through an internal screening using information from an external data provider for ESG data. If any investment fails to follow these principles, the Investment Manager questions further and without sufficient progress, preparation is made to exit the investment.
Environmental or social characteristics of the financial product
The environmental or social characteristics of this Portfolio (together, the “E/S Characteristics”) include:
The Portfolio´s overarching ESG strategy is to invest in listed equities of enablers of the transition towards sustainable transports, industrial processes, buildings, food value chains as well as energy production and systems. Over time this is expected to lead to lower emissions of greenhouse gases.
The Portfolio integrates ESG factors into the investment process with the help of the Investment Manager´s sustainability screening and selection model, which assesses underlying companies´ability to manage sustainability risks and opportunities. The Portfolio promotes E/S Characteristics and the ESG analysis is an entirely integrated part of the investment process. Advantages in ESG are vital parts of what makes an investment attractive, together with the traditional financial metrics.
The Portfolio partly invests in sustainable investments, which means companies involved in activities that contribute to an environmental or a social objective based on ESG components together with Do No Significant Harm criteria as defined in SFDR article 2 (17).
Exclusion filters are applied in the portfolio construction to restrict investments in companies with significant exposure to certain activities deemed to be detrimental to the environment or the society at large, including weapons, tobacco companies and fossil fuel companies amongst others. Furthermore, the portfolio excludes companies that have confirmed violation against UN Global Compact principles.
The negative impact of investments on sustainability factors is taken into consideration as an integrated part of the investment process.
Investment strategy
Investment strategy used to meet the Characteristics
Beyond the Portfolio´s overarching strategy described in section above, the Investment Manager will closely monitor the companies’ management of sustainability risks, and strategies concerning climate are analyzed, as well as the sustainability of business models in the form of effects of the companies’ products and services on society and the environment.
The analysis will be based on internal and as well as external research and advisers. Exclusion of companies with business models and products that negatively affect the climate, society or stakeholders is one important part to promote the sustainability characteristics of the Portfolio, alongside the integrated sustainability analysis, which affects investment decisions.
As a first step, an exclusion criteria will apply for the Portfolio to determine the investment universe. The Portfolio has restrictions for the following sectors: Alcohol, Tobacco, Gambling, Weapons, Adult entertainment and Fossil fuels.
Investments are screened to exclude companies that generate more than a certain percentage of their revenues from of the following sectors:
| Production | Distribution | Power generation | Services | |
| Alcohol | 5% | 5% | NM | NM |
| Tobacco | 5% | 5% | NM | NM |
| Gambling | 5% | 5% | NM | NM |
| Adult enter-tainment | 5% | 5% | NM | NM |
| Conventional weapons | 5% | 5% | NM | |
| Fossil fuels | ||||
| – Coal | 1% | 5%* | 5%* | 5%* |
| – Oil | 5% | 5%* | 5%* | 50% |
| – Gas | 5%* | 50% | 50% | 50% |
NM: not meaningful
* Investments can be made in transition companies if they meet certain criteria related to credible transition targets and transition capex. The companies should not be involved in non-traditional oil exploration or production (e.g. oil sands, shale, arctic areas)
The investments are screened for violation against the UN Global Compact principles for responsible investments.
The investment manager will screen the investments continuously.
Good governance
Good governance practices of investee companies are addressed in several layers of the security selection process. Governance safeguards are inherent in the norms-based screening both before and during the lifespan of the investment, i.e. the Investment Manager monitors that the investments are in line with the UN Global Compact Principles which includes sound management structures, employee relations, remuneration of staff and tax compliance. If an investment fails, the Investment Manager questions further and without sufficient progress, preparation is made to exit the investment.
To build and maintain sound business principles corporate governance is of major importance. In the screening of companies the Investment Manager is focusing on e.g.:
The following factors will be considered before, and during the lifespan of all investments:
• Compliance with laws and regulations
• Transparency
• Independence of board
• Competitive behavior
• Remuneration principles
• Diversity
Furthermore, the Investment Manager monitors the proportion of sustainable investments and ensures that the proportion is not significantly decreasing over time, when doing this the good governance is ensured indirectely through the criteria Do No Significant Harm which is included in that definition.
Proportion of investments
The Portfolio is expected to dedicate at least 85% of its NAV to investments that are aligned with its E/S Characteristics, i.e. meet the criterias for:
• invest in listed equities of enablers of the transition towards sustainable transports, industrial processes, buildings, food value chains as well as energy production and systems screened through the activity/sector specific indicators,
• sector based exclusions including fossil fuel,
• norm-based screening,
of the E/S Characteristics promoted by the Portfolio in accordance with the binding elements of the investment strategy, including the minimum proportion of sustainable investments of the Portfolio.
The Portfolio is expected to dedicate at least 15% of its NAV to sustainable investments with environmental and social objectives, including Do No Significant Harm criteria. This implies that the investment meets all the binding elements in the investment strategy for sustainable investments and that the data provider is reporting the data.
The Portfolio is expected to dedicate at least 5% of the sum of the investments´ turnover (including non EU companies) to taxonomy-aligned investments. This implies that the data provider is reporting data. The taxonomy-aligned revenue trend should be stable or increasing over time.
There is no targeted allocation between other environmental and social investments that are sustainable as of SFDR article 2 (17) with an environmental or social objective in economic activites that do not necessary qualify as environmentally sustainable under the EU Taxonomy but all investments fits at least one of them, in a proportion from 0 to 100%.
The 85% of remaining investments are aligned with the E/S Characteristics but do not qualify as sustainable investments.
The rest of the NAV, maximum of 15%, that are not aligned with the Portfolio´s E/S Characteristics includes cash. The Portfolio may invest in other investments for which there are insufficient data. There are no minimum environmental or social safeguards on these instrument types.
The asset allocation may change over time and percentages should be seen as a minimum average over an extended period of time.
The Portfolio will mainly have direct exposures to investee entities, but indirect exposures can occur via investments in Exchange-Traded-Funds. There is no limits for these proportions and they can change over time.
Monitoring of environmental or social characteristics
The binding elements of the investment strategy used to select the investments to attain each of the E/S Characteristics promoted by the Portfolio are:
• The Investment Manager will consider activity/sector specific indicators (given availability) before, and during the lifespan of the investment, including the current situation as well as communicated targets and commitments. This approach is predominantly qualitative where the Investment Manager assesses relevant sustainable KPI´s within each sector. The activity/sector specific indicators the Investment Manager is looking at are presented in the next section “Methodologies”.
• Indicators, selection and screening of social matters include: incident rates, occupational health and safety management, labor and employment practices.
• The proportion of sustainable investments is defined and calculated by an external well known data provider MSCI ESG that defines sustainable investments based on ESG components together with Do No Significant Harm criteria as of SFDR article 2 (17). The method for calculating the proportion integrates a Pass/Fail measurement as calculated by MSCI ESG.
• Sector-based exclusions (based on maximal percentage of revenue) to prevent investments into activities that are inappropriate for the strategy. More information on the exclusion policy is available in the section “Investment strategy”. The sector-based exclusions include thresholds for exposure to fossil fuel production, distribution, power generation and services. Investments can be made in transition companies if they meet certain criteria related to credible transition targets and transition capex. The investments should not be involved in non-traditional oil exploration or production (e.g. oil sands, shale artic areas).
• Norm-based screening against violations of UN Global Compact principles having a negative impact on the environment, human rights, labor rights and business ethics. If flaws are suspected in sustainable practices, the Investment Manager questions further and without sufficient progress preparation is made to exit the investment.
• Monitoring the EU Taxonomy revenue alignment on portfolio level and ensuring that the alignment is stable or increasing over time.
• Monitoring the PAI indicators for greenhouse gas emission on portfolio level and ensuring that the measurement numbers alignment is stable or decreasing over time.
Activity/sector specific indicators
Indicators for screening of power generation
- Power mix: production/installed capacity, coal/gas/solar/wind/nuclear/storage
- Carbon intensity per generated TWh/ USD of revenues, trends and forecasts
- Investments: capacity/USD, coal/gas/solar/wind/nuclear/storage
- Sourcing of fuels
Indicators for screening of transport sector (including automotive manufacturers)
- Average emissions: per delivered unit, as percentage of revenues
- Share of ICEs vs EVs and hydrogen-fueled vehicles
- Targets for phase out of ICEs
- Investments in ICEs vs non-ICEs
- Supply strategy for critical components and materials
(This will be based on reports and commitments from the analyzed companies, as well as independent sector reports.)
Indicators for screening of metal & mining
- End markets: share of metals/minerals enabling the transition to lower carbon intensity in later stages of the chain. Percentage of revenues/capex today and plans going forward
- Power intensity, kWh/ton or USD of revenues
- Power sourcing: carbon intensity of power, fuel mix
- GHG/revenues, GHG/ton
- Local impact: emissions, water consumption, water recycling, waste
- Working conditions
- Mining permits: transparency of processes, corruption risks
Indicators for screening of GHG intense industrial processes
- GHG emissions/revenues, produced volumes
- Investment mix, capex spent on transition/total capex
- Degree of electrification. Forecasts and plans.
Indicators for screening of agriculture/forestry
- GHG emissions and sinks, related to area, production volumes and revenues
Resources that are separated from the responsible Investment Manager oversee the ESG analysis. The Portfolio will on a regular basis be screened via a MSCI ESG screening service . The costs of that provider will be borne by the Investment Manager.
Investments that do not comply with the requirements will be divested, in an orderly manner, considering the interests of the shareholders.
Methodologies
We have developed policies and procedures to ensure that the companies we invest in meet our expectations of ESG performance, and that ESG risk is managed in our investment process. This is supported by a norm-based screening process and exclusion criterias, as well as the integration of adverse sustainability impacts of our investment decisions (PAI).
Additional ESG measures for this Portfolio include a deeper ESG integration and hands-on involvement from the Investment Manager such as; minimum share of sustainable investments, monitoring the share of taxomomy alignment, and monitoring the activity/sector specific indicators.
To measure the attainment of the environmental characteristics, the Investment Manager will use mainly climate and other environmental indicators to the extent that relevant data is available. The analysis will use many independent sources of information.
• To find the most relevant investments for the Portfolio´s strategy, the Investment Manager will consider activity/sector specific indicators before and during the lifespan of the investments. This consideration demands information from different sources, including from MSCI ESG.
• Furthermore, the Investment Manager will work with exclusion criterias based on revenue for alcohol, tobacco, gambling, conventional weapons, fossil fuels including coal, oil and gas based on independent data from the renowned screening provider MSCI ESG as a first step to determine the investment universe.
• The Investment Manager will screen against norm-based violations of UN Global Compact Principles using tools provided by MSCI ESG which are presented as Pass/Fail for the investments. This screening includes all three pillars (environment, social and governance) included in sustainability.
• The Investment Manager will strive to hold stable or increase the investments that classifies as sustainable investments according to MSCI ESG.
• The Investment Manager will strive to hold stable or increase the Taxonomy revenue alignment on portfolio level according to MSCI ESG
• The Investment manager will strive to hold stable or decrease the PAI indicators on portfolio level with focus on the PAI indicators 1-6 according to MSCI ESG.
Exclusion of companies with business models and products that negatively affect the climate, society or stakeholders is one important part to promote the sustainability characteristics of the Portfolio, alongside the integrated sustainability analysis, which affects investment decisions.
PAI indicators are assessed in the Investment Manager´s screening process and the results over time are evaluated as an integrated part of the ESG strategy. Focus is on the PAI indicators related to greenhouse gas emissions which should not over time increase.
The Investment Manager consider PAI by screening both investments and external fund managers, where applicable, continously.
Data sources and processing
Data sources used
In the investment decision and in the periodic monitoring, the Investment Manager is using external ESG data from well known data provider, MSCI ESG. This is supplemented with other sources of qualitative information, both from external and internal analysis.
Measures to be taken to ensure data quality
To ensure data quality we rely on MSCI ESG who has undoubtedly larger resources both to manage large data sets and to do in dept analysis of the broad investment universe relevant for this Portfolio, than is possible with internal resources.
Prior to the data provider being chosen as a supplier, extensive market research has been conducted, and the potential data providers have been assessed on issues such as data quality, coverage, security, methodology, price, reliability and conflict of interest.
How data is processed
The data is processed by uploading portfolio holdings to the data providers platform and then manually and internally analyze the portfolio´s aggregated measures. This is the process for regular monitoring the Portfolio.
The ESG part of the investment decision, is instead, managed through various sources, where the dominant source for the quantitative data is the MSCI ESG platform.
The proportion of data that is estimated
The decisions and the monitoring, partly rely on estimated data from MSCI ESG. No estimates are calculated by the Investment Manager himself. MSCI ESG is only estimating where minimum quality is considered secured. As soon as the estimates can be exchanged to actual data, MSCI ESG will proceed with this.
Limitations to methodologies and data
ESG data in general is continually maturing and the data coverage is improving. The Investment Manager is searching the market for the data which adheres to EU regulation requirements. Estimates will be replaced with actual data, as soon as companies start to report.
The Investment Manager is focused on data that meets the EU criterias as opposites to subjective ESG data such as internally or externally provided ESG score systems.
The EU criterias relevant for the Portfolio are:
• the definition of sustainable investments (SFDR, EU 2019/2088 article 2 (17)),
• the definition of taxonomy alignment (EU Taxonomy),
• the definition of PAI on sustainability factors (Supplement to SFDR, EU 2022/1288 Annex 10).
The limitations to methodologies and data implies that it is not always possible to ensure the exact exposure in the investments. The level of the exposure can be both underestimated and overestimated compared to reality.
The Investment Manager is well aware of the limitations in data, and consideration in the investment process will be taken to ensure the Portfolio clearly promotes, among others, ESG characteristics, provided that the companies in which the investments are made follow good governance practices. The Investment Manager will manage the limitations in data by analysing multiple information and include both quantitative and qualitative measures in the investment decisions.
Sufficiently reliable data on Taxonomy alignment is scarce and the data coverage remains low, which implies a low commitment to a minimum proportion of Taxonomy-aligned investments of 5% in this Portfolio. Disclosures and reporting on taxonomy alignment will develop as the EU framework evolves and data is made available by companies.
Due diligence
The Portfolio´s ESG criterias and restrictions are monitored both before the investment and during the life-span of the investments.
Furthermore, the Investment Manager is continuously monitoring the investments to secure the E/S Characteristics of the Portfolio, gathering information directly from the companies, from external sources where the fund is subscribing for analysis and information, or from open sources such as news channels.
The information from the external data provider MSCI ESG is, where possible, questioned before used. MSCI ESG has been chosen to provide with ESG data by multiple requirements but one of the most important was to choose a large reputable data provider to achieve highest possible coverage and quality of data.
Engagement policies
As the Portfolio invests in companies around the world that have distinct E/S Characteristics or are engaged in the transition towards a more sustainable society, the theoretical need for engagement in their business is somewhat limited. The Portfolio has limited resources to engage and usually the Portfolio is a small investor in the companies, which both has the consequence that the engagement usually is limited.
The Investment Manager is a signatory of both UN PRI and UN Global Compact, and as such engaged in the work towards a more sustainable society.
Designated reference benchmark
The Portfolio does not uses a benchmark that is aligned with the Portfolio´s E/S Characteristics.