Sustainability
The Fund, in its investment selection process, is not strictly and equally bound by all three ESG criteria.
More precisely, while Governance constitutes a prerequisite for investments eligibility, Social and Environmental issues do not, by themselves, constitute an active restriction.
On Governance, a deep and extensive due diligence in each issuer’s track record is a standard process. Environmental criteria do rank high in the selection process but, so far, an otherwise attractive investment will not be restrained by average E scores. Social criteria, are likewise considered, but their impact on the investment process becomes significant only at extremely high scores.
Companies involved in criminal, illegal, or intractable activities are by default excluded. While energy and tobacco are not a priori banned, exposure to companies that might pose a greater financial risk, due to their environmental or other social damaging practices or harmful footprint, is carefully monitored.
There is certainly a trade-off between sustainability risk associated with any possible investment opportunity and its valuation and profitability outlook, but no strict selection criteria have so far been adopted and implemented. As a rule of thumb, nevertheless, investments with a poor overall ESG rank, i.e. a score inferior to 20% as given by Bloomberg, remain less attractive for investment evaluation. But there is no formal restriction on the maximum (minimum) exposure on poor (strong) ESG performing investments.
The Fund is nevertheless actively monitoring its individual and aggregate ESG scores and effort is made to maintain, at aggregate Fund level, a score on a weighted average basis greater than 50%.
At the Fund level, the objective is to advance the rotation towards investments that are less vulnerable to sustainability risks and maintain the overall ESG score increasingly greater than 50%, as measured by Bloomberg ESG criteria.
The influence and promotion of ESG characteristics in the investment decision making process is expected to gradually rise to reduce any potential adverse sustainability impact on the Fund’s NAV while enhancing the Fund’s risk-adjusted returns.
The Fund uses the following specialists’ ranking systems in assessing ESG scores:
- S&P Global ESG Rank. A company’s Total Sustainability Score is the sum of all question scores and ranges from 0-100. The Total Sustainability Score is based on individual questions that roll up into criteria, which in turn roll up into three dimensions – Economic, Environmental and Social.
- Bloomberg score based on the extent of a company’s Environmental, Social, and Governance (ESG) disclosure. Each data point is weighted in terms of importance, with data such as Greenhouse Gas Emissions carrying greater weight than other disclosures. The score is also tailored to different industry sectors.
- MSCI ESG Rating. To arrive at a final letter rating, the weighted average of the key issue scores are aggregated and companies are ranked from best (AAA) to worst (CCC). MSCI Environmental, Social and Governance (ESG) Research Limited Liability Company (LLC) provides in-depth research, ratings and analysis of the environmental, social and governance-related business practices of thousands of companies worldwide. MSCI ESG Research products and services are designed to provide critical insights that can help institutional investors identify risks and opportunities that traditional investment research may overlook. Even though Environmental and Social risks at the Fund level exist, the objective is to hasten the rotation towards investments that are less vulnerable to sustainability risks and maintain the overall ESG score increasingly greater than 50%, as measured by Bloomberg ESG criteria.