Financial Product Disclosure: Global Sustainable Leaders

The financial product has been approved by the Swedish Financial Supervisory Authority (SFSA) and the pre-contractual disclosure documents can be found here

In order to comply with the forthcoming Regulatory Technical Standards (RTS), the sustainability disclosures for the financial product on this website contains supplementary and clarifying information compared to the SFSA approved pre-contractual disclosure documents. It is the intention to update the pre-contractual disclosure documents to reflect the requirements in the RTS before the new regulation becomes applicable on January 1, 2022.

Summary

The financial product invests in developed market equities with superior sustainability characteristics.

Stock selection is based on the Sub-Investment Manger’s proprietary sustainability framework, the Sustainability CubeTM, focusing on several dimensions of sustainability:

  • Climate Transition
  • ESG industry leadership
  • United Nation’s Sustainable Development Goals

In addition to measuring companies’ current status along these dimensions, the Sustainability CubeTM Score also evaluates how well companies are positioned for the transition to a more sustainable economy, as measured by company strategy and development of sustainable products and services.

The Sub-Investment Manager seeks that, at all times, the capital weighted average sustainability score of the portfolio companies, within each industry and region, is better than the 90th percentile of the sustainability scores – that is, corresponding to the 10% best companies – within the investment universe for that industry.

No significant harm to the sustainable investment objective

In order to not do significant harm to environmental or social objectives, the Sub-Investment Manager takes principal adverse sustainability impacts (PAIs) into account in several steps of the investment process.

Firstly, the financial product does not invest in companies which:

  • Intentionally and repeatedly violate rules laid down by national authorities on the markets in which the financial product invests or by central international organizations generally endorsed by the global community. This includes, but is not limited to,
    • UN Global Compact
    • OECD Guidelines for Multinational Enterprises.
  • Are domiciled in countries covered by EU or UN sanctions, as well as countries where the sustainability risks with regards to money laundering, bribery, terrorist financing and tax avoidance are deemed unacceptable. The list of excluded countries is updated on an ongoing basis.
  • Do business in industries with excessive risk of principal adverse sustainability impacts. This includes, but is not limited to, the following industries:
    • Tobacco
    • Thermal coal mining
    • Nuclear weapons
    • Controversial weapons
    • Oil sand extraction
    • Adult entertainment
    • Arctic drilling and exploration

Secondly, the Sub-Investment Manager evaluates the sustainability characteristics of all companies in the investment universe using its own proprietary sustainability model. The model includes several principal sustainability impact indicators on environmental, social and governance issues.

The Sustainability CubeTM model supports the “do no significant harm principle” by

  • Excluding companies with the 10% worst social scores
  • Only investing in companies with the 20% best overall sustainability score within each region and industry

Forthcoming EU regulation requires that certain PAI indicators are taken into account in order to ensure no significant harm to environmental or social objectives. These indicators are integrated into the Sustainability CubeTM as data meet certain quality and coverage criteria.

Sustainable investment objective of the financial product

The objective of the financial product is to provide long-term capital growth by investing in companies that the Sub-Investment Manager believes contribute positively to social and environmental factors. The Fund aims to achieve its objective by investing in companies that, as measured by the Sub-Investment Manager´s proprietary sustainability model (the Sustainability CubeTM), are ESG industry leaders, best positioned for the transition to a low carbon economy and aligned with the United Nations Sustainable Development Goals.

The Sub-Investment Manager seeks that, at all times, the capital weighted average sustainability score of the portfolio companies, within each industry (as per MSCI GICS level 1) within each region, is better than the 90th percentile of the sustainability scores – that is, corresponding to the 10% best companies – within the investment universe for that industry.

Investment strategy

The financial product invests in developed market liquid equity securities subject to the exclusions described in the section ‘No significant harm to the sustainable investment objective’.

Companies in the investment universe are ranked based on the Sustainability CubeTM score, and the 10% highest scoring companies in each industry in each region are selected for the portfolio. If a company at a later stage falls below the 15% best companies, the company position is closed out. This part of the investment process is an important step towards achieving the sustainability objective of the financial product.

Thereafter, the Sub-Investment Manager deploys a multi-step conviction weighting methodology, based predominately on the Sustainability CubeTM score, meaning that the higher the Sustainability CubeTM score the higher portfolio weight.

The Sub-Investment Manager assesses governance practices of investee companies when identifying companies for engagement and exclusions. Moreover, assessment of governance practices of investee companies is naturally integrated into the selection process of investee companies, since governance measures are integrated into the Sustainability CubeTM score.

Proportion of investments

Under normal circumstances, in order to attain the sustainable investment objective, the financial product aims to invest all of its equity exposure in companies classified as sustainable investments as defined under the EU sustainable finance disclosure regulation.

The Fund may also hold cash or cash equivalents, and the Fund may use derivative instruments for the purposes of efficient portfolio management and hedging.

Monitoring of the sustainable investment objective

The Sub-Investment manager will, on an ongoing basis, evaluate if the sustainable investment objective has been attained. The result will be reported to the Investment Manager and reported on the Sub-Investment Manger’s website on a yearly basis (in June).

Methodologies

The sustainable investment objective is obtained if the capital weighted average Sustainability CubeTM score of the portfolio companies, within each industry (as per MSCI GICS level 1) within each region, is better than the 90th percentile of the sustainability scores.

For each region and industry, the distribution (across business days) of the capital weighted average Sustainability CubeTM score of the portfolio companies is calculated. The objective is attained if the average score is above the 90th percentile for at least 90% of the time in all regions and industries.

Data sources and processing

Data for the Sustainability CubeTM are obtained from various data providers and data sources:

  • MSCI (carbon emission, environmental-, social-, and governance data, UN SDG alignment)
    • Macro data at segment or geographic level from academic, government, NGO datasets
    • Company disclosure (sustainability reports, proxy reports, AGM results, etc.)
    • Government databases, media, NGO, other stakeholders
    • Companies are invited to participate in a formal data verification process
  • Matter (sustainability sentiment data)
    • Natural Language Processing of UN SDG related news from 30.000 – 60.000 daily news articles
  • Google patent database (green patents)

Data quality assessment is performed by the data provider as well as by the Sub-Investment Manager.

  • MSCI
    • Quality Review Committee:
      • This committee aims to conduct data quality checks on all companies prior to publication. Automated quality database checks flag to the committee when pre-specified conditions relating to score changes are triggered, or any suspect values.
    • Data review and company communication:
      • A data review process that allows companies to comment on the accuracy of company data for all MSCI ESG Research reports
      • Companies are invited to participate in the data review process prior to the annual update
      • 50% of companies returned substantive feedback on ESG research in 2018
  • Matter
    • Out of sample validation:
      • The Natural Language Processing algorithm is validated on an ongoing basis. Random sample of news data identified as either positive or negative for the SDGs are assessed by human eye
  • Sub-Investment Manager
    • Data consistency checks
    • Quality sampling
    • Completeness assessment

An aggregated Sustainability CubeTM score is calculated for the purpose of evaluating the overall sustainability characteristics of companies in the investment universe. The objective, in designing this scoring framework, has been to create a robust and balanced measurement. The scoring methodology of the Sustainability CubeTM measures sustainability along several dimensions, with different indicators being considered in each dimension in order to attain the sustainable investment objective of the financial product. Dimensions include, but are not limited to:

  • Climate transition score:
    • current carbon footprint, carbon targets, decarbonization initiatives and development of products and services supporting greenhouse gas emission reduction
  • ESG industry leadership score:
    • current ESG score, ESG progress score and controversies screening
  • Alignment with United Nations’ Sustainable Development Goals (“UN SDGs”) score:
    • SDG revenue, measured as a percent of total revenue that can be associated with sustainable impact categories and SDG Coverage, measured as the number of SDGs with related company revenues

In addition to measuring companies’ current status along these dimensions, the Sustainability CubeTM Score also evaluates how well companies are positioned for the transition to a more sustainable economy, as measured by company strategy and development of sustainable products and services.

Limitations to methodologies and data

Sustainability factors are challenging to measure, and the involved data are often incomplete and insufficient. Missing data in sub-dimensions of the Sustainability CubeTM are imputed on a best effort basis to avoid excluding companies with incomplete sustainability data.

The Sub-Investment Manager believes that in order to attain the sustainability objective of the financial product, it is absolute key to allocate significant resources, on an ongoing basis, to search for new relevant data sources and develop tools to optimize the insight of existing data.

In addition, the Sub-Investment Manager aims to always measure sustainability factors using various data sources and cover different aspects of such factors. The philosophy behind the Sustainability CubeTM, used in the investment process, is that sustainability is multi-dimensional and dynamic, and no single data point can capture all aspects of any environmental or social factor.

Due diligence

As the investment strategy of the financial product is systematic and rule based, the investment strategy implementation as well as the monitoring of investee companies on relevant matters, including financial and non-financial performance and risk, capital structure, social and environmental impact and corporate governance, are mainly based on quantitative measures.

As the financial product only invests in liquid financial instruments traded on a regulated marketplace under a transparent disclosure regime a lot of the required data regarding financial information is publicly available in good quality. With respect to sustainability, data are not as easily accessible, and are often short, incomplete and to some degree noisy. Consequently, an important part of the investment due diligence is to make sure that relevant data for ensuring compliance with the regarding financial and non-financial topics, including sustainability, are available in a good quality.

Engagement policies

Engagement policies for the financial product follows the Sub-Investment Manager’s general engagement policies.

Company dialogue is an important part of the Sub-Investment Manager’s sustainability framework, as it believes that engagement is generally the best strategy for contributing to improving sustainability and responsible behaviour in companies.

As a general rule, the Sub-Investment Manager intends to exercise its voting rights in investee companies. The Sub-Investment Manager aims to protect and grow the value of investments by ensuring that the portfolio companies diligently mitigate risks and have the lowest possible capital costs, by acting responsibly, and at the same time encouraging companies to grow earnings by pursuing sustainable opportunities that support the goals of society and the global community. This forms the basis for the principles for exercising the voting rights.

Attainment of the sustainable investment objective

This section is only relevant for Article 9(1) and Article 9(3) products, that is, products which either have an index as reference benchmark or reduction in carbon emissions as its objective. Attainment of the sustainable investment objective for the financial product is instead covered by the ‘Methodologies’ section above.


[1] Regulatory Technical Standards regarding the content, methodologies and presentation of sustainability-related disclosures under the EU Sustainable Finance Disclosure Regulation.

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