Our approach to sustainability

What is Sustainability?

We believe that sustainability is about meeting the needs of the present without compromising the ability of future generations to meet theirs.

As a consequence, sustainable investing is not only a question about avoiding investing in the companies that are part of the problem, showing no signs of a fast transition, but just as much about investing in innovation and progress by identifying and investing in the companies best positioned to solve the world’s biggest challenges.

No commonly accepted definition or measurement of sustainability exists, which often makes conversations on this topic difficult. At Qblue Balanced, we believe that sustainability is achieved if a company is able to run a long-term profitable business and at the same time do well simultaneously in three sustainability dimensions:

• ESG Industry Leadership
• Climate Transition Readiness
• SDG Alignment

Qblue Balanced has developed an in-house proprietary framework – The Sustainability Cube™ – which defines and measures sustainability in the three dimensions with a multitude of sub-measures in order to achieve a balanced and robust sustainability measure allowing you to identify sustainability leaders and laggards across industries globally.

Why Sustainability?

The aim of Qblue Balanced is to protect and grow the value of assets under management by ensuring that the portfolio companies diligently mitigate risks and have the lowest possible capital costs, by acting responsibly, and to encourage companies to grow earnings by pursuing sustainable opportunities that support the goals of society and the global community.

We believe that a focused effort to reduce material adverse sustainability impacts and to integrate sustainability characteristics into investments is a prerequisite for long-term healthy earnings – and thus for the preservation and growth of the real value of investments. In our view, a long-term sustainable business model taking all stakeholders’ interests into account and a true understanding of the company’s role in society, are key to success.

Companies creating societal value and recognizing that their contribution to society is instrumental in how they are assessed by shareholders, customers, employees, governments and other stakeholders will be more likely to thrive and succeed.

Creating Societal Value

The standard measure for economic value creation in a society is the monetary value of all goods and services produced in a specific time period – known as GDP. You can think of this as the Private Value of economic activities, as it ends up as income to the resources deployed in the making of the goods and services – mainly as wages to the employed labour – and as profit to the owners of the companies, sometimes named Shareholder Value. The value to society of corporate activities is thus broader than corporate earnings or profits, and all parts of Private Value should be taken into account when calculating a corporation’s contribution to Societal Value creation.

But it does not stop here. Only part of the economic value creation in a society is captured in the Private Value (or GDP). A multitude of indirect effects or externalities caused by economic activities at the corporate level need to be considered in order to calculate the total value to society of a given economic activity. We label this unknown monetary value of corporate externalities as Public Value. Consequently, we can define Societal Value:

Societal Value = Private Value + Public Value

How do we integrate Sustainability?

Qblue makes use of a three step process when integrating the sustainability policy into investment practice. The process is subject to continuous evaluations and improvements and is expected to evolve over time. Below the three steps are laid out.

Engagements and Exclusions

The first step is to identify the companies in the universe to engage with and to exclude

Engagements

We believe that engagement is generally the best strategy for contributing to improving sustainability and responsible behaviour in companies. Therefore, Qblue engages in dialogue with a selected number of companies in which we have invested.

In the Engagement policy this is described in further details.

Exclusions

Even though Qblue as a general rule finds engagement more effectful than exclusion, there are certain situations where exclusions are used. Qblue does not invest in companies that intentionally and repeatedly violate rules laid down by national authorities on the markets in which the company operates or by central international organizations generally endorsed by the global community.

Qblue does no invest in specific securities, including central government debt securities, which are covered by EU or UN sanctions. In addition, and in order to reduce the risk of investing in securities where the sustainability risk with regard to money laundering, bribery, terrorist financing and tax avoidance are deemed unacceptable, Qblue does not invest in securities issued by governments or companies domiciled in such countries.

Excessive Sustainability Risk Industries

The second step is to identify industries or sub-sectors with unwanted inherent sustainability risks where mitigation is deemed insurmountable (“Excessive Sustainability Risk Industries”).

In this step we take a closer look at companies in industries or sub-sectors of industries, where the activities or products of the companies cause severe negative externalities to society and mitigation is insurmountable or very difficult, i.e., an investment would be associated with a material adverse environmental or social impacts and/or an unwanted sustainability risk. Investments in these industries or sub-sectors typically come with an uncompensated risk, making such investment less attractive from a financial point of view as well. As governments, consumers and investors increasingly focus on these negative externalities and adverse impacts associated with certain industries, the companies in such industries might face future economic sanctions as well as reputational risks, both being harmful to their business models.

If an industry or sub-sector is deemed to belong to this category, Qblue will refrain from buying any additional securities issued by companies in this industry or subsector and a divestment plan of existing holdings of such companies has to be made. It does not prevent Qblue from holding a short position in such a company.

As mitigation of sustainability risk and material adverse sustainability impact issues is a viable option in most industries, inclusion on the Excessive Sustainability Risk Industry list is expected to affect relatively few industries or sub-sectors.

The Sustainability Cube™

Qblue has developed a proprietary framework named The Sustainability Cube™ , where all companies in the investment universe are scored and ranked according to their sustainability standards.

In designing the The Sustainability Cube™ framework and the associated “The Sustainability Cube Score™” the objective has been to create a robust and balanced sustainability measure. In order to achieve this, it has to be taken into account that creating societal value and being sustainable:

The three dimensions spanning the Sustainability Cube™ are:

• Is a multi-dimensional effort, requires a broad range of supplementary data and data quality enhancements, as sustainability data tend to be short, incomplete and noisy, is a dynamic process and changes over time, and should be measured based on the companies’ current position as well as the forward looking trajectory, as they are both relevant and may very well differ.

• ESG Industry Leadership
• Climate Transition Readiness
• SDG Alignment

Based on a multiple of sub-measures each company in the broader investment universe (more than 15,000 companies) is scored on a 0-10 scale in each of the three dimensions, before calculating the final Sustainability Cube Score™ allowing Qblue Balanced to rank all companies within and between industries.

Low scores are given to companies associated with a high level of sustainability risk and low level of sustainability opportunities, and high scores given to companies with a low level of sustainability risk and a high level of sustainable opportunities.

Sustainability Governance

Sustainability policy

Our core beliefs and objectives related to sustainability are written into the company’s Sustainability policy.
We believe that sustainable investments must be characterized by consistency, predictability, seriousness, and openness and must be based on facts rather than subjective assessments. When possible, we will use quantitative measures to evaluate corporations’ standards.

A starting point, when evaluating the sustainability framework of a corporation, is often a comparison with absolute standards or best practices, but this cannot stand alone. Qblue will also consider a company’s proven ability and commitment to continuous improvement on sustainability factors, when selecting which companies to invest in and engage with.

The Sustainability policy, approved by the board of directors, defines a framework for the roles and responsibilities for establishing and updating procedures for:

• Integration of sustainability characteristics into investment strategies
• Identification and prioritization of principal adverse sustainability impacts

The Sustainability Committee, chaired by the CCO, is a key component in our governance structure with a range of responsibilities, as described below.