Sustainable, Responsible &/or ESG Policy:
The 7IM Sustainable Balance Fund is an actively managed fund with a balanced risk profile, invested in a range of global equities, bonds and funds managed within a sustainable investment framework.
Direct equity selection
The direct equity portfolio within the Sustainable Balance fund is managed by Sarasin & Partners LLP to a mandate which is agreed with 7IM.
Sarasin manage the direct equity selection to a blended benchmark, which is similar in composition to 7IM’s Strategic Asset Allocation (SAA). This benchmark was chosen to align with the 7IM SAA and ensures that the use of passive vehicles in the global equity selection was kept to a minimum, thus maintaining a high active share.
There are two negative screens applied at the outset.
Negative screening
Identifies companies from certain industries or with significant exposure to certain activities (taken to be more than 10% of revenues), which are precluded from investment at the outset. These are:
- Adult entertainment
- Alcohol
- Armaments
- Gambling
- GMOs in agriculture
- Nuclear Power generation
- Tobacco
A second screen identifies those companies which, although in acceptable industries, nonetheless exhibit unacceptable conduct. This includes:
- Widespread corruption
- Environmental degradation
- Poor labour practices and breaches of human rights
- Companies which persistently, knowingly, and materially breach international legal standards
The negative screens remove around 5% of the investment universe. Were the negative screens reduced to 0% business activity (i.e. no exposure to alcohol), this would remove about 20% of the investment universe. Our view is that setting the limit at 10% helps to keep the tracking error of the fund to an appropriate level without compromising the sustainability of the direct equity portfolio.
In addition to the negative screening, Sarasin screens for positive environmental, social and governance factors.
Positive screening
Screen 1 consists of identifying companies which have:
- Sustainable environmental practices
- Sensitivity towards the communities in which the business operates
- Responsible employment practices
- Conscientiousness about human rights
- Best practice or improvement in corporate governance
Screen 2 is where companies are scored on a range of environmental, social and governance (ESG) factors, with the scores ranging from A-E, with E being the lowest. Companies that score between A and C are investible for the Sustainable Balance fund, while those that score D and E being deemed as un-investible.
This scoring is based on a questionnaire that Sarasin sends to each company, with more than one hundred questions to the companies using a red/amber/green traffic lights scoring system. If companies exhibit too many red traffic lights, they are not investible.
Thematic framework
Finally, Sarasin select companies which have sustainable long-term businesses within five main mega-themes. The screening process results in a list of about 70 global equity holdings focused on the 5 mega-themes and further divided between the sub-themes listed below them. Sarasin see these mega themes as the drivers of sustainable investing and look for investment opportunities which means drilling down into investible sub-themes.
For example, one of the sub-themes within climate change is low carbon transport. As a percentage of global emissions, it is not as big as agriculture and power, but a significant 14%, so a way to lower carbon emissions in the transport sector would make a significant difference. This might include shifting from cars to rail, from hydrocarbon internal combustion engines to ones powered by electric or hydrogen energy or making transport more efficient by improving engine or fuel technology or using lighter components. The investible universe might include companies that produce lightweight materials for aircraft manufacture, for example.
The fund exclusions are reviewed from time to time, with 7IM adding new exclusions when they think it is appropriate. Gambling was added a couple of years ago as it became clear how addictive and destructive internet gambling was for some customers
Indirect Investments via Collective Investment Schemes
The 7IM Sustainable Balance fund is invested across a wide range of asset classes, some of which can only be accessed through open ended or closed ended collective investment schemes. These are funds in which a number of different investors invest.
Because the ethical investment policies of the Sustainable Balance fund cannot be applied fully, or at all, in investments in collective investment schemes it is essential that parameters for the selection of funds by third party managers are set.
1) Scope
The selection process applied to the choice of funds for the 7IM Sustainable Balance Fund is as follows.
The funds are selected on the basis that they track recognised ethical or socially responsible indices or are managed in accordance with 7IM’s judgemental screening. To that end we adopt a rigorous, multi-step process when it comes to selecting funds managed by third parties to ensure that only appropriate investments make it into the 7IM Sustainable Balance Fund.
2) Active Funds
When selecting collective investment schemes managed by third parties we try and identify managers that have the following characteristics:
- Systematically integrate ESG factors into investment decisions
- Analyse ESG materiality before and after investment decisions
- Act as good stewards and implement responsible investment and engagement practices
- Address positive and negative outcomes caused by their investment
The purpose of the fund selection process at 7IM from an ESG perspective is to identify an investment that has the people, process and expertise in place to invest sustainably. We explain this below and use Morningstar, Bloomberg and ESG Manager to validate this due diligence.
- We screen the asset class universe for funds which follow a sustainable benchmark or systematically integrate
ESG factors into investment decisions.
- We screen these investments based on size, date of launch and key performance metrics.
- We meet with managers to discuss how they integrate ESG into their investment process, firm culture and howthey engage with companies that they are invested in.
- We then do a deep dive into their investment process, how they generate value and how they manage risks.
As part of our ESG due diligence process we send out a questionnaire to prospective managers that includes a range of questions covering corporate structure, investment strategy and voting & engagement. This questionnaire attempts to go further than what is provided in the standard marketing material and find out the how the investment manager approaches ESG and what resources they have available.
When a new fund is proposed we follow a rigorous review process whereby the investment manager and the sector specialist with responsibility for the asset class at 7IM meet the fund managers of the fund. At that point we explore the fund investment process and philosophy, strength of the team managing the fund, years of experience etc., research resources, risk analysis and performance attribution. All this is captured in an extensive due diligence document which highlights potential issues to pay particular attention to.
Post investment, the performance is monitored using style adjusted benchmarks on a fortnightly basis at our Selection Committee. We also meet with the managers at least once a year, or on an ad hoc basis if there is an issue which needs to be explored.
We also review a fund manager’s and the strategy’s progress in ESG terms.
3) Passive funds
Passive funds, which include exchange traded funds and open-ended funds, are selected on the basis that they track recognised ethical or socially responsible indices. These passive funds typically use both negative and positive screening to filter the best companies in the broader index. For example, our passive equity funds select the top 25% of companies in each sector based on their MSCI ESG rating. This allows us to get a balanced exposure across the market via the highest rated companies.
In some cases we need to use a passive fund to access a particular sustainable theme in the portfolio. In the cases where the fund doesn’t track an ethical or socially responsible index we must judge whether the index meets certain ESG characteristics. To do this we ensure it has at least an ‘A’ ESG rating on MSCI’s fund rating tool and has a very low potential for exposure to controversial weapons, tobacco or other controversial activities.
- We screen the asset class universe for passive funds which follow a sustainable benchmark
- We screen these investments based on size, date of launch, cost and key performance metrics.
- Preferably we select managers that score highly on our ESG questionnaire
If the product is following a sustainable benchmark we meet with the manager to find out how the benchmark is constructed, focusing on the negative and positive screens that are in place. We also speak with the manager to see how the index rules have changed over time and how they may develop in the future.
As part of our ESG due diligence process we send out a questionnaire to prospective managers that includes a range of questions, covering corporate structure, investment strategy and voting & engagement. This questionnaire attempts to go further than what is provided by the standard marketing material and find out the how the investment manager approaches ESG and what resources they have available.
Post investment, the performance is monitored using style adjusted benchmarks on a fortnightly basis at our Selection Committee.
We also review a passive fund manager’s and the strategy’s progress in ESG terms.
4) Exclusions
The intention when looking for collective investment schemes managed by third parties our aim is to keep exposure to controversial activities to a minimum. During the due diligence process we ask what exclusions the manager has and at what thresholds these are enforced. We also try to understand how these have changed over time and what activities they are planning to exclude in the future.
The underlying exclusion policy for each third party fund is unlikely to be the same, meaning there may be residual exposure that breaches the thresholds above. We ensure that these residual exposures do not add up to more than 1% of the fund.
If we find that through our monitoring activities that a fund has a holding that leads us to breach that 1% limit we will firstly engage with the fund manager to understand whether our information is correct and whether there is justification for the holding. If we do not deem the reason to be satisfactory we will set the manager a 3 month deadline to remove the controversial holding and if the deadline is not met we make plans to exit the fund.
Please see the full list of our exclusions and thresholds here: https://www.7im.co.uk/media/d4phbtxp/sustainable-balance_fund-screening-process.pdf
5) Review Process
The above process is reviewed on an annual basis by the 7IM ESG Investment Committee. Any ad hoc changes must be approved by the 7IM ESG Investment Committee.
Stewardship
The Manager engages with investee companies on thematic issues, with the aim of positively influencing behaviour. The 7IM stewardship philosophy is fully described at https://www.7im.co.uk/inside-7im/cleaner-investments/how-we-view-stewardship-and-responsible-investing
The 7IM Sustainable Balance Fund’s screening process is fully described at https://www.7im.co.uk/media/d4phbtxp/sustainable-balance_fund-screening-process.pdf
Sustainable, Responsible &/or ESG Process:
Resources, Affiliations & Corporate Strategies
At the corporate level:
The Culture and Sustainability Committee’s responsibilities include:
- to act as guardian of the 7IM Stewardship Code;
- to review and recommend changes to 7IM’s sustainability strategy and policy, to ensure that standards of business behaviour are up to date and reflect best practice;
- to introduce to 7IM best practice thinking and ongoing awareness of global developments in sustainability and corporate social responsibility; and
- to make sure the 7IM culture is respected and advanced across the firm.
The Culture and Sustainability Committee is increasingly focusing on the outcomes of our stewardship and ESG activities, as required by the UK Stewardship Code. Representatives for each of our four Sustainability Commitments (as outlined below) take turns to report on progress at the monthly Committee meetings. An operating rhythm has been set to ensure each of our lead representatives are providing an update, including both successes and any blockers to achieving our objectives, on a quarterly basis. Investment stewardship and ESG at 7IM are managed by the ESG Investment Committee, also set up in 2020. It reports to the Culture and Sustainability Committee and to the Investment Committee, which is the senior decision-making body for all 7IM’s investments and is ultimately responsible for investment performance.
ESG Investment Committee
The ESG Investment Committee is based in the Investment Management team and has six members. It includes representatives from every stage of the investment process at 7IM: Strategic Asset Allocation, Tactical Asset Allocation, Portfolio Management and Investment Risk. Two members of the Investment Committee also sit on the ESG Investment Committee
Further initiatives underway
We have been awarded the Stewardship Code for 2020 and 2021 which was a substantial and ambitious revision to the UK stewardship code.
We have applied for the 2022 Stewardship Code.
We are signatories to the UN PRI and this year are submitting a detailed report to obtain a grading from them.
We aim to reduce emissions by 30% at the strategic asset allocation level over the next five years, by mid-2026, and are working on a programme to lower them further after that.
We are exploring ways to further integrate ESG and responsible investing across our investing practices.
For further details on our resources, roles and responsibilities, please see our 2022 Stewardship report here: https://www.7im.co.uk/media/2o5l4qk1/stewardship-report-2022.pdf
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