Sustainable, Responsible &/or ESG Policy:

ESG criteria are fully integrated into our investment process and our SDG assessment is fully aligned with our ESG methodology as it based on business practices.

Our ESG/CAR industrial materiality rating looks at companies' business practices in relation to their broad ecosystem of stakeholders. We have developed a proprietary LO ESG Materiality Heatmap and Rating methodology, allowing our investment teams to focus on the environmental, social and governance dimensions that really matter to a company across its value chain. Our proprietary framework of 14 categories reflects the main dimensions of potential ESG opportunities and risks expositions across companies’ value chain. This includes upstream risks predominantly related to supply chain or natural resource usage; operational risks directly related to a company’s direct production and operational processes; and downstream risks related to the potential negative impact of products and services sold. The construction of our ratings uses raw data from a variety of specialized suppliers

We identify and rank the most material ESG dimensions for 158 GICS Level 4 sub-industries, captured in our LO ESG Materiality Heatmap. For each company, we calculate a score from 0 to 100 integrating materiality by overweighting the information that has greater significance based on their specific industry, and underweighting general information that is less relevant.

We embed our proprietary ‘Consciousness’, ‘Actions’ and ‘Results’ (‘CAR’) methodology which overweighs the ‘R’ component – ESG indicators linked to definitive outcomes. These scores, allows to attribute to each company an ESG rating from A+ to D based on their percentile positioning in their respective sector. The LO ESG Materiality methodology enhances our ability to monitor companies’ progress on the most relevant sector-specific issues for long-term sustainability, and engage with them on these material issues. The methodology differentiates the talkers from the doers and achievers.

Additionally, we map all the ESG metrics and data in our methodology to the United Nations 17 Sustainable Development Goals. This provides our investment teams with another important lens to consider the sustainability of companies’ business practices, to inform their engagement and allows us to provide clients with greater transparency on how aligned their portfolios are to the SDGs. We embed our LO ESG Materiality expertise in our SDGs ratings.

The ratings are deployed to all investment teams and are user friendly accessible through their usual cockpits and monitoring tools. Investment teams will use them differently depending on the type of strategy and asset class.

For high conviction strategies, ratings are used as sanity-check in order to avoid investing in companies with very poor business practices. Managers and analysts use these ratings as a base for dialogue and engagement.

The detailed components of the ratings are also available to portfolio managers for them to understand the weak and strong ESG characteristics of a company.

The ESG team will act as a support team for more information or drilling down.

Extra financial information is used alongside financial information to understand that companies are being understood from all aspects and that our selected companies are not exposed to material ESG issue that could prove detrimental to their ability to succeed over the long term. We could argue that such usage of ESG information is more linked to risk reduction.

Process:

The strategy follows LOIM’s systematic and high conviction disciplined approach by selecting sustainable companies within its proprietary Climate Transition universe. We build our initial Climate Transition universe using different systematic techniques to ensure we constantly capture opportunities as they arise (IPO, spin-off, changing activity split). From an initial universe of the most listed liquid companies across developed markets, we screen for the following:

• Solutions providers
• Transitions candidates
• Adaptation

This initial step ensures we have an opportunity set most aligned with the Climate Transition guiding principles and includes approximately 850 companies spanning sectors and regions filtered from a wider universe of approximately 2,500 stocks.

From our proprietary Climate Transition universe, LOIM’s investment approach combines:

1.A disciplined financial analysis of the investment universe, focusing on the sustainability of financials with our excess economic returns (EER) methodology:

• Capital efficient: for every dollar provided (debt and/or equity) it generates the highest amount possible of “new” dollars through its economic activities (ROE, ROCE)
• Maintenance of free cash flow: after having spent the annuity of capital required to maintain its economic asset base (replacement spent), it generates the highest level possible of cash flow available for funding either growth and/or returning capital to financial markets (maintenance free cash flow yield)
• Independent from capital markets: it would run its operations at a pace that it would not require constant capital raise and or new sources of debt to balance its books. The associated risk being that equity holders may dilute over time or face too much risk due to an over-accumulation of debt (external financing to net assets)

The investment universe focuses on companies capable of delivering EER that might be discounted (mispriced) by the market (DEER).

2.A dedicated review of sustainable business practices: the investment team considers extra-financial information provided by our internal ESG Solutions team’s analysis and conducts ad hoc additional investigation for companies with worst practices or worst controversies (or other ESG criteria). As part of this stewardship process, the investment team enters into dialogue with companies to better qualify our ESG-related concerns and monitor improvements.

3.A fundamental in-depth analysis on sustainable business models, corporate strategies, exposure to long-term trends and economic cycles. By conducting in depth analysis, the investment team assesses how companies defend their economic positions in the face of economic/market threats and the strength of the corporate strategy put in place to capture the exposure to long-term trends. Corporate strategy analysis consists of analysing: market share, technology advantage, cost position, network effect, and scale effect. We want to ensure we select companies with the most effective moats.

We construct portfolio with approximately 40-60 stocks by selecting the most attractively priced companies from the Climate Transition universe following our investment process.

Description of research process

Top-down analysis

The SIRSS team provides the top-down view and maintain responsibility for identifying, analysing and mapping material sustainability challenges likely to affect the long-term viability of companies’ business activities and models. The team establish the initial investment universe. Employing our investment philosophy and the expertise of our sector analysts, we further filter this initial universe.

Bottom-up analysis

Portfolio managers then carry out bottom-up analysis to identify the strongest opportunities, drawing from the top-down interaction.

The investment team uses a centralised investment platform: our investment cockpit.

• To identify the most attractive companies from an excess economic returns standpoint: capital efficiency (ROE, ROCE), cash flow generation (post maintenance capital spent) and dependency to external financial markets (limited equity capital/debt raise needs). This screening enables the identification of companies where their valuation looks attractive versus their quality (PB to ROE or EV/CE to ROCE).
• To visualise and access extra financial information and analysis related to sustainability i.e. ESG criteria, which contributes to building up a conviction on a company. Beyond aggregated ratings, the investment team has access to granular information through our central platform further identifying areas of weakness, which are material to the companies’ activities. We aim to focus on companies with good practices and avoid any controversies that could penalise long-term performance of a company.
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Finally, beyond financial models, and business practices, the investment team focuses on a deep understanding of the sustainability of activities and business models. Understanding activities exposure to climate transition is a cross-team collaboration within the firm, between portfolio managers, sector analysts and our experts.

This collaborative approach results in a blend of systematic and fundamental analysis at all levels of the investment process. The focused “sustainable universe” of approximatively 200 names enables our analysts and portfolio managers to concentrate on the most suitable names aligned with our investment philosophy and cover their respective sectors. The team does not have a specific “buy” list as they continually analyse and follow their investable universe. Research by analysts and portfolio managers outside of the focus universe must include an extensive documented research or dialogue with the company to justify why it should belong to the portfolio.

100% of the research analysis is internal as our team build each investment case. However, the origination of ideas may come from many sources including our discussions with our external network. They base research on information originating from a variety of sources including company annual reports and other pertinent published materials, meetings with the target companies, and meetings with other companies along the associated value chain.

Company visits and meetings

The team has a well-established network with the management, board members and shareholders of the majority of the “sustainable investment universe”. We conduct meetings with companies (typically at CEO and CFO level) at conferences, our offices, and company premises. Collectively our team conducts around 400 meetings per year. We typically visit a company 1-2 times before making an investment. If the investment case requires, the team also meets with suppliers, competitors, and customers of companies in which it is looking to invest. As a result, of many years of investment experience, the team is mostly researching companies they have already met several times in the past.

SRI Exclusion/Restriction Policies

Although the Fund is not exclusion based, we apply the firm Social Responsible Investment exclusion and restriction policies as follows:

a.Firm wide exclusion policies 

LOIM has a corporate exclusion policy across all our funds in terms of:

• companies involved in controversial weapons
• financial instruments directly linked to essential food commodities (rice, soya, wheat and corn)

b.SRI Restrictions Policy

• Tobacco - companies deriving more than 10% (included) of their revenues from either production of tobacco products or retailing of tobacco products/services.
• Coal extraction - companies deriving more than 10% of their revenues from thermal coal extraction.
• Power Generation - companies deriving more than 10% of their revenues from coal power generation.
• Unconventional Oil & Gas - companies deriving more than 10% in aggregate of their revenues from any of tar sands, shale gas and oil and artic oil & gas exploration.

c.Controversies

In addition, for High Conviction Equities strategies, we look at companies’ exposure to and severity of controversies (classification of incidents following standards by United Nation Global Compact Principles) as a means of managing portfolio risk. Such events can be material due to reputational issues or legal and remediation costs, and potentially lead to lower market performance.

We apply a “Controversy Score” from 0 to 5 on each company, where 0 is no concern and 5 is a major concern. Our internal policy restricts trading in companies with any controversy level 5, where validation for a potential investment consideration must be obtained from the Equity CIO.

We will engage with companies that are included in the controversies’ basket, as a way to mitigate risks.

Resources, Affiliations & Corporate Strategies:

LOIM ESG/SRI teams

LOIM has over 20 in-house staff working on ESG/SRI as well as stewardship / responsible ownership activity.

The LOIM Sustainable Investment Research Strategy and Stewardship (SIRSS) team  is responsible for research and analysis regarding forward-looking sustainability challenges or traditional ESG issues, and for providing a centralised framework for our stewardship efforts. The team provides the data necessary to carry out appropriate climate-related risk oversight through engagement and voting.

Christopher Kaminker is the Head of the SIRSS team and reports directly to Hubert Keller, the Managing Partner of the Group in charge of LOIM. Maxime Perrin is the Head of the Sustainable Investment team and reports to Nathalia Barazal, Co-Head of LOIM (along with Jean Pascal Porcherot, the other Co-Head of LOIM).

In terms of organisation, the SIRSS team is responsible for identifying, analysing and mapping material sustainability challenges that are likely to affect the long-term viability of companies' business activities and models. The team analyses the exposure of different sectors and industries to sustainability challenges, and companies' susceptibility to those challenges, i.e. (1) zero-waste, (2) regenerative nature, (3) dematerialisation, (4) resource efficiency, (5) fair society, (6) secure society, (7) zero-emissions, and (8) adaptation and resilience.

The SIRSS team draws not only on third-party data suppliers but also develops and maintains proprietary, internal datasets to evaluate companies’ positioning with respect to sustainability challenges. The team also works to develop and launch new sustainable investment products and solutions and is responsible for internal verification of green, social and sustainability bonds. The team is also responsible for carrying out our strategic objectives on stewardship, working directly, or in industry collaborations, with investee companies to promote sustainable business practices and business models, and enhance long-term value for clients.

Within the SIRSS team there are 2 dedicated specialists, included and headed by Rebeca Coriat (Head of LOIM Stewardship), dedicated to proxy voting and engagement. In addition, the engagement team works closely with investment professionals in order to carry out engagements as this function is integrated. This refers to the complete engagement process, including engagement candidate identification, engagement research for internal memo, engagement program, with specific engagement objectives, conversations with investee companies, and engagement feedback into the engagement process

The ESG Solutions team (headed by Robert de Guigné) is a SIRSS sub-team that focuses on companies’ business practices and government sustainable policies.

The ESG Solutions sub-team is responsible for measuring various environmental impact metrics and the alignment of portfolios temperature with the Paris Agreement on climate change. It conceives, develops and distributes various ESG assessment tools such as business practices scorings, controversy indicators and impact metrics, including companies' carbon and water intensity. These tools are integrated by all our investment teams in their investment processes, through screenings, best in class, exclusions approaches for our systematic teams, and integration in the decision making process for our high conviction teams. The team collects comprehensive conventional and alternative data in order to assess companies’ sustainability through their business practices and their products/services offering. Our in-house scoring system verifies that companies’ business practices comply with the highest international ESG standards for their industry and measures their alignment with the United Nations Sustainable Development Goals (SDGs). Additionally, the team monitors the occurrence and severity of controversies with potential to affect companies and their stakeholders. Climate-related risk analysis is a cross-team collaboration between our investment teams and our dedicated sustainability experts, which allows us to blend systematic and fundamental analysis at all levels of the investment process. This collaborative approach and our innovative investment platform ensure that our investment team can make forward-looking investment decisions with the highest level of information and, therefore, conviction.

In addition, the Sustainable Investment team (headed by Maxime Perrin, and previously named CLIC Solutions team) works closely with the SIRSS team at the group level, helping to efficiently embed the relevant tools, metrics, and analysis in the LOIM’S investment products and solutions. The team was created by the LOIM CEO office as a unit responsible for supporting the LOIM’s ambition to be a leader in the sustainable investment field. The team supports this key strategic initiative across LOIM by providing leadership, coordination, and implementation support to all business units on sustainable investment.

The Sustainable Investment team has full responsibility on:

• investment processes: ensuring the integration of ESG/sustainability criteria and tools in the investment decision process;
• reporting: defining the most appropriate disclosures and reporting for each investment product and solution;
• regulation and internal organization & policies: collaborating in the definition of the internal organization and policies, in compliance with the evolving regulatory framework around sustainability;
• communication and content: narrating LOIM vision and strategy on sustainability; and product range, helping develop and launch new sustainable investment products and solutions.

Industry collaboration

LOIM closely monitors all regulatory frameworks related to investment advice and products. Active memberships in various national and international financial trade associations enable the firm to provide knowledgeable inputs, voice its opinions, and embrace business innovation and regulatory changes promptly. Through both LO Group and its operational entities, LOIM is part of:

• Signatory of UN PRI: 2007
• UN Global Compact: 2018
• Certified B Corporation:2019
• Founding member Circular Bioeconomy Alliance: 2020
• Signatory of the UNEP Principles for Responsible Banking: 2020
• Active member of Sustainable Finance Geneva (SFG): 2008
• Founding partner and active member of Swiss Sustainable Finance (SSF): 2014
• Founding partner and active member of the Global Impact Investing Network’s (GIIN) Investors Council: 2012
• Member of the Institutional Investors Group on Climate Change (IIGCC): 2018
• Signatory of the Carbon Disclosure Project (CDP) on Climate Change, Forests and Water: 2004
• Signatory of the Task Force on Climate-Related Financial Disclosure (TCFD): 2019
• Participant in Climate Action 100+: 2020
• Member (Investors) of the Green Bond Principles, Social Bond Principles and Sustainable Bond Principles
• Member of the Energy Transitions Commission: 2019
• Supporters of the UK Stewardship Code
• Declaration of acceptance for Responsible Institutional Investors (Japan’s Stewardship Code)
• Finance for Biodiversity Pledge member: 2020
• Business for Nature member: 2020
• Founding members of the Natural Capital Investment Alliance: 2021
• Signatory of the UK Stewardship Code: 2021

Additionally, Lombard Odier participates in several key collaborative initiatives to encourage policy makers and regulators to take ambitious action on climate change, including promoting the adoption of the TCFD reporting standards. These include:

• Signatory of the 2019 Global Investor Statement on Climate Change
• Signatory of the 2020 letter urging the US Securities and Exchange Commission to preserve shareholder rights
• Endorsed the 7 Priorities to Help the Global Economy Recover from the Energy Transition Commission in 2020
• Signatory of the 2020 open Letter to EU Leaders From Investors on a Sustainable Recovery from COVID-19

SDR Labelling:

Not eligible to use label