Sustainable, Responsible &/or ESG Policy:

This Sub-Fund uses the following sustainability indicators to measure the attainment of the sustainable investment objective:

1)The coverage rate of ESG analysis: ESG integration through ESG scoring using Carmignac’s proprietary ESG platform “START” (System for Tracking and Analysing of a Responsible Trajectory), which includes internal and external ESG ratings, is applied to at least 90%of issuers.

2)The amount the equity universe is reduced by (minimum 20%):

• Firm-wide: Negative screening and exclusions of unsustainable activities and practices are identified using an international norms and rules-based approach on the following: (a) controversies against the OECD business guidelines, the International Labour Organization (ILO) Declaration on Fundamental Principles and Rights at Work and UN Global compact principles, (b) controversial weapons, (c) thermal coal mining, (d) power generation companies, (e) tobacco, (f) adult entertainment.
• Fund-specific: Extended activity or stricter exclusion criteria cover oil and gas, weapons, gambling, alcohol, power generation and thermal coal mining. In addition, the companies with a MSCI ESG rating of CCC are excluded. Companies with a Co2 intensity greater than 500 tCO2/mEUR revenue are excluded. The universe is further reduced by the number of companies deemed not aligned according to our SDG alignment assessment.

3)Minimum of Sustainable investments: the Fund makes sustainable investments whereby a minimum of 80% of the Fund’s net assets, which align positively with relevant United Nations Sustainable Development Goals.

The minimum levels of sustainable investments with environmental and social objectives are respectively 10% and 30% of the Fund’s net assets.

4)Active stewardship: ESG-related company engagements contributing to better awareness or improvement in companies’ sustainability policies are measured by following indicators: (a) level of active engagement and voting policies, (b) number of engagements, (c) rate of voting and (d) participation at shareholder and bondholder meetings.

5)Low-carbon intensity target: the Fund aims to achieve carbon emissions 50% lower than its reference indicator (MSCI WORLD (USD) (Reinvested Net Dividends)), measured monthly by carbon intensity (tCO2/ mUSD revenue converted to Euros; aggregated at portfolio level (Scope 1 and 2 of GHG Protocol).

Process:

The investment process starts with an ESG/SRI filter to narrow down the universe. Through negative (exclusions) and positive screenings (based on UN SDGs) a sustainable universe is created which is at least a 20% reduction from the original universe. This is followed by a financial screening aimed at finding the most attractive opportunities worldwide based on companies’ financials follows. Then, fundamental analysis is done for each potential investment. The manager seeks to create a concentrated Fund which targets 35 to 45 holdings. ESG analysis and risk management are part of ongoing portfolio monitoring and are integrated in the process. Finally, we are optimizing the weighting of our conviction based on the economic cycle.

Step 1 – ESG/SRI Screening

As part of its objective, the Fund seeks to invest sustainably for long-term growth and implements a socially responsible investment approach. The Fund’s SRI Filter comprises negative as well as positive screenings so to align with its sustainable investment objective. That is: the Fund is to invest at least 80% of its net assets (100% of stocks investments) in shares of companies that are considered aligned with relevant United Nations Sustainable Development Goals (UN SDGs) – in accordance with Carmignac Outcomes Framework.

Negative Screening

Exclusion lists are used in the screening stage. Controversial weapon companies, tobacco producers, wholesale distributors and suppliers – among others – are excluded across all funds. In addition to firm-wide exclusions, the Fund’s specific exclusions are also applied as detailed in the table below:

Positive Screening

On top of excluding harmful businesses, we also want to emphasize companies that contribute positively to either the environment or the society. In order to do so, we leverage the United Nations Sustainable Development Goals.

As mentioned, the Fund makes sustainable investments whereby a minimum of 80% of its net assets (100% of stocks investments), aligns positively with selected SDGs as per our proprietary Outcomes Framework.

In order to be considered aligned, a company must meet one of the following thresholds:

• Product and services: the company derives at least 50% of its revenue from goods and services that are related to one of the following nine SDGs: (1) No Poverty, (2) No Hunger, (3) Good Health and Well Being, (4) Quality Education, (6) Clean Water, (7) Affordable and Clean Energy, (9) Industry, Innovation and Infrastructure, (11) Sustainable Cities and Communities, (12) Responsible Consumption and Production;
• Capital expenditure: the company invests at least 30% of its capital expenditure in business activities that are related to one of the previously mentioned SDGs;
• Operations:
  • the company achieves an “aligned” status for operational alignment for at least 3 out of all 17 SDGs, based on the evidence provided by the investee company of available policies, practices and targets addressing such SDGs. An “aligned” status represents an operational alignment score of ≥2 (on a scale of -10 to +10) as determined by an external scoring provider (MSCI SDGs Operational Alignment Score); and
  • the company does not achieve a “misaligned” status for operational alignment for any SDG. A company is considered “misaligned” when its score is ≤-2 (on a scale of -10 to +10), as determined by an external scoring provider (MSCI SDGs Operational Alignment Score).

 Step 2 – Financial Screening

Our proprietary financial screen is based on metrics of historic profitability and reinvestment rate. This screening ranks companies on five factors assessing profitability, stability of margins and reinvestment in future growth. Companies are assigned a combined score based on the above criteria and we calculate a score for our portfolio based on the weighted average score of its holdings. This financial screen is a starting point for further work, or a tool for validating the ideas of the investment team, corporate and market developments, stockbroker’s analysis or information from the companies themselves. The tool used to screen the investment universe on financial criteria is illustrated below:

Stocks are ranked on five historic factors, then weighted – according to a pre-defined coefficient – so to get a global score which is ultimately representative of that specific stock within the universe. The lower the score, the better.

This financial screen aims to identify companies with the most attractive long-term growth prospects. It favors companies with longer track record of high and stable profitability but not only. Indeed, stocks with a score above the median score of the investment universe are excluded a priori, but exceptions can exist.

Additionally, we also aim for the average score of the portfolio to rank in the first quartile of the investment universe. Therefore, we could invest in companies that do not have a very long track record but reflect attractive prospects. However, these companies cannot be over-represented in the portfolio to an extent that would deteriorate the portfolio’s score below the first quartile threshold.

This screening points us in the direction where we are likely to find names that meet our philosophy.  Our process is not a quantitative approach as we follow up with fundamental research and analysis which is the backbone of our method. It is a starting point for ideas, or a check of financial soundness and of ideas sourced externally. The screen does not favor only defensive names – technology, business services, industrials names are all more cyclically exposed but indeed meet the approach.

Step 3 – Validation/Research/Valuation

Stock picking

Companies that meet our investment criteria and have sufficient growth potential are considered for inclusion in the portfolio. In more detail, after conducting initial screening, our team performs a fundamental analysis to ensure the sustainability of key characteristics we seek, namely profitability and reinvestment potential. Consequently, the decision to purchase a security involves considering several factors:

• Future Growth: We examine the company's fundamentals, including debt levels, cash management, and other key indicators to assess the health of its growth prospects.
• Viability of Growth: We evaluate the company's position relative to its peers, competitive advantages, ability to maintain them, and the industry's evolution. Positive industry or sector outlooks may influence our decision to invest in securities within that space.
• Management Analysis: We analyze the management's trajectory, strategy, and alignment with the numerical data. Additionally, we meet with the team to ensure our alignment of thinking.
• Valuation: We consider securities with strong financial performance, growth potential, and a competitive position as attractive investments. We also seek undervalued or mispriced securities compared to their intrinsic value, as they may present investment opportunities. When determining the valuation of investments, we tend to lean towards utilizing a Discounted Cash Flow (DCF) approach, where applicable. This method involves making explicit forecasts of the business's profit and loss (P&L) and cash flow over a period of 4-5 years. Following the forecast period, we apply conservative assumptions for growth during a fade period, and then make a long-term assumption regarding growth and profitability for the terminal phase. Once we have these projected cash flows, we discount them back to their present value using an appropriate discount rate. This enables us to calculate the net present value (NPV) of the future cash flows, which we then compare to the current share price of the stock in question. If our analysis indicates sufficient potential upside, considering the NPV and current share price, we may consider the stock as a potential investment opportunity. This rigorous valuation process helps us identify stocks that offer favourable risk-reward characteristics.
• ESG Analysis: We conduct a comprehensive analysis of both quantitative and qualitative aspects of environmental, social, and governance factors. This assessment helps identify any controversies and understand the company's extra-financial environment, which may impact the stock in the future.

Once all these criteria align with our expectations, we may proceed to purchase the stock for the portfolio. Prior to this decision, we create an extensive investment thesis and calculate a targeted price.

Portfolio Construction

Portfolio construction is the result of stock selection. Thus, geographical and sectoral allocation depends mainly on our stock picking capabilities. The final selection of securities is guided by our assessment of the underlying business through fundamental analysis, our valuation and the potential investment return based on our risk adjusted price target. ESG assessment will also influence the weighting of holdings in the portfolio.

The portfolio is focused but well diversified.  Each initial position ranges between 1 to 5%, based on the strength of the investment thesis, and as a result of a high conviction, the fund manager targets a number of portfolio holdings within a range of 35 to 45 stocks.

If the size of a position exceeds 5%, in the event of a strong investment thesis, such position would be closely monitored from a risk perspective, and the investment case re-assessed more frequently.

Step 4 – Quantitative Inputs to Optimize the Weighting of our Convictions

Our quant macro analysis aims to incorporate both positive and negative macroeconomic environments into our stock selection process. To achieve this, we evaluate the impact of macro factors on our investments using quantitative inputs derived from sentiment indicators. In our analysis, we take into account the relative sentiment surrounding key fundamental factors such as sales, EBITDA, earnings, and price. We consider this relative sentiment as a dependable proxy for identifying our position within the economic cycle. By assessing these indicators, we gain insights into the overall economic health and our current standing within the economic conditions. Based on our analysis and the evaluation of macro sensitivity across our portfolio, we make adjustments every quarter to the composition of our holdings to align with the stage of the economic cycle. This dynamic approach enables us to prioritize stocks that are expected to perform well in a particular economic and investment phase. Conversely, we reduce our exposure to stocks that may be negatively affected by the economic cycle, as illustrated below:

Step 5 – Monitoring and Risk Management

Risk management is at the heart of the investment process and the construction of the portfolio. We are always monitoring our investment cases to check they are developing according to our thesis and if not, then re-assess the investment case thereby seeking to minimise the risk. The weighting of holdings in the Fund is continuously monitored and weights are altered when our assessment changes.

In addition, they are supported by the Front Office Risk Management team of two headed by Guillaume Huteau. The team’s objective is to help deploy the risk in the most efficient manner and to monitor and enhance overall portfolio construction. As a member of the SIC, Guillaume ensures consistency of views with the overall Portfolio construction and that conclusions of analysis are reflected in the portfolio in the most appropriate manner. The team provides tracking error decomposition and calibrates positions sizing with a view to optimise diversification and mitigate tail risk. Complementary to the ex-ante risk modelling, they conduct performance analysis at fund, PM, or analyst level across the entire fund range. They are also instrumental in the development and enhancement of the investment team’s main day to day Portfolio management tools.

The dealing desk ensures that the trading of securities for the Fund is carried out in accordance with our best execution policy.

An important level of control is performed by an independent risk control team which ensures that regulatory, prospectus and internal investment restrictions are respected.

A third level of control is carried out by the independent middle office team which ensures that all operations related to the Fund are conducted seamlessly.

Resources, Affiliations & Corporate Strategies:

PHILOSOPHY

Carmignac, empowered through its independence and transparency since 1989, has maintained a long-held practice of investing responsibly, aware of its corporate duty to its investors and stewardship in the European fund management industry. As Risk Managers, Carmignac seeks to mitigate as many risk factors as it can identify, this very resolutely includes risks associated with ESG issues. Since 2012, Carmignac, as a PRI signatory (Principles of Responsible Investment) and a French investment firm (under the French government’s directive Grenelle II Law, art 224-238, 2010), has raised its level of transparency regarding the application of Environment, Social and Governance (ESG) criteria in the investment process. Each PRI principle has been implemented across most of its Fund range.

OUR ESG OBJECTIVES AND DEFINITIONS

Carmignac has committed to implement Environmental, Social and Governance criteria in its relations with companies in which we invest. Carmignac believes that engaging with corporate leaders on sustainability issues will heighten awareness and accountability. Identifying both risks and opportunities associated with ESG factors we believe will enhance returns, as well as lower volatility of the funds. We seek to mitigate risks associated with environmental challenges particularly in respect of fossil fuel reserves, poor governance and shareholder underrepresentation and irreverence to social issues such as health and safety.

Environment

The scope of our interest includes the impact of companies on the environment and their ability to propose services and products which respond to environmental challenges. Environmental issues we consider could include company’s treatment of carbon emissions, pollution, waste, water usage.

Social

We focus on monitoring the impact of companies with all of its stakeholders (suppliers, employees, consumers) and the increasing public expectations of social responsibility. Social issues we consider could include all types of employment abuses, staff turnover metrics, diversity, workplace health and safety, income distribution, and product safety.

Governance

We focus on the enhanced value created by companies that encourage governance ethics.

Governance issues we consider could include any tendency towards uses of bribery and corruption, government’s involvement and impact on management, board independence, executive compensation, and anticompetitive practices.

In addition, there are 30+ ESG indicators of company data that can be monitored on the Carmignac proprietary ESG system START.

THE RESPONSIBLE INVESTMENT TEAM

The Sustainable Investment team has a total of seven members including 4 ESG analysts and a dedicated Sustainable Investment Specialists team.

Ultimately, the portfolio managers are responsible for implementing an ESG approach in their portfolios. The whole Investment team have been given the responsibility and requirement to assess ESG risks in investment rationales, supported by the ESG Analysts.

Lloyd McAllister is the Head of Sustainable Investment. His role is to oversee the implementation of the socially responsible investment process, corporate and investor communication, industry thought leadership and new product innovation. Lloyd reports to Maxime Carmignac, Executive board member and CEO of Carmignac UK Ltd.

Portfolio Managers and Analysts are directly responsible for the implementation and oversight of ESG criteria in their portfolio. A Sustainable Investment Director, 4 ESG Analysts, a Sustainable Investment Specialists dedicated team support the investment team in important stages of the investment process: screening for controversies, external ESG research provider coordination, active voting and engagement framework, socially responsible certification, maintenance and control of controversial sector exclusion lists, ESG consultant services and investor communication.

Understanding the investment universe

Inside START, our proprietary ESG system

Effective management of ESG factors is inherently linked with long-term performance and risk management. Our latest ESG development is the implementation of our interactive proprietary system START (System for Tracking and Analysis of a Responsible Trajectory), systemizing the integration of ESG analysis in our Funds’ investment process. It provides:

• Systematic assessment of ESG criteria across all Funds and all equity, credit and sovereign debt assets (TR Refiniv Raw company data and Beyond Ratings)
• Ability to do scenario analysis and carbon analysis for issuers (S&P, Trucost)
• Appreciation of the company’s impact on the environment and society (MSCI impact, Impact-cubed)
• A centralised platform that also includes controversies data (ISS ESG)
• ESG sentiment assessment based on AI to identify company ESG turnaround (Truevalue Labs)

START provides forward-looking ESG analysis that gives our investment team the insight they need to make appropriate investment decisions, to best serve our clients’ long-term interests.

Overall, we analyse 31 specific ESG indicators that we have defined as financially material for around 8000 companies, to which we add controversy and impact data. START allows our teams to add unique human insight and conduct company engagement surrounding these key indicators.

Environmental

• Carbon Emissions
• Carbon Intensity
• Flaring of Natural Gas
• Total Energy / Revenues
• Renewable Energy / Total Energy
• Total Energy Consumption
• Total Waste / Revenues
• Waste Recycled / Total Waste
• Direct and Accidental Oil Spills
• Water Use / Revenues
• Water Recycled
• Total Fresh Water Withdrawal

Social

• Employee Satisfaction
• Employee Turnover
• Incidence of Female Managers
• Employee Training Hours
• Lost Time Due to Injury
• Employee Fatalities
• CEO Salary Gap with Average Salary
• Gender Pay Gap
• Customer Satisfaction

Governance

• Audit Committee Independence
• Compensation Committee Independence
• Nomination Committee Involvement
• Board Size
• Independent Board Members
• Average Board Tenure
• Board Gender Diversity
• Highest Remuneration Package
• Long Term Objective-Linked Executive Compensation
• Sustainability Compensation Incentives

We will soon launch START 2.0, the second iteration of our ESG proprietary research platform. START 2.0 is Carmignac's new ESG proprietary scoring system that builds upon START 1.0. START 2.0 will encompass bespoke peer grouping based on multiple factors such as revenue splits, region, and market cap. It follows the Sustainability Accounting Standards Board (SASB) framework and includes a broader range of KPIs for ESG data, including historic, current, and forward-looking data from multiple data vendors assessed based on materiality and coverage. The scoring system will use AI powered sentiment data to dynamically compute the most and least material SASB categories for each entity. 

Integration of ESG criteria:

Identifying risk factors and adopting responsible behaviour. Comply with a list of excluded companies and identify potential controversies in our investments.

The Portfolio Managers and Analysts complete a rationale for investment case which includes comments on E, S and G issues, and engage with companies on relevant ESG topics and controversies. These exchanges, along with the investment rationale, are documented in the front office database Verity.

The START system aggregated and collated within 90 proprietary peer groups, thus creating a company score and ranking that incorporates climate data, controversies screening, impact analysis and ESG indicators. Proprietary qualitative analysis is then incorporated, and this overall ESG risk assessment is built into the investment rational.

Exclusion policy and Coal Exit Strategy:

We believe our investments should be made in companies with sustainable business models and which are exhibiting long-term growth perspectives. As such, we have compiled an exclusion list with companies that do not meet Carmignac’s investment standards, due to their activity in areas such as controversial weapons, tobacco, adult entertainment, and thermal coal producers (1), or because they contravene global standards on environmental protection, human rights, labour standards, and anti-corruption. (2) Furthermore, Carmignac has committed to a total exit of coal mining and coal-fired power generating companies by 2030 across OECD countries and the rest of world.

Firm-Wide Hard restrictions

(Transactions are prohibited and blocked on trading tools)

• Controversial weapons manufacturers that produce products that do not comply with treaties or legal bans
• All tobacco producers + wholesale distributors and suppliers with revenues over 5% from such products
• Thermal coals miners with over 10% revenues or 20 million tonnes from extraction
• Power generators that produce more CO2 than the defined threshold
• Adult entertainment and pornography producers and distributers with over 2% revenues from such product
• International Global Norms violations including OECD business principle, ILO principles, UNGC principles, EU, UN or OFAC sanctions

Regulatory and EU or UN regulatory sanctions and restrictions – e.g. Russian Economy Financing, Office of Foreign Assets Control (OFAC) Sanction are also enforced exclusions.

Our ESG restrictions are configured within our internal risk management system CMGR to avoid investments in stocks, sectors or countries that do not comply with our internal ESG policy. The exclusion list is controlled by the Compliance & Internal Control and Risk teams.

Voting policy

We have partnered with Institutional Shareholder Services (ISS), a leading provider in Corporate Governance and Proxy Voting Analysis & Processing. While benefiting from ISS’s global reach and their comprehensive governance research and recommendations, we maintain total control of our voting decisions. We have adopted ISS’s sustainability guidelines.

Since 2015, an active voting participation has been adopted and reported in our annual voting reports. The objective for our funds is to participate in all possible votes.

The Fund Management team is responsible for deciding how votes are to be cast. Decisions are taken either at management committee meetings, or individually, having regard to the principles set out in the “voting policy” document.

Engagement policy

Carmignac is committed to engaging with companies in which it is invested and implementing effective stewardship. Our Engagement Policy explains our active engagement approach to investee companies. A more complete description with a selection of engagements can be found in the Funds’ respective annual reports.

Climate Policy

We have made climate awareness a formal component of our investment process, joining the efforts undertaken as part of the Paris Agreement and applying article 173 on carbon reporting and ESG implementation across our Funds. As of 31/12/2020, €21.8 billion were measured and monitored in terms of carbon emissions. The carbon footprint of these investments was 53% lower than their reference indicators per million EUR invested.

Outcomes Policy

As part of being a responsible investor, we believe it is important to understand the sustainability outcomes that we have caused, have contributed to, and are directly linked to. This Policy underpins our work looking at environmental and social good and harm.

Carmignac Sustainable ‘SRI funds’ offer

Our Socially Responsible Investment (SRI) and Thematic ESG Funds take a broader approach to ESG integration depending on their philosophy, investment process and Fund Manager’s convictions. These funds can feature a wider range of investment exclusions, a low carbon footprint objective, a thematic bias or a positive screening filter.

SRI Funds adopt a socially conscious approach to investing (e.g. excluding high carbon-emitting or unethical sectors or investing in companies contributing positively to the planet).

Thematic ESG Funds adopt a thematic (E, S or G) investment approach (e.g. investing exclusively in companies actively addressing or contributing to climate change mitigation). Thematic ESG Funds at Carmignac are:

• Carmignac Portfolio Family Governed (Governance)
• Carmignac Portfolio Climate Transition (Environment)
• Carmignac Human Xperience (Social)

Best in Universe

Regarding best in class, as a non-benchmarked, active investor, our socially responsible funds apply a best in universe approach where specific sectors are excluded. Secondly, those funds that seek a low carbon emission have near zero exposure to the energy and the materials sectors. Companies that are improving their operational risk management in specific E S or G issues are also considered for investment, particularly if these improvements are a result of our engagements. Lastly, within the sustainable universe, we seek to invest in companies that are providing positive solutions to the environment and people, the objectives of which are either broadly or specifically aligned with the UN SDGs depending on the strategies.

ESG Reporting and Communication

Minimum Standards:

An ESG assessment commentary, key engagements, and carbon emissions assessment in accordance with the French Energy Transition law can be found in each Funds’ annual reports. This mandatory comment is made on ESG issues that the fund may have experienced, as well as a qualitative comment on the evolution of the funds’ annual MSCI ESG analytical assessment.

Periodic Reports:

• ESG Factsheets: We produce dedicated, monthly ESG reporting for our 6 SRI funds and which is now part of our monthly Factsheet
• Annual Voting and Engagement Reports
• The Annual ESG and HR indicator report
• Carbon reporting: (Cop21 initiatives and adhering to Energy Transition Law Article N.173 of the Monetary and Financial Code of the French government L533-22-1 du Code Monétaire et Financier).
• UNPRI Transparency report and Assessment

All firm-wide policies and reports can be found here.

Other SRI Fund reports:

• Outcomes reports through our ESG Outcomes Calculator
• Fund Sustainability-related disclosures
• Detailed Voting policy and report per Fund
• Transparency Codes

SDR Labelling:

Working towards adopting label