Sustainable, Responsible &/or ESG Policy:

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

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

2) The amount the universe is reduced by (minimum 20% of equities and bonds where applicable):

• i) 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.
• ii) Fund-specific: Extended activity or stricter exclusion criteria cover oil and gas, weapons, gambling, alcohol, power generation, thermal coal mining, companies involved in factory farming, and companies on the People for the Ethical Treatment of Animals ("PETA") list. The universe is further reduced by the number of companies deemed not aligned according to our SDG alignment assessment, as described above.

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 SDGs. The minimum levels of sustainable investments with environmental and social objectives are respectively 5% and 35% 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 EM (EUR) (Reinvested net dividends)) measured monthly by carbon intensity (tCO2/ mEUR revenue); aggregated at portfolio level (Scope 1 and 2 of GHG Protocol).

6) Principal adverse impacts: Furthermore, this Fund is committed to applying the SFDR level II 2019/2088 Regulatory Technical Standards (RTS) annex 1 related to Principal Adverse Impacts whereby 14 mandatory and 2 optional environmental and social indicators (selected by the Sustainable Investment team for pertinence and coverage) will be monitored to show the impact of such sustainable investments against these indicators: Greenhouse gas emissions, Carbon footprint, GHG intensity (investee companies),  exposure to companies in fossil fuel sector, Non-renewable energy consumption and production, Energy consumption intensity per high-impact climate sector, Activities negatively affecting biodiversity-sensitive areas, Emissions to water, Hazardous waste ratio, Water usage and recycling (optional choice), Violations of UN Global Compact principles or OECD Guidelines for Multinational Enterprises, Lack of processes and compliance mechanisms to monitor compliance with UN Global Compact and OECD Guidelines for Multinational Enterprises, Unadjusted gender pay gap, Board gender diversity, Exposure to controversial weapons, Excessive CEO pay ratio (optional choice).

Process:

1) Negative screening policy

The investment universe is refined by a negative screening within the front office portfolio management system, which prevents investments in companies that are involved in the following sectors and activities:

The exclusions derived from ESG criteria (ESG exclusion lists, SDG Alignment) reduce the investable universe from approximately 1,400 stocks after the financial screening to approximately 840 names.

Other companies are also excluded because of ESG controversies such as corruption, polluting activities, or social controversies.

Examples of extra-financial criteria (not exhaustive)

• Environmental: sourcing and suppliers, energy type and efficiencies, water at waste management, carbon emissions data, water usage per revenue.
• Social: human capital policies, client data protection and cyber security,
• Governance: regulation, corporate governance and behaviour, employee satisfaction, employee turnover, % of independence board, executive remuneration.

2) Positive screening

When filtering out our investment universe, we try to select sectors and companies whose activity have a positive impact on the environment and society. Our focus on underpenetrated sectors also ensures that we favor sustainable growth companies, addressing environmental and social challenges in emerging markets.

Our approach is a combination of a best-in-universe and best-efforts approaches.

• Best-in-universe: instead of a best-in-class process, we opted for a more comprehensive approach in which we target companies in sectors that have a positive impact on the environment and/or society and avoid completely companies in sectors that have according to us negative externalities. That is why, we have 0% exposure in energy or materials industries in the fund, even though they may include AAA rated companies (according to MSCI ESG) in our EM investment universe.

Best efforts: when analyzing companies, we try to identify and invest in those that have an improving trajectory. We believe it is the best way to have an impact when investing in Emerging markets, instead of having a fund composed only of best rated companies that have limited upside potential and less room for improvement.

For instance, given our focus on the trajectory, we are invested in Hyundai, rated B by MSCI ESG. Hyundai is at the forefront of developing clean energy vehicles including electric cars and hydrogen trucks. They have also been steadily making progress on improving their governance credentials though there has not yet been enough progress on resolving cyclical ownership structures in the group companies.

In our ongoing discussions with Hyundai Motor, the ESG risks on which we focused concerned product recalls and the battery supply chain. We came to understand that the product recalls were initiated by Hyundai rather than government agencies, which shows that the company is constantly and proactivity reviewing its processes and products to ensure their safety. Quality is always kept at the highest level (in the UK, for example, the warranty is 7 years).  Hyundai has also appointed a new manager to oversee the entire manufacturing process, who was the former President and CEO, to ensure that the end-to-end process is more robust and constantly seeks to improve. The battery supply chain remains a topic that we will continue to discuss, to encourage maximum transparency going forward as well as mitigate the risks of future controversies.

3) Engagement policy

As an active and responsible investor that manages high conviction portfolios, active ownership is an integral part of Carmignac’s overall strategy and forms the foundation of our approach to investing responsibly. We strongly believe in a stakeholder management approach and, as an active owner, we engage with companies’ management, boards, industry experts and other stakeholders across our equity and bond holdings.

Carmignac has built a detailed Engagement Policy, published on our website (https://carmidoc.carmignac.com/ESGEP_SE_en.pdf), which sets out our approach to engagement including the engagement process and escalation.

Portfolio managers, analysts and the ESG team collaborate to engage actively with the investee companies.

There are 5 types of engagement:

• ESG risks
• Thematic engagement
• Impact engagement
• Controversial behaviours engagement
• Proxy voting decisions engagement

Carmignac’s dedicated Governance Analyst coordinates the Engagement plan enlisting the ESG analysts for their area of expertise as support and collaborating with the sector analysts and portfolio managers for joint decisions of engagement rationale whereas the oversight of the Engagement policy is performed by the CIO, Edouard Carmignac and the CEO of Carmignac UK Ltd, Maxime Carmignac.

Furthermore, at an operational level, an ESG Governance group, composed of Maxime Carmignac, the Head of Sustainable Investment, and the Governance Analyst decide on the annual engagement programme as well as to ensure ongoing oversight.

Finally, to illustrate our approach to engagement, please refer to the following case study on our engagement with LG Chem (held in Carmignac Emergents) which we published on our website as part of our periodic active ownership reporting: https://www.carmignac.com/en_US/markets-and-outlook/flash-note/an-active-start-in-the-year-6957.

4) Inside START, our proprietary ESG system

Effective management of ESG factors is inherently linked with long-term performance and risk management.

Our interactive proprietary system START (System for Tracking and Analysis of a Responsible Trajectory), systemizes the integration of ESG analysis in our Funds’ investment process.

ESG analysis is performed through our proprietary ESG ranking and research tool – START, which covers all funds and asset classes. The tool combines external quantitative data with internal qualitative expertise.

Fund Managers and Analysts are directly responsible for their implementation and oversight in their portfolios. To this end, they combine proprietary (START) and third-party ESG research with company meetings with the support of the Responsible Investment team. All investments must have an ESG rationale documented on the Research platform – verity.

START is our proprietary ESG research and ranking tool which applies to all Funds and provides a platform to consolidate data from all the external data providers.

5) CO2 emissions

Carmignac Gestion has made climate awareness a formal component of its investment process, joining the efforts undertaken as part of the Cop21 initiatives and adhering to Energy Transition Law Article 29.

The Fund also contributes through its investments to the following environmental objectives: climate change mitigation and climate change adaptation. The Stratedy aims to achieve carbon intensity 50% lower than its reference indicator (MSCI EM index), measured monthly by carbon intensity (tCO2/ mUSD revenue converted to Euros; aggregated at portfolio level (Scope 1 and 2 of GHG Protocol).

For more details, please refer to climate policy (Article 29 and TCFD report) available on Carmignac’s Sustainable Investment website.

6) No significant harm to the sustainable investment objective

All the investments of the Fund are examined for adherence to global norms on environmental protection, human rights, labor standards and anti-corruption, through controversy screening. More precisely, the investments are subject to a screening of minimum safeguards to ensure that their business activities are aligned with the OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles on Business and Human Rights. Additionally, the Fund ensures that such activities do not significantly harm the environmental objectives.

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 3 ESG analysts, a dedicated ESG product specialists’ team.

Ultimately, the fund 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, a board member and a managing director of Carmignac UK.

Portfolio Managers and Analysts are directly responsible for the implementation and oversight of ESG criteria in their portfolio. A Sustainable Investment Director, 3 ESG Analysts, an ESG Product 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 Ethix)
• 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