Sustainable, Responsible &/or ESG Policy:

The Fund adopts a socially responsible approach towards the environment and invests thematically in equities of companies that provide products or services that the fund manager believes are addressing climate change mitigation. In pursuing this outcome, the strategy will invest in companies that provide low carbon solutions, enable emissions reductions, or undertake activities that contribute to a transition to net zero emissions by 2050, including companies involved in the more efficient extraction of commodities that are key to mitigating climate change.

This Fund uses the following sustainability indicators to measure the attainment of the each of the environmental or social characteristics promoted by the Fund:

• 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.

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• 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: Companies which do not:
    • derive more than 10% of their revenues or capital expenditure towards eligible EU Taxonomy (“Taxonomy”) activities; or
    • invest at least 10% of their capital expenditure in companies performing efficient commodity extraction, key to industrial supply chains that contribute to mitigating climate change.

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• Minimum of Sustainable investments: The Fund makes sustainable investments whereby a minimum of 30% of the Fund’s net assets are invested in shares of companies which:
  • derive more than 10% of their revenues or capital expenditure towards eligible EU Taxonomy activities; or
  • invest at least 10% of their capital expenditure performing efficient commodity extraction, key to industrial supply chains that contribute to mitigating climate change.

To qualify as a sustainable investment, if a company meets one of the above critiera but has a heavy emitting business model (defined as being in the top 25% of polluting firms within the benchmark MSCI ACWI using the metric tonnes of Scope 1, 2 and 3 per euro of enterprise value including cash), it needs to have a science-based GHG reduction target, defined as having a Science Based Greenhouse Gas Target approved by the Science Based Targets initiative.

In addition, the minimum proportion of Taxonomy aligned investments is 10% of the Fund’s net assets. For the minimum Taxonomy alignment calculation, the Technical Annex also serves as reference. The 4-step process is followed according to this guidance:

• Determine if a company has eligible turnover,
• Assess the eligible activity’s substantial contribution,
• Ensure that the companies’ activities as a whole do not cause significant harm against the Taxonomy environmental objectives,
• Determine if minimum safeguards are undertaken and the company does not violate important business norms such as the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.

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• 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.

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• 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:

Carmignac Portfolio Climate Transition is a thematic equity strategy investing in global equities using a fundamentally driven long-only investment approach and pursuing a positive environmental contribution, by investing in companies contributing to climate change mitigation. The Strategy is looking for above average return businesses, compounding value over the long-term.

The investment process is based on a fundamental bottom-up stock-picking approach, complemented by a Top-Down overlay to manage exposure & risks. It targets leading innovative, growth companies trying to bring a solution to environmental issues by:

• providing low carbon solutions
• enabling emissions reductions
• undertaking activities that contribute to a transition to net zero emissions by 2050

Determining our Universe

The initial investment universe is composed of global equities, in developed and emerging markets, represented in the MSCI All Country World Index. This represents a list of ~2900 names. We then apply multiple screens to this initial investment universe to narrow it down to identify companies that meet our investment philosophy and investment process requirements.

Moreover, Carmignac Portfolio Climate Transition is a thematic Fund. This thematic approach has important implications on the determination of the investment universe as it leads to the reduction of the initial Investment universe (i.e. MSCI All Country World) to identify those companies across all geographies and sectors that contribute to climate change mitigation and that can go into one of the three pillars below:

• Green Energy providers: Companies providing products, services or solutions that are low carbon like renewable energies or electric vehicles.
• Green Solutions Enablers: Companies offering products, services or solutions that directly or indirectly that enable other companies to cut their carbon emissions or enhance their energy efficiency (facilitators of solutions); for example, semiconductor companies that provide key components for electric vehicles.
• Energy Transition: Companies that contribute the most to the energy transition and the reduction in global carbon emissions, for example, some large integrated mining or oil companies that have adopted drastic policies to shrink their carbon footprint and are expanding their commitment into renewables.

Step 1 – Screening - Investment idea generation

The initial investment universe is composed of global equities, in developed and emerging markets, represented in the MSCI All Country World Index. This represents a list of ~2900 names.

The MSCI All Country World universe is first screened and narrowed down using Carmignac Firm wide exclusions (see next section) and liquidity assessment of companies. This initial screen helps us reduce the universe to ~2000 companies

Then we apply a screen that we call “Green Investment screen “. It is a screening based on proprietary methodology to define companies with positive environmental contribution, including those with environmentally sustainable activities as defined in taxonomy sector framework (see dedicated section on Taxonomy below for more information).

It is mainly a qualitative study that consist on analysing the companies’ main businesses and the revenues they generate from their different business, with the goal to identify those who have an activity that directly or indirectly contributes to the low carbon industry or renewable energy value chains. Put differently, we try to identify companies whose activity contributes directly or indirectly to reduce the CO2 emissions.

In order to do that we ask ourselves several questions:

• Is the company providing a product or a service that is essential for low carbon / “Green” industries or renewable energy value chains?
• What percentage of revenues is coming from activities that is essential for green industries and renewable energy value chains?
• What percentage of revenues of the company is Taxonomy aligned (i.e. Is coming from an activity that is considered environmentally friendly according to EU Taxonomy regulation standards?)
• For transitioning companies, what is the percentage of renewable energy sources in the total energy mix of the company?
• What are the incremental expenses and capital expenditure that is allocated to renewable energy sources?
• What are the incremental expenses and capital expenditures engaged to increase the energy efficiency of its activities?

We then carry a taxonomy eligibility screen, to identify the companies whose activities are eligible to the EU Taxonomy. For this we use our proprietary screening tool that uses FactSet data to identify the revenue stream of the companies and identify those that are eligible to EU Taxonomy requirements.

This Taxonomy eligibility screening is a major & crucial step in the investment process as it helps us to define companies that are comply with the thematic in which the fund invests (companies that contribute to climate change & energy transition). This screen helps us reduce further the universe to ~400 companies.

Step 2 – Validation/ Incremental Research/Valuation

This initial screening stage to define the investable universe is then followed by specific and proprietary fundamental company analysis and valuation. The Portfolio Manager focuses on understanding business models through examination of company-published accounting and corporate information, as well as management meetings to identify sustainable growth companies using proprietary analysis & valuation tools.

This step aims to assess companies’ profitability, stability of revenues & margins, the stability of their balance sheet and reinvestment in future growth in order to Identify those with the most attractive & sustainable long-term growth prospects. This points us in the direction where we are likely to find names that meet our philosophy. It is not a quant approach as we follow up with fundamental research and analysis which are instead the backbone of our approach. It is a starting point for ideas, or used to check financial soundness of ideas coming from another source e.g. news, brokers, members of the team, etc.

During this phase of the investment process, the Fund manager also carries a detailed ESG analysis of companies, analyzing Governance & Social standards, Do Not Significant Harm criteria* using our proprietary ESG criteria assessment system called START (see next section for more details). The Portfolio Manager interacts with the company in order to identify any Environment, Social or Governance risks as ESG research may have a direct impact on the portfolio construction. Special mention is made of ESG factors regarding each investment thesis. Corporate sustainability reports, specialized ESG corporate research such as MSCI ESG Ratings are consulted, and potential controversies are discussed. An active voting policy has been adopted with the objective to participate in all possible voting actions. The Proxy voting leader ISS is our partner helping us to report and identify specific issues related to ESG aspects.

In addition, the investment team will consult with the relevant internal analyst as well as external stockbroker’s analysts. The team will also build proprietary financial models to help understand the company, as well as an aid to valuation and to define target prices. Investment cases are documented for future references.

The investment thesis and the valuation models for each of the securities in the portfolio are documented in our research management tool, Mackey RMS, which centralizes the research of our analysts and managers. These notes also incorporate ESG analysis. Additionally, our proprietary rating system START allows a comparative to MSCI ratings, with a broad coverage and aggregated data set and what we believe to be a superior peer group comparing: Capitalizations, Region - EM or DM, and 90 industry groups with 31 ESG indicators if there is coverage.

With this step, the investable universe is thereby further reduced to a list of approximately 100 names.

Step 3 – Portfolio construction

Companies that meet our investment criteria and have sufficient growth potential are considered for inclusion in the portfolio. Portfolio construction is the result of stock selection. Thus, geographical and sectoral allocation depends mainly on our stock picking choices. The final selection of securities is guided by our assessment of the underlying business through fundamental analysis, our valuation and the potential investment return to our price target adjusted for risk. ESG assessment will also influence the weighting of holdings in the portfolio.

Step 4 - 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 minimize the risk of poor price development. The weighting of holdings in the Fund is continuously monitored and weights are altered when our assessment of the amount of upside to price target and risk changes.

The portfolio is also monitored by the Front office risk management team, led by Guillaume Huteau. The Front Office Risk management team is dedicated to monitoring portfolio risk at the front office level. It assesses the portfolio's absolute and relative exposures in terms of sectors, countries and currencies, and style factors. The team ensures consistency of views with the overall portfolio construction and calibrates positions to optimize diversification and mitigate extreme risks.

The risk of the portfolio is also monitored by an independent risk control team, who can make recommendations on an ad hoc basis. This team also meets every month with the fund managers at our monthly Risk Committee where key risk indicators of the portfolio are reviewed.

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:

Not eligible to use label