Sustainable, Responsible &/or ESG Policy:

The Fund’s investment strategy is based on a structured, quantifiable, and sustainable process:

The investment process starts with an ESG/SRI filter to narrow down the universe. Through negative (exclusions) and positive (relative and absolute) screenings a sustainable universe is created which is at least a 20% reduction from the original universe. A financial screening aimed at finding the most attractive opportunities in Europe based on companies’ financials follows. Lastly, fundamental analysis is done for each potential investment. The manager seeks to create a concentrated Fund which targets 35 to 40 holdings. ESG analysis and risk management are part of ongoing portfolio monitoring and are integrated in the process.

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.  This means that the Fund will invest mainly in shares of companies that derive most of their revenue from goods and services related to business activities which align positively with the United Nations Sustainable Development Goals.

More information of our ESG/SRI process is detailed in our section “Fund’s ESG/SRI process – further details”.

Step 2 – Financial screening

The investment process involves a proprietary financial screen based on metrics of historic profitability and reinvestment rate of the stock universe (mainly equities from Western Europe, Eastern Europe and Turkey, with ideally at least EUR 1bln market capitalisation, or lower in exceptional cases). This represents a list of ~1200 names. This analysis is carried out on the whole universe.

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. The 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.

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 favours 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 favour only defensive names – technology, business services, media names are all more cyclically exposed but indeed meet the approach.

The sustainable universe is thereby further reduced to a list of approximately 350 names.

Step 3 – Validation/Research/Valuation

This initial stage to define the investable universe is then followed by specific and proprietary fundamental company analysis and valuation. The investment team focuses on understanding business models through examination of company-published accounting and corporate information, as well as management meetings.

During this phase, the investment team interacts with the company as part of fundamental research but also to identify any Environment, Social or Governance risks. ESG research has a direct impact on the portfolio construction.  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: Capitalisations, Region – EM or DM, and 90 industry groups over 30 ESG indicators if there is coverage. Corporate sustainability reports, specialized ESG corporate research such as MSCI ESG Ratings are consulted and potential controversies are discussed.

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. 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 centralises the research of our analysts and managers.

Step 4 – 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 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 40 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 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.

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.

Fund’s ESG/SRI process – further details

ESG analysis is performed for each investment. Exclusion lists are used in the screening stage, access to the START* platform provides our managers and analysts insight into third party research as well as our proprietary internal reviews. Responsible Investment team helps with specific ESG analysis and/or company engagements.

Portfolio managers and analysts are responsible for ESG qualitative analysis and engagement and are assisted by a Governance and ESG Analysts. During the due diligence directly with Corporations as part of the investment rationale, ESG risk and opportunities are identified and discussed. External ESG data sources are aggregated on our START platform from: Trucost, TR Refinitiv, MSCI and ISS. MSCI ratings are updated annually. The overall portfolio is monitored frequently for assessment of average ratings.

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.

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

SDR Literature:

• Consumer Facing Disclosure link