The Global Environmental Transformation Fund (the Sub-Fund) has sustainable investment as its objective and is therefore considered to comply with Article 9 of the Sustainable Finance Disclosure Regulation (SFDR)1.
This disclosure is made in compliance with Article 10 of SFDR and sets out key information with regards to the sustainable investment objective of the Sub-Fund. This information is summarized as follows:
The sustainable investment objective of the Sub-Fund is to invest at least 85% of its net assets in companies that are providing solutions or a pathway to help the transition to a low carbon economy and/or to adapt to, or mitigate, the effects of climate change.
The Sub-Fund commits to investing a minimum proportion of 85% of its portfolio in sustainable investments with an environmental objective, with these investments contributing to the sustainable investment objective by making positive contributions to climate change.
Although the Sub-Fund does not commit to a minimum level of taxonomy alignment, the Sub-Investment Manager expects that the Sub-Fund’s sustainable investments may contribute to climate change mitigation and climate change adaptation
The Sub-Investment Manager has fully integrated ESG considerations into the investment decision making process. As part of this overall approach, the Sub-Investment Manager ensures that the sustainable investments made by the Sub-Fund Do No Significant Harm (“DNSH”) to sustainable investment objectives by (a) adhering to a detailed exclusion framework and (b) identifying and considering the principal adverse impacts (“PAI”) on sustainability factors.
The Sub-Investment Manager’s overall investment process includes both quantitative and qualitative metrics to measure how the sustainable investment objective of the Sub-Fund is met, including an exclusionary framework, positive selection process and use of PAI metrics.
The Sub-Investment Manager uses a range of data sources in order to monitor the sustainable investment objective of the Sub-Fund, including both in-house research and third party data provider(s). These are used to systematically screen client portfolios for sustainability risks, identify priority companies for engagement and to inform company analysis as described in the Sub-Fund’s investment policy. The third party data provider(s) are subject to ongoing review and change and may differ between asset classes or sub-funds depending on the nature of the indicator to be measured.
The main limitation to the methodologies and data sources is the lack of global reporting standards and availability of consistent data. Where data is available, this also has limitations and is subject to estimation and reporting gaps and continues to evolve. The Sub-Investment Manager keeps under review the sources of data it uses for the implementation of its sustainability policy and will make changes where it considers this is necessary.
This financial product has sustainable investment as its objective.
The Sub-Fund commits to investing a minimum proportion of 85% of its portfolio in sustainable investments with an environmental objective, with these investments contributing to the sustainable investment objective by making positive contributions to climate change.
Although the Sub-Fund does not commit to a minimum level of taxonomy alignment, the Sub-Investment Manager expects that the Sub-Fund’s sustainable investments may contribute to the environmental objectives of climate change mitigation and climate change adaptation.
The Sub-Investment Manager has fully integrated ESG considerations into the investment decision making process. As part of this overall approach, the Sub-Investment Manager ensures that the sustainable investments made by the Sub-Fund Do No Significant Harm (“DNSH”) to sustainable investment objectives by (a) adhering to a detailed exclusion framework and (b) identifying and considering the principal adverse impacts (“PAI”) on sustainability factors.
In addition, the Sub-Investment Manager applies positive selection criteria as further explained in the “Investment Strategy” section below.
Each of these elements is further explained below:
a) Exclusion Framework
The Sub-Fund adheres to an exclusion framework where certain companies are removed from the permissible investment universe. The exclusion framework seeks to identify and screen out companies, where possible, which are considered by the third party data provider(s) used by the Sub-Investment Manager to be in violation of the Ten Principles of the United Nations Global Compact (UNGC). The exclusion framework also seeks to identify and screen out companies with products or within industries that are considered by the Sub-Investment Manager to be unsustainable or associated with significant environmental or social risks.
These may be updated from time to time depending on the assessment of each product or industry against the abovementioned principles, but currently the following companies will be automatically eliminated from investment consideration:
(i) any companies deriving more than 5% of annual net revenue from alcohol, tobacco, adult entertainment, gambling operations or conventional weapons; or
(ii) utility companies deriving more than 5% of their annual net revenue from power generation through the combustion of thermal coal; or
(iii) any companies deriving any revenue from controversial weapons, oil and gas extraction and production or thermal coal mining and sales.
Where no data is available from the third party data provider(s) regarding compliance with the exclusion framework above, issuers will not be excluded from the Sub-Fund’s investment universe, provided that they satisfy the positive screen applied by the Sub-Investment Manager and any other quantitative or qualitative analysis the Sub-Investment Manager considers relevant in order to satisfy the principle of “do no significant harm”.
For avoidance of doubt, the maximum revenue limit derived from power generation through the combustion of thermal coal may be disapplied in respect of existing or prospective investments in the event of government mandates/actions causing temporary deviations, for example, where a utility is required to generate electricity irrespective of fuel source in order to protect a country’s energy provision.
The Sub-Fund will also consider other sustainability and/or ESG-related attributes of companies when choosing whether to invest in companies that have been assessed as complying with the quantitative or qualitative screens, except for cash and cash equivalents or derivatives, subject to data availability. These attributes may include, but are not limited to, a company’s performance on and management of certain environmental factors, such as natural resource use, social factors such as labour standards and diversity considerations, and governance factors such as board composition and business ethics. This forms a material part of the Sub-Fund’s DNSH test.
The exclusionary framework explained is aligned with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights, including the principles and rights set out in the eight fundamental conventions identified in the Declaration of the International Labour Organization on Fundamental Principles and Rights at Work and the International Bill of Human Rights.
b) PAI on sustainability factors
The Sub-Investment Manager has assessed the PAI indicators relevant to the Sub-Fund and which the Sub-Investment Manager considers should be taken into account for the purposes of assessing whether sustainable investments otherwise cause significant harm.
Based on data availability, the following PAI indicators are taken into consideration for investments in equities and/or fixed income products issued by corporate issuers for the proportion of holdings where data is available:
1. Scope 1 Green House Gas emissions
2. Scope 2 GHG emissions
3. Scope 3 GHG emissions
4. Total GHG emissions
5. Carbon footprint
6. GHG intensity of investee companies
7. Share of investments in companies active in the fossil fuel sector
8. Share of non-renewable energy consumption and non-renewable energy production of investee companies from non-renewable energy sources
9. Energy consumption in GWh per million EUR of revenue of investee companies, per high impact climate sector
10. Share of investments in investee companies with sites/operations located in or near to biodiversity-sensitive areas
11. Tonnes of emissions to water generated by investee companies per million EUR invested, expressed as a weighted average
12. Tonnes of hazardous waste generated by investee companies per million EUR invested, expressed as a weighted average
13. Share of investments in investee companies that have been involved in violations of the UNGC principles or OECD Guidelines for Multinational Enterprises
14. Share of investments in investee companies without policies to monitor compliance with the UNGC principles or OECD Guidelines for Multinational Enterprises or grievance /complaints handling mechanisms to address violations of the UNGC principles or OECD Guidelines for Multinational Enterprises
15. Average unadjusted gender pay gap of investee companies
16. Average ratio of female to male board members in investee companies
17. Share of investments in investee companies involved in the manufacture or selling of controversial weapons
For investments in sovereign bonds and bonds issued by supranational entities, the following PAI indicators will be considered:
1. GHG intensity of investee countries
2. Absolute number of investee countries subject to social violations
3. Relative number of investee countries subject to social violations
4. Non-cooperative tax jurisdictions
The Sub-Investment Manager aims to identify the adverse sustainability impact from the Sub-Fund’s investments in several ways, including via general screening criteria, ongoing review of PAIs and where appropriate supplemented by fundamental research during the Sub-Investment Manager’s investment processes. Subject to data availability, the Sub-Investment Manager, with subject matter support from the Manulife IM’s Sustainable Investment team, is responsible for assessing and monitoring the above PAI indicators for all in-scope assets on an ongoing basis using an internally developed monitoring system, third-party data, company issued data and public information. This assessment may include both fundamental as well as quantitative analysis. Issuers identified as outliers on specific indicators, or which exhibit high adverse impact across several indicators will be subject to further analysis by the Sub-Investment Manager and may be reviewed by the Sustainable Investment team.
All specific PAI indicators that are taken into consideration for the Sub-Fund, both at an overall portfolio level and in relation to the DNSH assessment for sustainable investment, are subject to data availability. The Sub-Investment Manager monitors data availability on an ongoing basis with the aim to improve both data quality and availability.
PAI value outcomes for the Sub-Fund will be reported on an ongoing basis in the periodic reporting required by SFDR.
The sustainable investment objective of the Sub-Fund is to invest at least 85% of its net assets in companies who are providing solutions or a pathway to help the transition to a low carbon economy and/or adapt to or mitigate the effects of climate change.
Further details on the Sub-Investment Manager’s selection process are included in the section “Investment Strategy” below.
The Sub-Fund has not designated a benchmark for the purpose of attaining the sustainable objective of the Sub-Fund, as the Sub-Investment Manager considers that the sustainability indicators and other measures monitoring the attainment of the sustainable investment objective are a more appropriate reference.
The sustainability indicators used by the Sub-Investment Manager to measure the attainment of the sustainable investment objective of the Sub-Fund are linked to the four key environmental transition themes of the Sub-Fund’s investment strategy, being: 1) production of low carbon energy, 2) development of transition-enabling materials, 3) resource security and 4) electrification and efficiency.
The sustainability indicators include:
The Sub-Investment Manager uses indicators it believes will most accurately demonstrate the attainment of the sustainable investment objective, using data points the Sub-Investment Manager believes it will be able to access. However, as with any data reporting linked to companies, which may be subject to differing reporting requirements in their home jurisdiction, there may be gaps in the available data. In order to minimise the risk of this, and to ensure that the indictors are as accurate as possible, the Sub-Investment Manager may rely on estimates and/or third-party information. To the extent this is required, the Sub-Investment Manager will disclose this in the Sub-Fund’s periodic reporting when assessing the performance of the sustainability indicators.
The Sub-Fund aims to invest at least 85% of its net assets in equity and equity related securities including, but not limited to, common stocks and depositary receipts of companies which are listed on any exchange across the globe (inclusive of emerging markets), with such companies having been identified by the Sub-Investment Manager to positively contribute to environmental transformation by providing solutions or a pathway to help the transition to a lower carbon economy and/or by facilitating the ability of governments, and corporations to adapt to or mitigate the effects of climate change. To assess and monitor this positive contribution, the Sub-Investment Manager will invest thematically, while applying both quantitative and qualitative assessments as part of both the selection process and ongoing monitoring of the Sub-Fund’s portfolio.
In selecting the sustainable investments for the Sub-Fund, the Sub-Investment Manager applies the exclusionary framework detailed above, with the active investment approach that centered around four key environmental transition themes: (1) production of low carbon energy, (2) development of transition-enabling materials, (3) resource security and (4) electrification & efficiency. In selecting the sustainable investments for inclusion in the portfolio, the Sub-Investment Manager will consider companies that it identifies as having a higher degree of transition opportunity and thematic alignment, whereby eligibility criteria for selection are , (i) companies that derive more than 25% revenue from one or more of the four themes, or (ii) utility companies associated with more than 25% capacity for renewable energy, or (iii) companies associated with more than 5% of planned and future committed investment dedicated to one or more of the four themes. The evaluation will be determined by the Sub-Investment Manager using a proprietary methodology which aims to incorporate all relevant environmental factors, considering and processing third-party data from select third-party data sources.
The Sub-Investment Manager will also consider companies within the four key environmental themes which, instead of satisfying the quantitative selection criteria mentioned above, have an identified transition pathway to progress towards a low carbon economy, as determined by the Sub-Investment Manager’s assessment and data from select third-party data sources.
In addition to the criteria explained above, the Sub-Fund will also consider other sustainability and/or ESG-related attributes of companies when choosing whether to invest in companies that have been assessed as complying with the quantitative or qualitative screens, except for cash and cash equivalents or derivatives, subject to data availability. These attributes may include, but are not limited to, a company’s performance on and management of certain environmental factors, such as natural resource use; social factors such as labour standards and diversity considerations; and governance factors such as board composition and business ethics.
Over time issuers’ eligibility status with respect to the relevant ESG criteria in the Sub-Fund’s stock selection process as described above may change and some issuers who were eligible when purchased by the Sub-Fund may become ineligible. When this occurs, the Sub-Investment Manager may engage with issuers to have a constructive dialogue in order to improve factors that lead to ineligibility within the next 90 days. The position in respect of such issuers may be divested at any time or for any reason during this 90-day period.
Further details on the wider investment strategy used to attain the sustainable investment objective of the Sub-Fund are included in the investment policy.
Please also see the Sub-Investment Manager’s Sustainable Investing and Sustainability Risk Statement for further details on how the Sub-Investment Manager integrates sustainability into its investment process to ensure that it is applied on a continuous basis.
The investment strategy and selection process are applied to all assets of the Sub-Fund, except for cash and cash equivalents or derivatives. In addition:
All of the above elements are binding on the Sub-Investment Manager on a continuous basis.
Good governance practices of investee companies of the Sub-Fund are evaluated across various steps of the security selection process. Governance safeguards are inherent in the Sub-Investment Manager’s level norms-based screening as well as the Sub-Investment Manager’s PAI processes for the Sub-Fund.
Furthermore, at the Sub-Fund level, investee companies are screened for good governance principles at the point of investment and on an ongoing basis. This screening process includes sound management structures, employee relations, remuneration of staff and tax compliance, and is based on third-party data, and/or a proprietary assessment.
A proprietary assessment will be used and may take precedence over the third-party data, when the Sub-Investment Manager determines to engage with the investee companies or the Sub-Investment Manager otherwise evidences the good governance practices of investee companies, or when third- party data is lacking, the Sub-Investment Manager applies these principles by assessing issues including, but not limited to: companies’ board composition and oversight, executive compensation, labor management and human capital and tax controversies.
The selection of these specific indicators is subject to change from time to time although the overall principles will remain. Where the Sub-Investment Manager identifies any areas for improvement, and subject to an overall assessment of good governance, it may engage with the relevant investee company to seek improvements before choosing to divest, which will typically occur within 90 days. The assessment is not applicable to any cash, cash equivalent or derivatives investment or investments in securities issued by sovereigns or government-related entities.
The Sub-Fund aims to invest at least 85% of its net assets in companies having been identified by the Sub-Investment Manager to positively contribute to environmental transformation by providing solutions or a pathway to help the transition to a lower carbon economy and/or to adapt to or mitigate the effects of climate change.
The active sustainable investment approach centers around four key environmental transition themes: (1) production of low carbon energy, (2) development of transition-enabling materials, (3) resource security and (4) electrification & efficiency.
The exposures to these investments will be direct. The Sub-Fund may use derivatives for hedging and/or efficient portfolio management purposes. However, derivatives instruments will not be used to attain the sustainable investment objective of the Sub-Fund.
The Sub-Fund may hold up to 15% of the remaining assets in cash, cash equivalents and derivatives.
The Sub-Fund will have a minimum proportion of 85% of its net assets invested in sustainable investments. The remaining investments will be in cash, cash equivalents and derivatives.
The sustainable investment objective of the Sub-Fund is measured and monitored throughout the lifecycle of an investment using the sustainability indicators. These are:
The sustainable investment objective and the sustainability indicators of the Sub-fund are monitored during initial security selection and ongoing portfolio management using a combination of internal and external data.
Once an investment is made, and to ensure that investments continue to meet the Sub-Fund’s sustainability criteria, the Sub-Investment Manager continues to monitor material factors that could impact an investment, including sustainability risks and factors. Relevant risks or concerns are addressed as part of the Sub-Investment Manager’s ongoing investment process which may result in changes in a fund position size or divestment. The Sustainable Investment team may also conduct reviews on a periodic basis and engage with the investment team about potential sustainability risks.
The Sub-Investment Manager uses a combination of externally sourced data and proprietary research to ensure that the information used when monitoring the sustainable investment objective of the Sub-Fund is suitably robust, given the current levels of disclosure by companies, and performs periodic reviews allowing the Sub-Investment Manager to seek to identify gaps and/or data that may require further review. The current level of disclosure of environmental and social characteristics remains comparatively limited in comparison with other financial data, and that which is available is typically subject to more limited review (such as audits).
The Sub-Investment Manager’s overall investment process includes both quantitative and qualitative metrics to measure how the sustainable investment objective of the Sub-Fund is met, including an exclusionary framework, positive selection process and use of PAI metrics. In addition, the Sub-Investment Manager seeks to understand the sustainability risks and opportunities by using a range of external research providers as well as internal research.
Each sustainability indicator for the Sub-Fund is subject to measurement using clearly defined metrics on an ongoing basis, using a combination of internal and external data and research as is appropriate for the particular indicator.
The Sub-Investment Manager uses a range of data sources in order to monitor the sustainable investment objective of the Sub-Fund, including both in-house research and third party data provider(s). These are used to systematically screen client portfolios for sustainability risks, identify priority companies for engagement and to inform company analysis as described in the Sub-Fund’s investment policy. The third party data provider(s) are subject to ongoing review and change and may differ between asset classes or sub-funds depending on the nature of the indicator to be measured.
The Sub-Investment Manager acknowledges that, given the lack of a consistent standard of global regulatory requirements on sustainability disclosures generally, third party provider(s) upon whom the Sub-Investment Manager places reliance, do have to estimate datapoints and the proportion of estimations used will vary depending on the subject matter and asset in question. The Sub-Investment Manager does not seek to systematically audit those estimates but does challenge numbers with third-parties if it identifies data it believes is inaccurate, and where possible places greater reliance on actual disclosed data. The Sub-Investment Manager seeks to encourage adoption of sustainability disclosure standards by issuers and thus decrease reliance in the industry on estimated or incomparable information.
The main limitation to the methodologies and data sources is the lack of global reporting standards and availability of consistent data. Where data is available, this also has limitations and is subject to estimation and reporting gaps and continues to evolve. The Sub-Investment Manager keeps under review the sources of data it uses for the implementation of its sustainability policy and will make changes where it considers this is necessary.
In case data gaps pose challenges to making an informed decision on an aspect of the investment process, the Sub-Investment Manager’s Sustainable Investment team, together with the investment analysts and fund managers may seek further information. Such options may include a direct dialogue with the company, a dedicated engagement plan or a decision against holding the company.
Due diligence is a key element of the methodology for integrating sustainability factors into the investment decision making process, on both a pre-investment and ongoing basis. As part of the due diligence process, the investment team seeks to assess sustainability risks and factors material to an investment, and incorporate these issues into fundamental analysis, which then may influence their valuations, portfolio construction decisions, and transaction underwriting, where relevant.
To inform their assessment framework, teams may utilise ESG research and data as described above as well as support from the dedicated in-house Sustainable Investment team assigned to the investment team. The investment team may also consider the responses of investee company management teams to inquiries focused on their ability and willingness to manage ESG issues. Conclusions about the sustainability risks and factors are documented in investment research. The Sub-Investment Manager may engage with company management to understand their ESG strategy, influence best practices towards disclosure, seek improvement in key sustainability metrics over time, and to address issues pertinent to the specific investment thesis.
Once an investment is made, the investment teams continue to seek to monitor material issues that could impact an asset or company, including sustainability risks, factors and opportunities. Relevant risks or concerns are addressed as part of the investment teams’ ongoing investment process, via ongoing company surveillance and engagement, where relevant, portfolio positioning and risk monitoring.
The Sustainable Investment team may also conduct, on a periodic basis, reviews of individual portfolios, and engage with investment teams about potential sustainability risks as a further support to the investment process. The nature of any material risks identified will inform decisions as to next steps within the context of the investment teams’ overarching investment process, including further company research and company engagement among other considerations.
Responsible stewardship is an integral component of the Sub-Investment Manager’s business and culture.
Engagement with investee companies provides an opportunity to gather further information, which feeds into the Sub-Investment Manager’s due diligence process. The Sub-Investment Manager will also engage to enact positive change in disclosure, management, and performance related to sustainability risks or factors.
The Sub-Fund’s investment team will meet with company management as part of its fundamental research process. These meetings provide analysts and portfolio managers with insights into management quality, business drivers, and the strategies of the companies in which they invest. In addition, these meetings allow the investment team to assess companies’ risk, including exposure to sustainability factors and the companies’ management of that exposure to protect shareholder value. Where appropriate, members of the Sustainable Investment team may also participate in company meetings alongside investment analysts and portfolio managers.
The Sub-Investment Manager also participates in collaborative engagements with other firms in the industry. Engaging collaboratively with other investors amplifies the Sub-Investment Manager’s impact on the companies, industries, and markets in their collective orbit of influence. For the companies the Sub-Investment Manager engages with, collaborative efforts reduce the noise of numerous points of view, helping focus on goal setting and real outcomes. Collaboration is always in alignment with the Sub-Investment Manager’s fiduciary duty to its clients as an asset manager.
If in the Sub-Investment Manager’s opinion issues of concern remain unaddressed by a company’s leadership after a process of engagement conducted over a reasonable period of time, then the Sub-Investment Manager may consider an escalation. Depending on the asset in question, this could include voting their equity proxies in accordance with their views, filing or co-filing a shareholder resolution, or divesting, where applicable.
The Sub-Investment Manager may also occasionally engage with regulators where the Sub-Investment Manager believes it is appropriate and in the best interests of their clients.
For additional detail, please see the Sub-Investment Manager’s ESG Engagement Policy.
1 Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector
The Sub-Fund uses the MSCI All Country WorldIndex NR USD as a benchmark for performance comparison purposes only and not as a reference benchmark for SFDR purposes.
Due to the lack of consistent sustainability disclosure requirements and available data in the countries in which the Sub-Fund is invested, the Sub-Investment Manager is not currently able to collect or evaluate complete or reliable data on the environmental objective(s) set out in Article 9 of the Taxonomy Regulation and on how and to what extent the investments underlying the Sub-Fund are in economic activities that qualify as environmentally sustainable under Article 3 of the Taxonomy Regulation (“Taxonomy Aligned Investments”). The Sub-Investment Manager will continue to monitor this position and will seek to improve access to such data where reasonably possible to do so.
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