The Sustainable Asia Bond 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 Sub-Fund will invest a minimum of 25% of net assets in ESG bonds.
Sustainable Issuers are those that demonstrate stronger performance on practices and management of sustainability issues compared to their peers. Environment and/or social sustainability attributes of Sustainable Issuers may include, but are not limited to, sustainability factors with respect to an issuer’s performance on, and management of, certain environmental factors, such as climate change and natural resource use; social factors, such as labor standards and diversity considerations; and governance factors, such as board composition and business ethics.
Enabling sustainable practices refers to issuers that provide products and services to help other companies improve their environmental and/or social performances.
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.
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 their 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.
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.
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 screening and a proprietary ranking of ESG ratings.
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 characteristic 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 which contribute to the sustainable objective through their performance in areas such as energy transition, health and wellbeing, diversity and inclusion and improved labour standards.
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 natural resource use. The Sub-Fund also has socially focused investments which are not yet designated under the EU Taxonomy.
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.
Each of these elements is further explained below:
a) Exclusion Framework
In relation to its investment in both Sustainable Issuers and ESG bonds, the Sub-Fund adheres to an exclusion framework where certain issuers are removed from the permissible investment universe. This includes screening out issuers, subject to data availability, who are considered by 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. This also includes issuers 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 issuers and/or bonds are automatically eliminated from the investment consideration (exclusion framework) if the issuer of that bond derives:
a) more than 5% of revenue from thermal coal power generation (However, the Sub-Investment Manager may make exceptions in the case of ESG bonds that support sustainable purposes in line with the Sub-Fund’s sustainable investment objective. Any such exception will be considered by the Sub-Investment Manager on a case by case basis, carrying out a qualitative and/or quantitative assessment to determine that the issuance is a sustainable investment);
b) more than 5% of revenue from alcohol, tobacco, adult entertainment, gambling operations or conventional weapons, and to the extent only that such revenue results from by-products or captive use, thermal coal mining and sales, or oil and gas extraction and production; and
c) any revenue from controversial weapons.
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”.
The Sub-Fund will also consider other sustainability and/or ESG-related attributes of Sustainable Issuers when choosing whether to invest. These attributes may include, but are not limited to, an issuer’s performance on and management of certain environmental factors, such as climate change and natural resource use, social factors such as labour standards and diversity considerations, and governance factors such as board composition and business ethics.
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 Sub-Fund’s periodic reporting.
The sustainable investment objective of the Sub-Fund is to invest at least 85% of its net assets in a portfolio of fixed income securities issued by governments, agencies, supranationals and corporations in Asia (which shall include Australia and New Zealand), with the issuers and/or the securities demonstrating strong environmental and/or social sustainability attributes and/or enabling sustainable practices.
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 include:
The Sub-Fund seeks to invest at least 85% of its net assets in fixed income and fixed income-related securities of companies domiciled in, traded in and/or with substantial business interests in Asia (which shall include Australia and New Zealand) and/or governments and government-related issuers located in Asia, with the issuers and/or the securities demonstrating strong environmental and/or social sustainability attributes and/or enabling sustainable practices.
To meet its objective, the Sub-Fund will invest in securities where:
1) Those issuers demonstrate strong environment and/or social sustainability attributes and/or enable sustainable practices (“Sustainable Issuers”); and/or
2) The securities are ESG labelled bonds, including but not limited to, “green”, “social”, “sustainable”, “sustainability-linked”, which align with one or more of the relevant bond standards, including but not limited to the International Capital Market Association (ICMA) Green Bond Principles, ICMA Social Bond Principles and/or the ICMA Sustainability Bond Guidelines, amongst others (“ESG bonds”).
The Sub-Fund will invest a minimum of 25% of net assets in ESG bonds.
Environment and/or social sustainability attributes of Sustainable Issuers may include but are not limited to sustainability factors with respect to an issuer’s performance on and management of certain environmental factors, such as climate change and natural resource use; social factors, such as labor standards and diversity considerations; and governance factors, such as board composition and business ethics.
Sustainable Issuers are those that demonstrate stronger performance on practices and management of sustainability issues compared to their peers. Enabling sustainable practices refers to issuers that provide products and services to help other companies improve their environmental and/or social performance.
In selecting Sustainable Issuers, the Sub-Fund's investment process combines bottom-up fundamental credit analysis with a ranking process for sustainability attributes, where each potential issuer will be assessed on each category of environmental, social and governance factors, based on the Sub-Investment Manager’s evaluation of that issuer’s performance on and management of such factors. The issuers with the lowest sustainability rankings will be removed from the eligible investment universe.
The Sub-Fund also applies a positive screen in selecting Sustainable Issuers, which captures issuers that demonstrate strong sustainable practices and/or which enable sustainable practices. The positive screening is quantitative and qualitative driven. Third party data providers’ relevant data at company level will be used as primary inputs for the quantitative assessment. Data used can be both products or services related (e.g., revenue contribution from products or services with positive impact), or business practices related (e.g., adoption of carbon emission reduction targets or product safety management program). With regards to the limited data availability, missing data or lack of coverage from raw datapoint sets will be supplemented with company reported information and/or findings from proprietary credit analysis, and/or ESG research for qualitative assessment and the Sub-Investment Manager’s own analysis of raw industry data (such as publicly available ESG reports, assessment reports or case studies).
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.
The investments of the Sub-Fund may include debt securities that are issued or guaranteed by governments, agencies, supra-nationals and corporate issuers incorporated in Mainland China but which are issued and distributed outside Mainland China. The Sub-Fund may also invest up to 10% of its net assets in RMB-denominated debt securities that are circulated in the CIBM via Bond Connect.
The Sub-Fund may invest up to 15% of its net assets in the fixed income securities of Sustainable Issuers outside of Asia, and/or cash, cash equivalents and derivatives.
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 following elements of the investment strategy are binding within the selection process:
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 seeks to invest at least 85% of its net assets in companies domiciled in, traded in and/or with substantial business interests in Asia and/or governments and government-related issuers located in Asia (which shall include Australia and New Zealand), with the issuers and/or securities demonstrating strong environmental and/or social sustainability attributes and/or enabling sustainability practices (“Sustainable Issuers”) and bonds labelled as “green”, “social”, “sustainable” or “sustainability-linked”, which align with a combination of one or more of the relevant bond standards, including but not limited to the International Capital Market Association (ICMA) Green Bond Principles, ICMA Social Bond Principles and/or the ICMA Sustainability Bond Guidelines, amongst others (“ESG bonds”). Environment and/or social sustainability attributes of Sustainable Issuers may include, but are not limited to, sustainability factors with respect to an issuer’s performance on, and management of, certain environmental factors, such as climate change and natural resource use; social factors, such as labor standards and diversity considerations; and governance factors, such as board composition and business ethics. Enabling sustainable practices refers to issuers that provide products and services to help other companies improve their environmental and/or social performances.
The exposures to these investments will be direct. The Sub-Fund may use derivatives for hedging and/or efficient portfolio management purposes. However, derivatives will not be used to attain the sustainable investment objective of the Sub-Fund.
The Sub-Fund may invest up to 15% of its net assets in the fixed income securities of Sustainable Issuers outside of Asia, who demonstrate strong or improving sustainability attributes, and/or cash, and cash equivalents and derivatives.
The Sub-Fund will have a minimum proportion of 85% of its net asset 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 screening and a proprietary ranking of ESG ratings. 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 characteristic 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 data 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 decn 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 their 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 their 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 Managers' 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 JPMorgan ESG Asia Credit Index TR USD Index as a benchmark for performance comparison purposes only and not as a reference benchmark for SFDR purposes.
As a result of the nature of the assets in which the Sub- Fund is invested, and particularly the geographical focus of the Sub-Fund, 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 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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