Sustainability

SFDR

Introduction

The Sustainable Finance Disclosure Regulation (SFDR) is an EU regulation aiming at increasing transparency and promoting sustainable investments. The SFDR requires the disclosure of information on the impacts of sustainability risks on products and services, as well as the policies and processes for managing these risks. The SFDR also creates a framework for classifying sustainable investments and specifies that products marketed as sustainable must meet certain criteria.

Article 6 of the SFDR requires the disclosure of information on the sustainability risks and impacts of the products and services, as well as the policies and processes for managing these risks. This includes information on how the products contribute to environmental or social goals and any negative impacts they may have.

Article 8 aims to ensure that financial products and services offered to investors are consistent with the sustainability objectives of the SFDR and are marketed in a manner that is transparent and accurate for investors. The European Securities and Markets Autority (ESMA) will adopt appropriate guidelines and recommendations on the application of and compliance with the SFDR.

Our implementation

Fisch Asset Management (Fisch) follows an integrated ESG approach taking sustainability risks into account. It is based on the principle of responsible investing and three pillars – exclusion, integration and engagement. This approach considers the key ESG issues. These include environmental issues such as climate change and water use, social issues such as diversity and data security, and governance issues such as shareholder rights and corruption.

Basic ESG approach (subfunds classified as Article 6 and Article 8 products)

General exclusion criteria

• Controversial weapons such as anti-personnel mines or cluster bombs
• Thermal coal
• Tobacco
• Adult entertainment
• Nuclear weapons

Among other issues, corporate controversies are also taken into account when analysing ESG risks. Controversies include breaches of domestic and international conventions and generally recognised global standards. Any events identified as extremely serious controversies result in exclusion. As part of the ESG investment approach, we may also exclude companies that we assess as being high risk from an ESG perspective and which are not willing to take action to mitigate these risks.

Exclusion criteria are defined in our portfolio management system and monitored by Risk Management. Responsibility for exclusion guidelines lies with the internal ESG committee. The defined exclusion criteria are reviewed by the ESG committee and Risk Management at least once a year. Any adjustments are approved by the Executive Committee.

Qualitative integration

ESG integration is one component of Fisch’s fundamental analysis process to identify risks and opportunities. Fisch uses ESG information to support its recommendations and weightings during portfolio construction. A proprietary “materiality map” is used as the starting point for the qualitative ESG integration approach, with an ESG materiality analysis carried out for each sector and its sub-sectors. Material and market relevant ESG criteria are identified using in-house ESG analysis. The materiality map thus specifies the relevant issues for the ESG analysis of a company or country.

The analysis is based on corporate reports, raw data and the ratings of various providers, ESG analyses and research produced by investment banks. The following principal adverse impacts (PAI) are systematically applied during this process:

• GHG emissions
• Carbon footprint
• GHG intensity
• Activities negative affecting biodiversity-sensitive areas
• Board gender diversity
• Exposure to controversial weapons
• Investments in companies without carbon emission reduction initiative
• Water usage and recycling
• Rate of accidents
• Number of days lost to injuries, accidents, fatalities or illness

Six indicators are taken into account in the qualitative ESG analysis of countries:

• Environment: MSCI E-Pillar Score, GHG Emissions per Capita
• Social: Gini Index, Stability & Peace Score
• Governance: World Governance Indicators (WGI), Corruption Perceptions Index.

^{Source: MSCI, World Bank}

Fisch classifies issuers in one of the following four internal risk categories on the basis of the ESG analysis: low risk, moderate risk, increased risk, high risk. Each ESG assessment includes a comprehensive description of the relevant and potentially material ESG risks and opportunities and justification for the risk category selected based on the relevant ESG data. It is our aim and ambition to cover a major part of the positions in each portfolio with an ESG assessment.

For increased ESG risks that have a material impact on the investment decision, the investment manager will contact the issuer directly or participate in joint investor engagement on specific issues in order to mitigate the investment risk. The investment manager monitors and documents whether the issuer has taken the necessary steps to deal with and improve on the issues raised. The investment manager will sell the holding if there is no improvement.

Engagement

Engagement is an important element of our ESG integration approach and helps us to better assess the ESG risks and opportunities of an issuer and to determine whether these are reflected in its valuation. Engagement also offers the opportunity to influence the actions and practices of an issuer in line with the results we wish to see. We are convinced that continuous direct dialogue with investee companies and cooperation with various organisations is an effective approach to achieve positive sustainability and investment results. As ESG criteria are increasingly anchored in market standards and regulatory requirements, we intend to take a long-term approach to dialogue with issuers in order to promote transparency in the market for sustainable investments, which is ultimately also in the interests of our clients.

We monitor and document whether the company has taken the necessary steps to deal with and improve on the issues raised. We participate via the PRI platform and on Climate Action 100+, cooperating on joint investor engagement relating to thematic and company-specific issues. We also cooperate with Sustainalytics on engagement services and participate in their Material Risk Engagement programme. This aims to protect long-term values by proactively engaging with high-risk companies, as regards financially material ESG risks, while participating in constructive engagement with these companies to help them better identify and understand ESG risks.

Expanded ESG approach (subfunds classified as Article 8 products)

Additional exclusion criteria

In addition to the general exclusion criteria, funds classified as Article 8 products under the SFDR apply the following additional exclusion criteria:

• Armaments manufacturers
• Government bonds of countries in which there are serious breaches of democratic and human rights. Freedom House Index data is used to identify these countries.

^{Source: MSCI, Freedom House}

Quantitative integration

In order to achieve full coverage via an integrated ESG approach for subfunds classified as Article 8 products under the SFDR, a quantitative integration approach is applied in addition to the qualitative integration approach. Quantitative in-house ESG analysis is based on the ESG ratings and scores of various recognised external providers. A threshold value is defined for each provider, which is approved by the ESG committee.

Under the quantitative ESG integration approach, Fisch chooses securities with at least a satisfactory rating or with a score in line with the defined threshold values. This also specifically includes cases where only individual ratings may be available. If the quantitative ESG analysis results in an unsatisfactory or inadequate rating, this investment is placed in the residual allocation. The residual allocation includes all investments assessed as being unsatisfactory based on a qualitative and/or quantitative ESG integration approach or those with an inadequate rating; the residual allocation is restricted to a specified proportion of the subfund. The residual allocation is assessed and monitored on an ongoing basis.

For investments in target funds and ETFs, the SFDR classification is taken into account. Classification as an Article 8 or Article 9 product under the SFDR is considered adequate. Qualitative ESG analysis must be carried out if an SFDR classification is not available. Target funds and ETFs classified as Article 6 products under the SFDR or with a comparable qualitative assessment are included in the residual allocation. Target funds and ETFs must always adhere to a sector standard on sustainability (e.g. PRI) and take account of PAIs.

Specific ESG approach (FISCH Convertible Global Sustainable Fund, classified as an Article 8 product under the SFDR)

In addition to a comprehensive integration of ESG criteria with a focus on the transition to a decarbonized economy by 2050, Fisch Asset Management's ESG approach for this strategy is based on exclusion criteria as well as a combination of "best-of-class" (industry rating) and "best-in-class" (company rating) selection.

Specific exclusion criteria

In addition to the general exclusion criteria, FISCH Convertible Global Sustainable Fund also applies the following exclusion criteria:

• Human Rights Violations
• Defense (civilian firearms, conventional weapons, weapon support systems & services)
• Energy (production of unconventional oil & gas such as oil sands, shale oil, shale gas and artic drilling, conventional oil & gas production or in oil & gas power production, owning or operating nuclear power plants (utilities) and companies that supply key nuclear-specific product or services to the nuclear power industry (incl. uranium mining)).
• Genetically modified organism (for agricultural use, reproductive human cloning)

Best-in-class / Best-of-class

As part of the best-in-class/best-of-class approach, which together with the exclusion criteria defines the investable investment universe, the internally developed ESG assessment method is applied. With the help of the resulting FAM-ESG-score, the investable universe includes the best 70% of the companies in the investment universe in terms of sustainability criteria.

Education

As part of our ESG strategy, we are committed to continuous education in sustainability matters. All members of the investment teams (PMs, analysts) will complete the ESG certification course "CFA UK Level 4 Certificate in ESG Investing" by the end of 2022. For employees who have already completed other equivalent ESG training, e.g. CESGA, the CFA certificate is voluntary. Further information why Fisch is an attractive place to work can be found here.