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Sauren ESG-Scoring: How The Process Works

The Sauren ESG scoring by Sauren Finanzdienstleistungen GmbH & Co. KG offers a new, systematic evaluation for sustainable investment decisions. The qualitative analysis of the sustainability processes that is performed as part of the Sauren ESG scoring dovetails perfectly with our company’s tried-and-tested qualitative fund manager analysis.

Sauren ESG scoring: how the process works

Sauren ESG scoring puts fund managers’ decision-making and investment processes at the centre of the analysis. These processes are evaluated based on the importance attached to sustainability aspects in the management of the fund portfolio concerned. This encourages fund managers to support positive environmental, social and ethical conditions or to work towards an improvement without prescribing specific tools or criteria for them to use. In this respect, the ESG scoring process is not designed to serve as a seal of quality. Rather, the underlying process is a measurement process that aims to analyse the extent to which ESG aspects have been taken into account in the fund concerned.

The Sauren ESG scoring process systematically translates the qualitative analysis findings into numeric values. Sauren ESG scoring is based on a scale ranging from -5 to +5. The greater the attention paid to sustainability aspects as part of the decision-making process, the higher the score tends to be. The Sauren ESG score that emerges from the first step in the process can be reduced as part of the subsequent portfolio check to reflect controversial portfolio positions. 

Positive values indicate that sustainability aspects are given due consideration in the target fund manager’s investment process. This can include, for example, straightforward exclusion procedures, regular company analyses looking at ESG factors, dialogue and interaction with the management team, or even active engagement with the aim of driving change at company level.

Values in the range from +1 to +3 are typically achieved by managers who see the consideration and analysis of ESG aspects during the investment process as relating, in particular, to the analysis of potential risks resulting from the investment concerned. Companies that do not act sustainably can be associated with considerable financial risks (e.g. increased risk of fraud due to poor corporate governance, environmental risks, etc.). 

Values in the range of +4 and +5 show that the manager is systematically trying to encourage change at companies as opposed to merely analysing the existing risks. This can be achieved, for example, by actively engaging with the management team, or by way of corresponding voting behaviour/activity at annual general meetings.

The highest value is achieved by a process that pursues change at the level of the individual portfolio companies as its primary objective (“impact investing”). In these cases, the manager tries to bring about positive change in E, S and G-related matters by systematically engaging with the company. In such cases, the focus is no longer on generating a return.

Fund managers who do not give any real consideration to sustainability aspects in the investment process and whose portfolios do not stand out in any way compared with a typical passive investment, such as the MSCI World Index, are assigned a neutral value of zero in the Sauren ESG scoring process.

Negative values typically mean that the target fund portfolio contains an accumulation of investments that are considered questionable to critical (e.g. companies in certain regions or industries, such as oil and mining or tobacco and weapons) and that sustainability aspects either play no role at all, or only play a minor role, in the investment process. A negative Sauren ESG score can also arise in a scenario in which a fund manager agrees to accept, or even deliberately accepts, increased risks and negative implications with regard to sustainability aspects in their investment process in order to achieve a higher return. The value of -5 is achieved if the investment process involves targeted investments in companies whose business model is based on deliberate breaches of sustainability in ESG matters.

SCOREDESCRIPTION
+5The focus of the investment strategy is on impact investing, i.e. primarily bringing about certain positive changes as a result of the investment. The return on an investment is not the primary consideration. This can, but does not have to be, accompanied by engagement activities.
+4Sustainability aspects given very clear consideration in the process, e.g. stringent exclusion criteria, where appropriate, positive lists and/or active engagement, e.g. very active moves to influence company management with regard to changes/improvements via direct contact and voting behaviour.
+3Sustainability aspects given clear consideration in the process, e.g. stringent rule-based exclusions apply, where appropriate, positive lists and/or engagement on a case-by-case basis (voting behaviour, dialogue with management, etc.).
+2Sustainability aspects given systematic consideration in the process, e.g. straightforward exclusions, engagement on a case-by-case basis (e.g. active voting behaviour, dialogue with management).
+1Sustainability aspects not given systematic consideration in the investment process, but, for example, application of straightforward exclusion criteria, where applicable, calculation of a positive ESG score, in rarer cases: engagement (e.g. voting behaviour, dialogue with management).
0Sustainability aspects not taken into account in the investment process, no marked proportion of investments that are considered questionable with regard to sustainability criteria. The portfolio is comparable to a passive investment such as the MSCI World Index from a sustainability perspective. There may also be a (straightforward) process in place that has been marked down during the scoring process due to a number of questionable portfolio positions.
-1Sustainability aspects not taken into account in the investment process, small proportion of investments that are considered questionable with regard to sustainability criteria. There may also be a (straightforward) process in place that has been marked down during the scoring process due to an accumulation of questionable portfolio positions.
-2Relevant sustainability aspects not taken into account in the investment process, accumulation of investments that are considered questionable with regard to sustainability criteria. There may also be a (straightforward) process in place that has been marked down during the scoring process due to a considerable accumulation of questionable portfolio positions.
-3Sustainability aspects not taken into account in the investment process, accumulation of investments that are considered critical with regard to sustainability criteria.
-4Sustainability aspects not taken into account in the investment process, significant proportion of the portfolio consists of investments that are considered critical with regard to sustainability criteria.
-5Deliberate investment in critical areas in a manner that runs contrary to the concept of sustainability in order to exploit investment opportunities.

The Sauren ESG scoring process comprises a systematic, qualitative process analysis and a portfolio check on the target fund concerned. The individual ESG score is calculated for each of the three sub-areas (environment, social, governance) as the result of a process analysis and a portfolio check. The individual scores for the three sub-areas, environment, social and governance, are used to calculate a fund’s overall Sauren ESG score.

The process analysis

Process analysis – qualitative evaluation of the investment process

  • Face-to-face discussion with the fund manager
  • Specific written questionnaire on environmental, social and governance matters in the investment process
  • Comparison of the written information with the face-to-face interviews
  • Systematic evaluation of the process with scoring for the three sub-areas: environment, social and governance

The qualitative analysis of the sustainability processes fits perfectly with our company’s tried-and-tested qualitative fund manager analysis. Based on the face-to-face interviews with the fund managers, the process analysis starts with a written request sent to the manager, asking for information on whether or not, and in what form, they take sustainability aspects relating to environmental, social and governance matters into account in their investment process. This request involves sending the manager the specific written Sauren ESG scoring questionnaire. The manager’s answers are checked for plausibility on the basis of experience gained in previous interviews, and individual fund positions are scrutinised with regard to the individual sustainability process. Typically, this process also involves renewed face-to-face interviews with the fund manager to understand and resolve any discrepancies. The aim is always to analyse the extent to which the sustainability process is actually put into practice and what impact the process has on the manager’s investment decisions. The process analysis provides answers to typical questions regarding the importance of sustainability aspects. These include, for example:

  • Does the fund manager work with exclusion lists?
  • Does the fund manager analyse all investments with regard to E, S and G aspects?
  • How actively does the fund manager perform their role as an investor in a company?
  • Does the fund manager try to provide impetus for positive change?

Based on the findings of the process analysis, a scoring value is calculated for each of the individual areas, E, S and G, based on a systematic classification system. Depending on the extent to which ESG aspects are taken into account in the investment process, a manager can be awarded between +1 and +5 points. If sustainability aspects are not taken into account at all, a value of 0 is assigned.

The portfolio check

Portfolio check – plausibility check on the basis of external data 

  • Analysis of the portfolio to identify any regional, industry-based or position-specific anomalies
  • Systematic scoring of the portfolio with regard to the environmental, social and governance sub-areas on the basis of data supplied by external providers
  • Analysis of the weighting of critical industries (e.g. oil, mining, weapons, tobacco, etc.)
  • Consideration of social factors using Social Progress Imperative's Social Progress Index and governance aspects with the help of Transparency International’s Corruption Perception Index

The portfolio check is based on an overview of the individual securities in the fund portfolio. It aims to identify any regional, sector-based or, where appropriate, position-specific anomalies that could conflict with the ESG process described by the manager. The portfolio check also involves calculating an ESG score for the E, S and G areas on the basis of a systematic scoring system. With regard to equity investments, for example, the portfolio check can be used to determine how sustainably the manager is invested relative to the MSCI World Index as an “average reference investment”. In the Sauren ESG scoring process, the portfolio check is used as a malus system, i.e. the best value a portfolio can achieve is 0.

Portfolio check – Environment

For the purposes of the environmental score (E score), all portfolio positions (companies, i.e. equities and corporate bonds) are examined to determine whether they belong to a sector that is considered critical from an environmental perspective. Investments in the following sectors are regarded as critical: metals & mining, oil, gas & consumable fuels, energy equipment & services, electric utilities, multi-utilities, airfreight & logistics, airlines and marine. Depending on their weighting in the portfolio as a whole, investments in these sectors can lead to a malus of up to -5 being applied.

Portfolio check – Social

The calculation of the social score is based on the “opportunity” factor of the Social Progress Index (Social Progress Imperative / socialprogress.org). Each issuer is awarded a score based on the location of its head office. The opportunity factor takes into account factors such as:

  • Privacy rights
  • Personal freedom
  • Equal treatment
  • Access to education 

The analysis also looks at the extent to which the fund is invested in companies in the tobacco and aerospace & defence sectors. This can lead to a malus of up to -5 being applied.

Portfolio Check – Corporate Governance

The calculation of the governance score is based on Transparency International’s Corruption Perception Index (CPI). Each issuer is awarded a score based on the location of its head office. This can lead to a malus of up to -5 being applied.

Consolidation of process analysis and portfolio check

The overall E, S and G rating is calculated based on the individual E, S and G values resulting from the process analysis and the portfolio check. Managers that follow a conscious process that takes sustainability aspects into account are awarded a positive process score. If the portfolio contains critical positions in the individual segments, a malus score is applied. In principle, the malus score resulting from the portfolio check is applied with a factor of 100% if the manager is following a process that does not take any ESG aspects into account, or in which ESG aspects only play a minor role (values 0 to 1). This means that a +1 score in the process analysis is offset by a score of -1 in the portfolio check and results in a rating of 0. The greater the extent to which sustainability aspects are taken into account, the less the weight attached to the malus. This is designed to take account of the fact that the fund manager subjects the individual investments to a more adequate analysis than the systematic portfolio check can achieve and, in particular, also engages with the companies, giving the fund manager the opportunity to provide impetus for positive change.

Total Sauren ESG score

The total score is calculated by adding up the individual scores in the environmental, social and governance categories, assigning an equal weight to each of these aspects.

The Sauren ESG scoring process is performed when analysing a potential investment, i.e. before it is included in the portfolio of a Sauren fund of funds. For existing investments, the results of the Sauren ESG scoring process are updated on a regular basis, meaning that the process described in this document is repeated for the target funds in the portfolio at least once a year. Shorter intervals can apply in specific circumstances.

Implementation in Sauren funds of funds

Before they are included in one of our funds of funds, all potential target funds undergo the Sauren ESG scoring process. The process looks at each individual fund to determine the extent to which the manager of a target fund includes environmental aspects, social aspects and principles of sustainable corporate governance in their investment decisions. However, it may be the case that target funds that do not yet take any sustainability aspects into account are selected for the portfolio. This is due to the fact that Sauren ESG scoring can better raise awareness of ESG criteria and contribute to greater sustainability in a process of dialogue, by calling the investment decisions made by fund managers into question.

Sustainability aspects are given even greater consideration in the three Focus funds of funds: the Sauren Global Defensiv Focus, the Sauren Global Balanced Focus and the Sauren Select Global Growth Focus. These funds assign greater importance to the Sauren ESG scoring process when selecting target funds. Investments in target funds that return insufficient scores are permanently excluded for as long as the score assigned to target funds fails to show a long-term improvement. An insufficient score is currently defined as a single score below -1 in one of the categories (as at September 2019 – as the process is a dynamic one and ESG aspects can evolve, the definition of the insufficient Sauren ESG score may also change in the future). The result is not an “ESG-compliant” fund of funds. However, the Sauren focal funds of funds are designed to offer the opportunity to invest in a portfolio which reflects a greater emphasis placed on ESG aspects in the fund manager processes, both at the fund of funds level and at the level of the target funds.

The procedure described in this document for the three Sauren Focus funds of funds applies with the entry into force of the new prospectuses on 14 October 2019.

The new Prospectus, including the Articles of Association, and Key Investor Information has been available free of charge since 14 October 2019 from the registered offices of the management company, the depositary, the paying agents and the sales office, as well as from the management company's website at www.ipconcept.com and the sales office's website at www.sauren.de.