Statement on the inclusion of adverse impacts on sustainability factors
Transparency of adverse sustainability impacts at entity level (Article 4 (1a) of 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)
In line with our ESG strategy and as a fund of funds manager we, Sauren Finanzdienstleistungen GmbH & Co. KG, take into account the principal adverse impacts on sustainability factors when making our investment decisions. Adverse sustainability impacts describe adverse impacts of investment decisions on sustainability factors. Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector describes sustainability factors as relating to environmental, social and governance matters.
Adverse sustainability impacts are a valuation factor in the investment process, included in our Sauren ESG process via Sauren ESG scoring. We strive to positively influence the adverse impacts potentially resulting from the investment in a target fund by consulting and assessing the mentioned sustainability indicators. Another core element is active dialogue with target fund managers, whereby we aim to instigate change and improve the respective target fund’s values relating to environmental, social and governance aspects.
2. Description of principal sustainability factors
We use environmental, social, and proper public- and private-sector governance indicators to allow for principal adverse sustainability impacts and have set out the corresponding compulsory indicators for corporate investments below:
1. Greenhouse gas emissions
2. Carbon footprint
3. Emissions intensity of investments
4. Exposure to fossil energy companies
5. Share of energy consumption and generation from non-renewable energy sources
6. Intensity of energy consumption by carbon-intensive sectors
7. Activities with an adverse impact on regions with biodiversity in need of protection
8. Emissions to water
9. Share of hazardous and radioactive waste
10. Violations of the UNGC Principles and of the OECD Guidelines for Multinational Enterprises
11. Lack of processes and compliance mechanisms at hand to monitor adherence to the UNGC Principles and OECD Guidelines for Multinational Enterprises
12. Unadjusted gender pay gap
13. Gender diversity in management and supervisory bodies
14. Exposure to controversial weapons (anti-personnel mines, cluster weapons, chemical and biological weapons)
Many economic activities can have an adverse impact on the above-mentioned sustainability indicators.
3. Description of procedure to identify and prioritise principal sustainability impacts
Portfolio management structure
We at Sauren Finanzdienstleistungen GmbH & Co. KG are outsourced fund of funds managers. The portfolios of the fund of funds we manage are thus mainly open-ended target funds. Direct investments in equities are usually not executed as part of the fund of funds’ investment strategies. Due to this structure, we as fund of funds portfolio managers do not have a complete overview of the respective target investments managed by the target fund managers. That also holds true regarding handling and implementation of sustainability aspects. It is generally our aim to trigger positive sustainability-related changes with the help of our Sauren ESG process. The Sauren ESG process comprises qualitative and quantitative target fund analyses and uses principal adverse sustainability impacts as a valuation factor in the investment process. In line with our ESG strategy, we apply our proprietary Sauren ESG scoring process to all target funds. The results of the aforementioned process are accounted for on a fund of funds level.
Sauren ESG scoring and ESG process
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 Sauren ESG scoring 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. It is also examined whether, and if so how, target funds manage principal adverse sustainability impacts.
The Sauren ESG scoring systematically translates the findings resulting from qualitative analysis of environmental, social and governance aspects into values. Sauren ESG scoring is based on a scale ranging from -4 to +4. The greater the attention paid to sustainability aspects as part of the decision-making process, the higher the score tends to be. The scoring process also includes an analysis and evaluation of principal adverse impacts on sustainability factors.
The Sauren ESG score that emerges from 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. It also includes whether the target fund manager pays attention to principal adverse sustainability impacts and, if so, how these impacts are accounted for. If they are, an analysis is conducted as to how the target fund identifies and prioritises them, and how this identification and prioritisation relates to the fund’s investment focus. Amongst other things, this analysis involves the number of indicators covered by the target fund together with the quality and plausibility of the target fund manager’s assumptions regarding the investment process.
In the Sauren ESG scoring, values in the range from +1 to +2 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 +3 and +4 show that managers are systematically trying to increase transparency and initiate changes at companies beyond the mere analysis and consideration of existing risks in the investment decision. They may do this through appropriate voting behaviour at annual general meetings, or by actively moving to influence management (from active ownership to impact investing).
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. In such funds, adverse sustainability factors are typically hardly taken into account, or not at all.
Negative values typically mean that the target fund portfolio contains an accumulation of investments that are considered questionable to critical (e.g. companies from 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 adverse sustainability implications in their investment process in order to achieve a higher return.
The Sauren ESG scoring comprises a systematic, qualitative process analysis and a portfolio check on the target fund concerned. It also includes consideration of adverse sustainability impacts at target fund level. The individual ESG score is calculated for each of the three sub-areas (environment, social, governance) as the result of the process analysis and 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 Sauren ESG process is applied to all sub-funds of the Fonds Sauren umbrella fund. Before they are included in one of the aforementioned fund of funds, all potential target funds undergo the Sauren ESG scoring. This process looks at each individual fund to determine the extent to which the manager includes environmental aspects, social aspects and principles of sustainable corporate governance in their investment decisions. It also assesses whether adverse sustainability impacts are given due regard. It may be the case that certain target funds do not yet account for adverse sustainability impacts, and this will be noted in the assessment of the target fund concerned. Such funds are eligible for investment without restrictions for Sauren sub-funds that only qualify as SFDR Article 6 funds, but restrictions do apply for Sauren sustainability funds that qualify as SFDR Article 8 funds and are suitable for clients with sustainability preferences within the meaning of Article 2 (7c) of Delegated Regulation (EU) 2017/565.
For the Sauren Nachhaltig Defensiv, Sauren Nachhaltig Ausgewogen and Sauren Nachhaltig Wachstum sub-funds, consideration of the principal adverse impacts on sustainability factors is mandatory within the process analysis/investment strategy, which comprises not only an annual analysis of the main adverse impacts but also engagement activities.
4. Engagement policies
Sauren Finanzdienstleistungen GmbH & Co. KG is an outsourced fund of funds manager. The funds predominantly invest in shares of open-ended target funds which, in turn, invest for example in equities. Direct investments in listed shares are generally a possibility; however, the respective sub-fund portfolios mainly comprise open-ended target funds. Direct investments in equities are usually not executed as part of the sub-funds’ investment strategies. Whilst Sauren Finanzdienstleistungen GmbH & Co. KG, as a fund manager, generally does not exercise shareholder rights if it invests directly, voting rights can be exercised by the respective target funds. Fund of funds structures imply that engagement within the meaning of Directive 2007/36/EC is very limited on the fund of funds level.
Within the scope of our ESG process, however, we attach great importance to target fund managers who, as active owners, pursue active engagement policies via dialogues and voting behaviour.
5. International standards
Sauren Finanzdienstleistungen GmbH & Co. KG is a signatory to the UN Principles for Responsible Investment (UNPRI), an investor initiative supported by the United Nations. The goal of the initiative is to incorporate principles for responsible investment into investment practice, to make the investment world understand how environmental, social and good governance aspects impact investments and to support the international network of UNPRI signatories in incorporating the above-mentioned factors into their investment decisions.
As a UNPRI signatory we actively support this process. This makes the consideration of sustainability criteria an essential investment approach within our ESG strategy.