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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: description of the scoring 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 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 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 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.

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 encourage change at companies and increase transparency, as opposed to merely analysing the existing risks and incorporating them into their investment decision. They may do so through corresponding 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 process. 

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 negative implications with regard to sustainability aspects in their investment process in order to achieve a higher return. 

SCOREEXPLANATION
+4Sustainability aspects given very clear consideration in the analysis and selection process, e.g. detailed analyses that include contact with the management and active engagement. This would likely include active moves to influence company management with regard to changes/improvements via direct contact and active voting behaviour (from active ownership to impact investing).
+3Sustainability aspects given clear consideration in the analysis and selection process, e.g. detailed analyses that include contact with the management and/or direct or indirect engagement on a case-by-case basis (active voting behaviour, dialogue with management, etc.) (active ownership).
+2Sustainability aspects given consideration in the process as part of a differentiated analysis of single issues, indirect engagement on a case-by-case basis (e.g. voting behaviour).
+1Sustainability aspects given consideration in the investment process where appropriate, e.g. application of straightforward exclusion criteria and/or analyses. 
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.

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 dovetails perfectly with our tried-and-tested qualitative fund manager analysis. The first step is a face-to-face discussion with the fund manager to clarify whether or not, and in what form, sustainability aspects are taken into account. If sustainability aspects are taken into account, the process analysis starts with a written request sent to the manager, asking for information on the form in which 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. Generally, 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 +4 points. If sustainability aspects are not taken into account at all, or if the information provided is not sufficient for the purposes of the process analysis, an (individual) 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 – qualitative assessment in cases involving complex portfolios where appropriate
  • Analysis of the weighting of critical industries (e.g. oil, mining, weapons, tobacco)
  • 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 -4 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 -4 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 -4 being applied. 

It is not always possible to fully evaluate portfolios using the portfolio check procedure described above, particularly in cases involving the use of derivative instruments. In such cases, the procedure described above is applied to the instrument underlying the corresponding derivatives, and/or a value that appears appropriate based on an overall assessment of the portfolio structure – also compared with other funds – is defined on a discretionary basis.

Consolidation of process analysis and portfolio check

The overall E, S and G score 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 score of 0. If the score is + 2, only 80% of the malus is applied, with only 40% of the malus being applied for scores of + 3 and any potential malus no longer being applied at all for scores of + 4. 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 equivalent to the average of 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 fund of funds of Sauren SICAV (société d‘investissement à capital variable in form of a société anonyme) or Sauren Select SICAV. 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. In cases involving target funds in liquidation, no scores are calculated, or existing scores are generally not updated.

Implementation in the funds of funds

The process is applied to all sub-funds of Sauren SICAV and Sauren Select SICAV. Before they are included in one of the aforementioned 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 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 Sauren Nachhaltig Defensiv, the Sauren Nachhaltig Ausgewogen and the Sauren Select Nachhaltig Wachstum funds. 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 their scores fail to show a long-term improvement. An insufficient score is currently defined as a single score below -1 in one of the categories. Furthermore, the following additional conditions apply:

  • These funds of funds primarily invest in target funds with a score of 2.0 – or better – in at least one of the categories of E, S and G.
  • The target fund selection only looks at target funds with a positive total score. The Sauren focal funds of funds offer the opportunity to invest – in varying degrees of intensity – 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.
  • We also require the target funds being considered for an investment to have or adopt a binding position on specific sustainability issues. Where no data is available on these sustainability issues, we require the target fund in question to provide a compliance statement. The overarching aim of this compliance statement, which can vary in detail, is to prompt the target funds to look into issues such as the delivery of armaments, tobacco production as well as coal production and distribution when making investment decisions, and to prompt them to take a binding stance on the matter. Unless the available data speaks for itself, we also require the target funds to concern themselves with respecting human rights, safeguarding the environment and eliminating forced/child labour, amongst other matters, within the framework of the UN Global Compact, and to make a binding statement on these issues. Furthermore, a statement in relation to consideration of the Freedom House Index is requested. 

The Sauren Nachhaltig Defensiv, Sauren Nachhaltig Ausgewogen and Sauren Select Nachhaltig Wachstum funds are products pursuant to Article 8 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.