The Sustainable Finance Disclosure Regulation (SFDR) is an EU regulation that came into force on 10 March 2021 and imposes disclosure requirements for EU financial products. These requirements include disclosing sustainability-related information for funds that (i) promote (among other characteristics) environmental or social characteristics (Article 8 products), or (ii) have a sustainable investment objective (Article 9 products), both as defined under SFDR.
Aikya Global Emerging Markets Fund is aligned to Article 9
Below is a summary of disclosures and explanations required for official product documentation
Sustainable Investment Objective
The Fund aims to achieve long-term capital growth by investing in high quality companies. These companies should make a positive contribution to sustainable development within the countries in which they operate.
In accordance with Article 9(2) of the SFDR, the Fund has sustainable investment as its objective and no index has been designated as a reference benchmark. We do not treat sustainability considerations any different to investment considerations, but rather views them as one and the same thing. Aikya approach is long-term and stock selection is not influenced or constrained by a benchmark.
To objectively judge the Fund’s progress in terms of Sustainability, we have embedded several sustainability impact assessments, with accompanying portfolio-level targets, into its investment selection process. The sustainability impact of the Fund is measured through annual measurement of the Fund’s progress against its six Sustainability Impact Goals, listed below:
- The Fund should only be invested in companies which make a significant contribution to at least one UN Sustainable Development Goal (SDG) by 2030.
- Carbon Intensity (i.e. Green House Gases (Scope 1 and 2) emissions to sales) for the entire portfolio should halve by 2030 (with 2019 as baseline year). The Fund’s portfolio should achieve net zero carbon emissions by 2040.
- Environmental Resource Intensity for the entire portfolio should halve by 2030 (with 2019 as baseline year) Environmental Resource Intensity is an Aikya defined metric which is customised for each industry. It refers to the virgin natural resources such as water, non-renewable energy and material a business uses and the waste it generates for every unit of sales.
- Ensure by 2030, that none of the portfolio companies display more than one incident of poor social stewardship over preceding three years.
- The portfolio companies should either have a dominant shareholder whom we trust or a truly independent board by 2025.
- The portfolio companies should have a healthy gender balance in their organisation by 2040.
Our approach to sustainability is very holistic. We first seek to understand the true ‘purpose’ of a business. If the business is aligned with one of the UN Sustainable Development Goals (UN SDG), we then assess how that business achieves its purpose in the most resource-efficient way, with low carbon intensity, and with best-in-class governance, and utilise proprietary industry-specific models to track progress and compare companies. This is an entirely bottom-up process which leverages our long-held relationships and experience in Emerging Market countries, and is consistent with the rest of our investment approach. Companies who do not satisfy these requirements are considered to have poor sustainability credentials and do not make it onto our quality list.
No Significant Harm to the Sustainable Investment Objective
Sustainability considerations are well integrated into our investment approach. Therefore, our investment process results in portfolios composed of companies without material exposure to harmful products and services. Aikya’s Position Statement on Harmful and Controversial Products and Services describes the harmful business activities we avoid as a result of our bottom-up investment approach.
Sustainability Indicators
Aikya’s investment process is entirely bottom-up. However, we believe companies with strong purpose aligned to achieving United Nations Sustainable Development Goals (UN SDGs) usually benefit from long-term structural growth and experiences fewer risks.
To measure the impact of the fund, we analyse the revenues generated from our portfolio companies’ various products and services and assess their contribution to each individual SDG.
Please refer to our submission to UK Stewardship code for the disclosure on key sustainability indicators we track for the Fund.
EU Taxonomy Disclosure
The EU Taxonomy Regulation (EU Taxonomy) sets out a classification system in respect of environmentally sustainable economic activities. EU Taxonomy covers six environmental objectives, ranging from climate change mitigation to protection and restoration of biodiversity, with technical screening criteria to determine whether certain economic activities supports these objectives. EU Taxonomy recognises these economic activities as green, or “environmentally sustainable” if they make a substantial contribution to at least one of the environmental objectives, while at the same time not significantly harming any of these objectives and meeting minimum social safeguards. EU Taxonomy came into force on 1 January 2022 for the first two, climate-related, environmental objectives. EU Taxonomy also amends the disclosure obligations under SFDR to extend the information to be disclosed for Article 9 products and Article 8 products with an environmental focus.
While there are investments in the Fund that are in economic activities that contribute to an environmental objective, and may be eligible to be assessed against the EU Taxonomy Screening Criteria, at current there is insufficient reliable, timely and verifiable data available to accurately assess investments accurately and describe:
- the extent to which the investments of the Fund are in economic activities that qualify as environmentally sustainable and are aligned with Regulation EU 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending SFDR (the Taxonomy Regulation);
- the proportion, as a percentage of the Fund’s portfolios, of investments in environmentally sustainable economic activities which are aligned with the Taxonomy Regulation; or
- the proportion, as a percentage of the Fund’s portfolios, of enabling and transitional activities (as described in the Taxonomy Regulation).
We are keeping this situation under active review and where sufficient reliable, timely and verifiable data on the Fund’s investments become available, we will provide the descriptions referred to above.
Below are the links to the disclosures to be made under SFDR
Article 3 – Policy relating to the integration of sustainability risks in our investment decision-making process.
Article 4 – Transparency of adverse sustainability impacts– Aikya’s Principal Adverse Impacts (PAI) Statement.
Article 5 – Transparency of remuneration policies in relation to the integration of sustainability risks.
The supplement to the prospectus for the Aikya Global Emerging Markets Fund also carries a section on SFDR disclosures, including required pre-contractual information.
