Sustainability Disclosures

Under Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (SFDR), Aikya is required to publish certain disclosures at both an entity and a product level. The purpose of this webpage is to publish these required disclosures.

The entity level disclosures are here:

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 below product level disclosure relates to the Aikya Global Emerging Markets Fund – UCITS.

The supplement to the prospectus for the Aikya Global Emerging Markets Fund contains the required pre-contractual SFDR disclosures. The Annual Report of the Aikya Global Emerging Markets Fund contains the required annual disclosures.

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.

The Aikya Global Emerging Markets Fund – UCITS (the Fund) is aligned to Article 9 of SFDR meaning is has a 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 (UN Sustainable Development Goals (SDGs)) within the countries in which they operate.

The Fund does not invest in companies with material exposure to harmful products and services, and companies which fail to demonstrate strong environmental and social stewardship.

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. The Investment Manager does not treat sustainability considerations any different to investment considerations, but rather views them as one and the same thing. The Investment Manager’s approach is long-term and stock selection is not influenced or constrained by a benchmark. The information on this page provides further details on how the Fund seeks to achieve its sustainable investment objective.

Sustainable Investments do no significant harm by not exceeding acceptable thresholds when assessed against Principle Adverse Impact (PAI) Indicators.

The Fund does not invest in companies:

• with material exposure to harmful products and services,
• which fail to demonstrate strong environmental and social stewardship.

The Investment Manager’s investment approach is highly selective and focused on picking the highest quality companies in their universe which should also have a positive impact towards UN Sustainable Development Goals (SDGs) and practices aligning with UN Global Compact (UNGC) principles and Organisation of Economic Cooperation and Development (OECD) Guidelines . The Investment Manager has detailed sustainability models on each portfolio company, backed by extensive proprietary data collected through their investment research. In addition, the Investment Manager closely monitors, reports on any norms, breaches and evaluates a range of PAI indicators, each listed below:

CLIMATE AND OTHER ENVIRONMENT-RELATED INDICATORS

1. Greenhouse Gas (GHG) Emissions
2. Carbon Footprint
3. GHG Intensity
4. Fossil Fuel Sector exposure
5. Non-renewable energy consumption & production
6. Energy consumption intensity per high impact climate sector
7. Activities negatively affecting biodiversity sensitive areas
8. Emissions to water
9. Hazardous waste ratio

SOCIAL AND GOVERNANCE INDICATORS

1. Violations of UNGC principles and OECD Guidelines
2. Lack of processes and compliance mechanisms to monitor compliance with UN Global Compact principles and OECD Guidelines
3. Gender pay gap
4. Board gender diversity
5. Exposure to controversial weapons

The Investment Manager aims for all Fund portfolio companies to align with the OECD Guidelines for Multinational Enterprises, as well as the UN’s Guiding Principles on Business and Human Rights. Each Fund portfolio company’s sustainability model tracks the progress of the company against a range of potential issues, such as human rights and labour rights.

PRINCIPAL ADVERSE IMPACTS (PAI) INDICATORS

Another way to measure how companies negatively impact sustainability factors is using Principal Adverse Impacts (PAI) indicators.

The Investment Manager’s  Position Statement on Harmful and Controversial Products and Services describes the harmful business activities they avoid as a result of their bottom-up investment approach.

In accordance with Article 9(2) of the SFDR, the Fund has sustainable investment as its objective (without a designated reference benchmark) .

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.

Generating healthy long-term investment returns with strong downside protection is only possible if the Fund invests in high-quality companies that are well-positioned to solve sustainable development problems.

The Investment Manager does not treat sustainability considerations any different to investment considerations, but rather views them as one and the same thing. The Investment Manager’s 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, the Investment Manager has 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 development goals which described under (6) below.

The Investment Manager’s approach to achieving our sustainable investment objective (as defined under (3) above) is holistic. They do not consider sustainability analysis separate to investment analysis and they assess the risks and opportunities associated with sustainability considerations along the following dimensions:

1. Purpose – companies with a purpose aligned to achieving a United Nations Sustainable Development Goal (UNSDG) will usually benefit from long-term structural growth and be exposed to fewer risks.
2. Environmental Stewardship – companies should have a minimal environmental footprint whilst serving their purposes.
3. Social Stewardship – companies that create more problems for local communities are at risk of losing their social licence to operate, which can have a negative effect on investment returns.
4. Good Governance – companies should exhibit alignment between shareholders and management interests over the long term.
5. Organisation Culture – companies should demonstrate – through a high level of diversity – a culture of healthy debate and mutual respect, and a leadership team that cares about its employees.

In choosing portfolio companies, the Investment Manager first seeks to understand the true ‘purpose’ of a business. If the business is aligned with one of the UN Sustainable Development Goals (UN SDG), they then assess whether that business achieves its purpose in the most resource-efficient way, with low carbon intensity, and with best-in-class governance.  The Investment Manager utilizes it’s proprietary industry-specific sustainability and stewardship models (Sustainability Models) to track progress and compare companies within the same industry.

This is an entirely bottom-up process which leverages the Investment Manager’s long-held relationships and experience in Emerging Market countries and is consistent with the rest of their investment approach. Companies who do not satisfy the Investment Manager’s requirements are considered to have poor sustainability credentials are not considered investable and are not included in the Investment Manager’s investable universe (the Quality List).

The extent to which sustainability issues represent potential or actual material risks to the Fund is considered by the Investment Manager as part of ongoing investment decision making and risk monitoring. Along with other material risks, the Investment Manager will consider Sustainability Risks to seek to maximize long-term risk-adjusted returns for the Fund.

Assessing Sustainability Risks is complex and requires subjective judgements, which may be based on data that is either difficult to obtain, incomplete, estimated, out of date, or otherwise materially inaccurate. Even when identified, there can be no guarantee that the Investment Manager will correctly assess the impact of Sustainability Risks on the Fund’s investments or proposed investments.

If a Sustainability Risk comes to the fore then there could be numerous potential consequences, which naturally vary depending on the specific risk, region, and asset class. In general, where a Sustainability Risk occurs in respect of an asset, there could be a negative impact on, or the entire loss of, its value.

Whilst it is difficult to assess the impact of Sustainability Risks as a whole on the Fund, the Investment Manager would expect the impact of Sustainability Risks to be low to moderate. Not only is the Fund diverse in nature but the Investment Manager is focused on stewardship, which results in a significant portion of the potential investment universe being deemed un-investable because of ESG related risks.

Sustainability Risks can exist in isolation, but it can also materially contribute to other risks relating to markets, operations, liquidity, or counterparties.

100% of the Fund’s investments (excluding cash and cash-like instruments, which may be up to 30% but in normal circumstances the cash position in the Fund will not exceed 5%) will be in sustainable investments as defined by article 2(17) SFDR. It will have a minimum of 0% having an environmental objective which is aligned with the EU Taxonomy, a minimum of 10% having an environmental objective (which is not aligned with the EU Taxonomy) and a minimum of 10% have a social objective.

In order to objectively assess the Fund’s progress in terms of meeting its Sustainable Investment Objective (as defined above), the Investment Manager has embedded several sustainability impact assessments into our investment selection process. The sustainability impact is measured through annual measurement of the Fund’s progress against six (6) Sustainability Impact Goals, listed below:

Goal 1: UN SDGs: The Fund’s portfolio should only be invested in companies that are assessed fundamentally by the Investment Manager as currently contributing towards, or is expected to contribute towards, at least one UN SDG by 2030 (see example above). To measure the impact of the Fund, the Investment Manager analyses the revenues generated from portfolio companies’ various products and services and assesses their contribution to each individual SDG at a sub-target level.

Goal 2: Carbon Intensity:  Green House Gases (Scope 1 and 2) emissions to sales for the Fund’s portfolio should halve by 2030 (with 2019 as baseline year). The Fund’s portfolio aims to achieve net zero carbon emissions by 2040. Progress against this target is measured by reporting Carbon Intensity for the portfolio on an annual basis. The Fund’s carbon footprint is calculated in tonnes of CO₂/ $bn of revenues. The data the Investment Managers reports represents Scope 1 and 2 emissions. Meaningful Scope 3 calculation methodologies are still a work in progress for most companies in the Emerging Markets universe and therefore are of insufficient quality for consistent reporting at this stage. In almost all instances, the Investment Manager’s portfolio has lower carbon intensity vs its performance benchmark (MSCI Emerging Markets Index (USD)).

Goal 3: Environmental Resource Intensity. The Fund’s portfolio should halve its Environmental Resource Intensity by 2030 (with 2019 as baseline year). Environmental Resource Intensity is the Investment Manager’s defined metric which is customised for each industry. It considers and combines environmental metrics including consumption of virgin natural resources such as water and non-renewable energy (per unit of sales), use of renewable energy, hazardous waste output as well as its ability to recycle waste.

Goal 4: Breaches of Social Stewardship The Investment Manager monitors the performance of each company in the Fund portfolio to ensure that it remains a good corporate citizen. None of the companies in the Fund’s portfolio should have displayed more than one incident of poor social stewardship over the preceding three years by 2030.  The Investment Manager measures the number of Aikya Portfolio companies that displayed more than one incident of poor social stewardship over the previous three years. The Investment Manager tracks every such incident of poor social stewardship. Examples of poor social stewardship include (but are not limited to): unfair treatment of customers, abuse of local communities, negligent safety culture within the operations, poor quality control in manufacturing, or a breach of customer data and privacy. The Investment Manager also avoids companies that could be aiding human rights abuse and not paying their fair share of taxes to governments.

Goal 5: Shareholder & Board Composition.  The Fund’s portfolio companies should either have a dominant shareholder whom Aikya determines, in its discretion, as trustworthy or a truly independent board by 2025.

Goal 6: Diversity & Inclusion The Fund’s portfolio companies should have a healthy gender balance in their organisation by 2040. The Investment Manager generally considers companies that have at least 40% of their workforce as women as having a healthy gender balance. The Investment management tracks progress against this metric but also considers when analysing companies:  the number of women at specific levels of the organisation relative to their male peers; gender pay gap (where this data is available, which is limited in Emerging Markets); parental leave policies; and a qualitative assessment of the work culture.

The indicators related to these goals do not have minimum thresholds, however the Investment Manager does expect portfolio companies to evidence continued progress against these indicators over a reasonable timeframe. Every company on the Investment Manager’s Quality List is monitored continuously through maintenance research which involves reviewing publicly available information and engaging with each company on calls and at meetings. Information obtained from these sources is used to assess the investment manager’s fair value of each company and re-visit its’ investment case.

The Investment Manager also reassesses each Quality List company’s sustainability and stewardship credentials annually, as part of the ongoing maintenance research process. This process provides the Investment Manager with a transparent and objective guide to whether companies are taking their sustainability and stewardship responsibilities seriously and builds a platform from which the Investment Manager can engage with a portfolio company’s management teams.

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 meeting all its social obligations and with best-in-class governance.

Analysing sustainability topics and then engaging with companies on the most material issues is an integral part of the Investment Manager’s investment process, and therefore each analyst is involved in sustainability analysis. The Investment Manager’s analysis of sustainability issues at a company level is as detailed and rigorous as traditional financial metrics.

The Investment Manager utilizes it’s proprietary industry-specific sustainability and stewardship models (Sustainability Models) to track progress and compare companies within the same industry on the quality of their: i) purpose, ii) environmental stewardship; iii) social stewardship; iv) governance; and v) organisational culture. These models not only enable to us to assess a company’s progress against the Sustainability Impact Goals (as laid out in the section above) but are also used to benchmark a company against its peers in the industry.

At a portfolio level, the Investment Manager’s aggregate information on the sustainability impact of companies held, and report this information to our clients on an annual basis.

The Investment Manager’s Sustainability Models on investee companies are populated with data from the following sources:

1. Public disclosure made by the company
2. Non-profit organisations such as CDP (Carbon Disclosure Project) which provide data on the sustainability impact of a company

These models are then peer-reviewed to ensure the accuracy and consistency of the data and calculations used to arrive at various metrics measuring the company’s sustainability impact.

While the Investment Manager has a robust and objective framework to assess a company’s sustainable development performance, ultimately the quality of the information available becomes a limiting factor. Companies based in Emerging Markets generally have less specific environmental data available than those in developed economies. To mitigate these discrepancies the Investment Manager also actively engages with the companies to improve both the quality and quantity of their disclosures.

The Investment Manager conducts detailed due diligence around the quality of stewardship, franchise, and financials of a company before it is considered for inclusion in the Fund. As described under (4) above, while assessing stewardship the Investment Manager does a detailed analysis on the sustainability impact of the company which combines both subjective and objective factors. Every piece of due diligence is discussed and peer reviewed by the Investment Manager’s investment team.

The companies that make it onto the Quality List are subjected to detailed industry specific analysis, which assesses whether or not the business has best-in-class sustainability credentials. This analysis utilizes the Sustainability Models, which enables the Investment Manager to assess and compare companies’ focus and progress on the sustainability-related issues that most affect their specific industry and supply chains. These Sustainability Models in combination with detailed engagement agendas for each portfolio company, allows for the tracking of progress in each company’s contribution to sustainable development. In addition, the Investment Manager has set specific portfolio-level long-term sustainability impact goals which are outlined in detail under (3) above. To meet these targets the direction-of-travel for portfolio company will need to be positive.

Once a company is admitted to the Quality List, its progress in terms of sustainability and stewardship is reassessed annually, as part of the ongoing maintenance research process. This process provides the Investment Manager with a transparent and objective guide to whether companies are taking their sustainability and stewardship responsibilities seriously and builds a platform from which the Investment Manager can engage with a portfolio company’s management team.

From time-to-time the ongoing research process may highlight changes in the sustainability and stewardship credentials for a particular company that may create sustainability risks, which have the potential to cause material negative impact on the value of the investment (Sustainability Risk). In the event that a Sustainability Risk arises, the Investment Manager may determine that a particular investment is no longer suitable and divest or remove it from the Quality List.

The Investment Manager pursues active engagement with the companies held in the portfolio. Engagement is performed and monitored at three levels:

1. Investment analysts – analysts are the primary drivers of engagement activities at Aikya and continuously monitor the companies held in the Fund’s portfolio. Monitoring is achieved through regular meetings with company management teams, annual report reviews and fair market value assessments on these companies.
2. The Investment Manager’s Stewardship Committee – an internal committee chaired by a senior portfolio manager, which is responsible for monitoring the progress of Aikya’s portfolio against the Sustainability Impact Goals (see above), coordinating company engagement and driving collaboration with external advocacy groups, other like-minded investors or industry initiatives that may further Aikya’s engagement agenda.
3. The Investment Manager’s Board monitors the Investment Manager’s approach to engagement and more generally ensures that investment and engagement activities remain well resourced.

For more details on our engagement policies please refer to Aikya’s Engagement and Proxy Voting Statement.

The Investment Manager is a signatory to the UK Stewardship Code and reports against its principles that outline best practice in responsible investment and active ownership, aiming to promote long-term value creation and sustainable benefits for the economy, environment, and society.

A reference benchmark has not been designated for the purpose of attaining the Sustainable Investment objective of the Fund. The portfolio companies and the portfolio as a whole are measured against the 6 portfolio-level sustainability impact goals described in (6) above.