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.

The Aikya Global Emerging Markets Fund – UCITS (the Fund) is aligned to Article 9. 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. 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 Indicators. The Fund does not invest in companies with material exposure to harmful products and services, and the companies 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). The Investment Manager has detailed sustainability models on our investee companies, 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 UN Global Compact (UNGC) principles and Organisation of Economic Cooperation and Development (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 portfolio investments to align with the OECD Guidelines for Multinational Enterprises, as well as the UN’s Guiding Principles on Business and Human Rights. The Investment Manager has detailed sustainability models on our investee companies, backed by extensive proprietary data collected through their investment research. The detailed sustainability models track the progress of investee companies against a range of potential issues, such as human rights and labour rights. The Investment Manager’s investment approach is highly selective and focused on picking the highest quality companies in their universe which means they have a zero tolerance for investments where it is evident that they have violated principles relating to OECD or UN Global Compact.

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

A document which lists the minimum standards of governance, environmental and social stewardship which the Investment Manager demands from their investee companies is available on their website. 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.

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 are:

1. The Fund should only be invested in companies which make a significant contribution to at least one UN Sustainable Development Goal (SDG) by 2030.
2. Carbon Intensity (ie Green 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.
3. Environmental Resource Intensity for the entire portfolio should halve by 2030 (with 2019 as baseline year) Environmental Resource Intensity is an Investment Manager 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.
4. Ensure by 2030, that none of the portfolio companies display more than one incident of poor social stewardship over preceding three years.
5. The portfolio companies should either have a dominant shareholder whom the Investment Manager trusts or a truly independent board by 2025.
6. The portfolio companies should have a healthy gender balance in their organisation by 2040.

The Investment Manager’s approach to achieving our sustainable investment objective (as defined above) is holistic. They do not consider sustainability analysis in anyway 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.

The Investment Manager’s approach to investing sustainably is holistic. They 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), they 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 utilizes proprietary industry-specific models to track progress and compare companies. 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 these requirements are considered to have poor ESG credentials and do not make it through the Investment Manager’s due-diligence process and onto the Quality List.

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 is made possible through the Investment Manager’s proprietary industry-specific sustainability frameworks, which compare various companies within an industry and across the value chain. Through industry-specific stewardship models as described above, the Investment Manager assesses and compares companies’ focus and progress on the sustainability-related issues that most affect their specific industry and supply chains. These stewardship models in combination with detailed engagement agendas for each investee 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 the heading ”Disclosures under SFDR”. To meet these targets the direction-of-travel for the underlying individual investments will need to be positive.

Once a company is admitted to the Quality List, its progress in terms of ESG 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 ESG responsibilities seriously and builds a platform from which the Investment Manager can engage with company management teams.

From time-to-time the ongoing research process may highlight changes in the ESG 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 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.

While the Fund has an overall sustainable investment objective, the Fund aims to have at least 10% of non-cash investments allocated to each of environmental or social objectives. Therefore, at any given time, the non-cash portion of the Fund could be up to 90% invested in sustainable investments with either environmental objectives or social objectives.

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:

1. 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)
2. Carbon Intensity (i.e. 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. In setting this target, the Investment Manager has assumed that Green House Gases (Scope 1 and 2) emissions are the best way to measure carbon emission by a company, and do not yet include Green House Gases (Scope 3) emissions due to lack of sufficient disclosure by the majority of companies in the Investment Manager’s Quality List.
3. Environmental Resource Intensity for the Fund’s portfolio should halve by 2030 (with 2019 as baseline year). Environmental Resource Intensity is the Investment Manager’s defined metric which is customised for each industry. It refers to the virgin natural resources such as water and non-renewable energy (per unit of sales) that a business consumes, as well as its ability to recycle waste.
4. 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. Incidents of poor social stewardship include an industrial fire or evidence of modern slavery in labour practices.
5. 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.
6. 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 above goals sharpen our focus when thinking about new investment ideas and strengthen the Investment Manager’s judgement when it comes to assessing the quality of stewardship, and also on an ongoing basis with maintenance research.

Every company on the Investment Manager’s Quality List is monitored continuously. We do the following pieces of work as part of maintenance research:

1. Company Annual Report Review (ARR): Once a year exercise where we analyse the annual report and revisit the investment case.
2. Company Fair Market Value (FMV): Once a year performed for all Quality List companies. This is where we question/debate our assumptions on Fair Value of the business in 10 years’ time and therefore our return expectations from the investment.
3. Company Meeting Note: A short note summarising learnings from a company meeting: answers to key outstanding investment questions, any new questions raised, progress with our engagement agenda etc.
4. Company Calls: We speak to the management and other contacts at companies, as well as competitors and other industry actors.

As part the of maintenance research process, we also conduct ongoing Sustainability Assessments (SAs) for all Quality List companies. This detailed analysis provides a transparent guide to whether companies are taking their ESG responsibilities seriously, and it gives us a platform to engage with company 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.

We utilise proprietary sustainability models to track progress and compare companies 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 proprietary 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. They also actively engage 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 the ‘Investment Strategy’ section, 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 Investment Manager pursues an 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.

The Investment Manager is a certified B-Corp. The Board, as per The Investment Manager’s Articles of Association, is obligated to consider the impact of our business on all stakeholders. The Aikya Global Emerging Markets Fund has the clear objective to make a significant impact when it comes to the sustainable development problems facing Emerging Market countries. They believe they do so by investing in responsibly managed, high-quality companies.

All portfolio companies are measured against the 6 portfolio-level sustainability impact goals described above. 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. More detail on the specific indicators that support the goals is included below:

Goal 1: UN SDGs

To measure the impact of their funds, the Investment Manager analyses the revenues generated from their portfolio companies’ various products and services and assess their contribution to each individual SDG at a sub-target level.

The Investment Manager’s 2030 objective is to have 100% of the Aikya Global Emerging Markets Fund – UCITS Portfolio (Aikya Portfolio) invested in companies that make a significant contribution to at least one UN SDG.

Goal 2: Carbon Emissions Data

The Investment Manager Portfolio’s carbon footprint is calculated in tonnes of CO₂/ $bn of revenues. The Investment Manager attributes investee company’s greenhouse gas emissions to the portfolio based on the position size of the company in the portfolio. The data we report 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. Once they achieve higher quality, the Investment Manager will include Scope 3 emissions in the footprints.

In almost all instances, the Investment Manager’s Portfolio has lower carbon intensity vs the benchmark sectors.

Goal 3: Other Environmental Metrics

Portfolio companies are also analysed against a host of other environmental metrics, including:

• Energy usage.
• Adoption of renewable energy
• Water usage and intensity
• Waste consumption and intensity
• Hazardous waste

The Investment Manager subsequently created an Environmental Resource Intensity measure, which combines the various relevant environmental related indicators (ex-carbon).

This measure is specifically adapted for each different industry.

Goal 4: Breaches of Social Stewardship

At a high level, the Investment Manager believes that businesses do not exist in isolation. Their fortunes are inextricably linked to the communities they inhabit, and to those whom they are obligated to behave in a fair manner. The Investment Manager therefore monitors the performance of each company in the portfolio to ensure that they remain good corporate citizens.

The Investment Manager tracks every such incident of poor social stewardship. Examples of poor social stewardship include (but 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.

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 believes a single incident could just be due to bad luck, but a repeated breach of social stewardship is often a symptom of a systemic problem

Goal 5: Shareholder & Board Composition

The Investment Manager measures the percentage of the Fund’s Portfolio invested in companies with either a large shareholder whom the Investment Manager trusts or a truly independent board.

The reason the Investment Manager does this is that they believe good governance is central to the delivery of sustainable development. At a company level, it requires long-term alignment of shareholder and management interests, a well-functioning board, robust internal controls, and an executive remuneration structure that is fair and aligned with the long-term interests of all stakeholders.

The Fund’s Portfolio is invested mainly in businesses that are majority-owned by an entrepreneur or business family.

Goal 6: Diversity & Inclusion

Given the socio-economic context of Emerging Markets, achieving a healthy gender balance within the workforce is a challenge for companies operating within these countries. The Investment Manager assesses a company’s gender balance from the following angles:

The number of women relative to the total size of the work force. A company with at least 40% of their work force is women is regarded as gender balanced.

The number of women at specific levels of the organisation, relative to their male peers. This shows how well women are able to progress their career within a company. This measure is disclosed by very few companies within the investable universe.

Gender pay gap illustrates the difference in average earnings between women and men for the equivalent role. This measure is not disclosed by most of the companies within the investable universe, though some countries like Taiwan have made reporting mandatory.

The strength of Human Resources policies in supporting women within the workplace, for example policies related to maternity and paternity leave.

A qualitative assessment of the work culture and how it supports female employees. Currently, the quantitative measure which the Investment Manager uses to assess gender balance at the portfolio level only includes Point 1, because data disclosure on other aspects of gender balance is poor.

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.