Guide to sustainable investing

Our approach to ESG integration combines sustainable investment practices and active ownership activities around the following three core themes:

Climate
Climate change poses an existential threat and is a source of systemic risk for our economies and the financial markets. We expect every investee company to mitigate their impact on the environment and understand climate change impacts on their activities and operations. We encourage them to contribute to the development of a lower carbon economy in line with the goals of the Paris Agreement.

Empowerment
Companies cannot successfully operate without appropriately balancing the interests of their stakeholders.
We expect our investee companies to value their employees whilst providing a supportive, safe and inclusive environment at work. With regards to customers, the appropriate processes and internal controls should be put in place to ensure customer welfare, enhancing their experience and therefore, their loyalty.
We also look for companies to ensure, to the best of their ability, strong human rights standards through their supply chain.

Leadership
A robust leadership underpins the long-term performance and success of any corporation. While there is no one size-fits-all as it relates to good governance, we expect our investee companies to put in place the appropriate governance structure which will contribute to foster innovation as well as ensuring strong checks and balances.

The early implementation of ESG criteria in the monitoring and selection of sovereign bonds has enabled us to complete the ESG integration in all the main asset classes of our fund range. While external solutions are slowly being developed, we have chosen to build our own proprietary models in order to ensure ESG integration and to provide material information to our investors. Two models have been developed in the last years:

• A global sovereign ESG risk model, which aims to assess ESG risks faced by developed and emerging countries
• An Emerging Markets-impact model that aims to identify positive ESG trajectories

While ESG was first coined in 2004, its roots exist in the socially responsible movement, or SRI, based on exclusions. Our Socially Responsible Investment (SRI) funds take a stricter approach to ESG integration, partly based on ethical considerations. These funds can feature a wider range of investment exclusions, a low carbon footprint objective or a positive screening filter.

The Sustainable Finance Disclosure Regulation (SFDR) was adopted by the European Commission and implemented in March 2021 (Level 1).
It requires asset managers like Carmignac to include sustainability (ESG-related) risks in their investment decisions and requests funds to be clearly categorised as to their “greenness” while documenting their objectives, policies and methodologies in their prospectus, website and periodic reports. A second significant measure has been the requirement for asset managers to measure the adverse impacts on a “comply or explain” basis of their investments at both firm and fund level through a prescribed set of 18 mandatory and standardised ESG indicators.

The SFDR has heralded a new era in mainstream sustainable investment offerings and classifications.

Article 6
Implement sustainability (ESG-related) risk in their investment decisions. To do that they must include it in their due diligence and make an assessment on how these risks would affect the financial return of the company.

Article 8
Promote, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices.

Article 9
Have identified a measurable sustainable objective that is central to investment decisions and defines the investment universe.

Thematic investing is a manner to align investments towards a specific and focused theme. Carmignac’s thematic funds seek to find innovative ways of delivering long term alpha and can provide clients investment solutions that align with their own specific sustainability goals. The thematic range also aligns with our 3 key ESG themes: Climate, Empowerment, Leadership.

To meet emerging client demand and facilitate the classification of some of our Equity funds to the ambitious Article 9 (SFDR) classification as well as define sustainable investments, Carmignac has built a rules-based “Outcomes Framework” in line with the United Nations SDGs.

We have identified 9 SDGs as ‘investable’, which means that companies in which our funds can invest are able to support progress towards these goals through their products and services.

To identify companies that are aligned to the 9 SDGs, we have mapped over 1,700 business activities to the targets within the following investable SDGs:

• SDG 1: No Poverty
• SDG 2: Zero Hunger
• SDG 3: Good Health and Well-being
• SDG 4: Quality Education
• SDG 6: Clean Water and Sanitation
• SDG 7: Affordable and Clean Energy
• SDG 9: Industry, Innovation and Infrastructure
• SDG 11: Sustainable Cities and Communities
• SDG 12: Responsible Consumption and Production

Within Carmignac’s SDG Outcomes framework, sustainable investments are defined as those companies that derive more than 50% of their revenues from goods and services positively aligned with at least one of the nine ‘investable’ SDGs by Carmignac. This high revenue threshold enables us to select companies whose intentionality to focus on sustainable activities is clearly demonstrated. Depending on the commitment and fund classification under the SFDR, our funds either invest a minimum of 50% or 75% of the eligible assets of the fund in aligned companies.