Sparinvest Responsible Investment Policy Investing for value creation and sustainability
This policy document aims to give an overview of our approach to responsible investment. Further details may be found on our website, and in further policy documents such as our Stewardship Policy Strategies and Solutions Sparinvest's business is characterised by: - Independence, transparency, straightforwardness; - Long-term focus and ability to block out short-term distractions; - Style consistency with dedication to proven outperformance strategies; - Focus on achieving lower fundamental risk and compensation for risk taking; - A commitment to providing the best possible investment outcomes for our clients. Investment solutions We provide solutions for genuinely long-term investors. By remaining true to our strategies at all times, our investment solutions can fulfill their intended strategic role for clients. Details on our strategies may be found at http://www.sparinvest.lu/strategies%20and%20solutions/strategies.aspx Responsible Investment and a Long Term Focus Certain characteristics of Sparinvest s corporate DNA dictate our approach to investment. These include a long-term horizon, a bias towards academically proven strategies that work repeatedly over complete economic cycles and, most importantly, a prudent attitude to risk the lens through which we analyse potential returns. Indeed, Sparinvest s Danish motto/strapline (conceived in the late 1990s) is: investering med omtanke which translates as Prudent investments. One of our core beliefs is that we invest in assets in the real world and not just in pieces of paper. Accordingly, risk considerations are more than just a matter of figures and charts to us. When conducting fundamental security analysis of target companies for actively managed funds, we do not look at financial ratios in isolation. Instead, our approach has been to scrutinize all threats to the viability of a potential investment. Consequently, factors like governance and corporate integrity (including responsible business conduct) have play a natural role in our decision-making process. With this in mind, it is no surprise that Sparinvest considers itself to be a responsible investment house. For our actively-managed funds, being responsible is about analysing the environmental, social and governance (ESG) characteristics of a company alongside all its other fundamentals to assess their potential impact on the investment case. Our aim is to follow strategies that we believe will deliver the best returns for clients, whilst helping our investee companies to recognise that a focus on sustainability matters can boost long term corporate value a win/win for all concerned. 1 8
Overview At Sparinvest, we believe that investing responsibly goes to the heart of our fiduciary duty to clients to generate strong long-term investment returns. When considering investments, in order to build an understanding of value and the sustainability of that value, our analysts and portfolio managers consider a wide range of risks and opportunities. Some are shorter term, with the potential for an immediate impact. Others are longer term, but no less significant to the intrinsic value of the investment. It is only natural that as part of this assessment, we consider ESG (Environmental, Social and Governance) issues, many of which tend to impact over the longer term. We aim to incorporate these considerations throughout our investment processes, across our asset classes. This means looking at ESG-related risks and opportunities at the individual security level, and also considering the impact of broader themes which may impact on values across an entire sector, country or portfolio. Responsible investment does not end with an investment decision. It is crucial to continue monitoring investments in their treatment of risks and opportunities. We also seek to foster the long-term value of our investments and in our corporate bond and equity funds - to improve corporate behaviour, by being active owners in communication with our holdings. We do this through voting and engagement. More details can be found in our Stewardship Policy document. This integrated way of thinking means that various elements of our responsible investment approach are firmly embedded within our investment teams, implemented by analysts and fund managers as part of their daily work. We also use external service providers to augment our internal capabilities in areas such as detailed ESG research, exercise of voting rights, screening of our ethical fund range, and for some types of engagement. It is important to note that while we seek external input, voting decisions are made by our own portfolio managers, and we generally seek to have an active relationship with our service providers. Responsible Funds Definition of ESG ESG refers to the environmental, social or governance issues, which may have an impact on investments. For example, ESG issues at a company can have a material impact on its long-term value, reputation or ability to conduct its business profitably/repay its creditors. We recognize that where such issues are material, they can be both opportunities for investment as well as risks. Sparinvest invests its entire fund range responsibly. In Sparinvest, responsible investing and ESG analysis is embedded with our portfolio management teams, thus making it truly integrated. We see the integration of ESG issues in our investment process, along with stewardship programmes, involving both voting and engagement, as being part of our fiduciary duty. Of course, the potential for ESG integration and stewardship varies by asset class and by strategy. Norms-based Screening Sparinvest uses an external service provider to screen ALL investments for normative issues. This includes screening of new investments and 6-monthly screens of entire portfolios. In our ethical fund range, these screens lead to certain companies being excluded. Across our fund range, the screens lead to engagement with companies where serious issues are identified. 2 8
Universal Exclusions Sparinvest has an active stewardship programme which aims to bring about change. However, in order to be responsible, Sparinvest ensures that certain investments are universally excluded across our entire range of funds because they represent extreme ESG risks. All Sparinvest strategies exclude investments in: Banned weapons (anti-personnel mines, cluster munitions, biological weapons, chemical weapons, nuclear weapons outside the Nuclear Non-Proliferation Treaty) Securities prohibited by EU Sanction We also offer a range of funds labelled Ethical, which exclude other investments based on international norms and industry exposures. Implementation of these exclusionary screens is carried out in partnership with external ESG service providers. ESG Integration Equity Funds Our range of equity funds includes not only our fundamental stock-picking funds, but also quantitative and index strategies. Actively managed fundamental stock-picking funds. These funds invest using a value strategy, looking for shares that are mispriced relative to intrinsic value. In actively managed value strategies, our investment team focusses on the fundamentally-driven selection of value stocks, which they typically hold for the long-term. For this reason, Environmental, Social and Governance issues form part of the wide array of fundamental issues we consider regarding our investments. We firmly believe that ESG issues can have a significant impact on long-term investment returns. A specific ESG issue might impact our valuation of company, or in some cases might affect the investment case so much as to stop us from investing. We view the UN Sustainable Development Goals as being a useful framework for the assessment of ESG issues and we are particularly focused on climate related risks and opportunities. In our actively managed funds, we work to understand the ESG issues faced by a company, and assess the implications for corporate value and whether risks are adequately compensated. We consider how stewardship can be used to nurture corporate value and to encourage improvements in sustainability Actively managed quantitative funds. These funds use a proprietary mathematical model to conduct computerized stock selection with the aim of extracting alpha from historically proven outperformance factors. When investing using quantitative strategies, the emphasis is on overall portfolio characteristics rather than on the individual holdings. Accordingly, consideration of ESG-factors is integrated in the investment process at the total portfolio level, with the aim of improving the portfolio s ESG score over time. Passively managed index funds. These funds invest with the intention of replicating the performance of their benchmark index. The requirement to mimic an index means that - unless the index itself is built upon environmental, social and governance (ESG) factors these cannot be artificially introduced in the portfolio construction procedures without altering the essence of the product. For this reason, Sparinvest s passive funds exercise stewardship, as described below. 3 8
ESG Integration Fixed Income Funds Our fixed income funds include: Actively managed fundamental corporate bond funds. These funds follow a value strategy within credit markets looking for issuers of bonds that are temporarily mispriced relative to the risk of default and loss given default. As with all strategies that invest for value, it is essential to analyse all the fundamental risks and opportunities that could have the potential to affect the investment case during the holding period. This is particularly the case for bonds which have limited upside potential, compared with equities but which have a considerable downside if default risk is not properly analysed. Hence attention to all forms of risk including ESG - is particularly important in the bond space. The team undertakes fundamental credit analysis of the bond issue and issuer with a particular focus on governance, but also on any material environmental and social factors, before determining the overall attractiveness of the investment in terms of credit spread. Actively managed sovereign bonds These funds invest in the global universe of sovereign debt. Issuers in this universe are not companies, but governments. In recognition that it is both difficult and potentially undemocratic to attempt to influence nation states through engagement, we apply exclusions with regards to our sovereign bond strategies on the basis of multi-lateral sanctions and international norms particularly with regards to a nations ability to protect basic human rights. We rely on an externally provided country screening service to help us determine which countries should be excluded. Actively managed securitized bonds These funds invest in Nordic covered bonds, as well as Danish and EU government bonds. We also have one passively managed index fund investing in this universe. Given the rigorous regulatory requirements and strong governance systems that issuers in this universe must comply with, we anticipate that breaches of international norms will seldom (if ever) occur. We are confident that our funds investing in this universe meet the highest ESG standards but we do continuously monitor for any lapses in these standards. Stewardship To get a full picture of Sparinvest s approach to active ownership, this policy document should be read in conjunction with Sparinvest s Stewardship Policy. The below is only a brief description of how active ownership applies in relation to the different strategies offered by Sparinvest. Actively managed fundamental stock-picking funds. For actively managed funds, we believe in being engaged owners, and view equity investment through the lens not of owning a piece of paper, but of owning a long-term stake in a real company. We seek to foster the long-term value of our investments and to improve corporate behaviour, by being active owners in communication with our holdings. We do this through voting and engagement. Our engagements are usually either direct, collaborative, or led by service providers. We often find it can be powerful to combine these methods. Generally, we seek to act as constructive partners to our investee companies and work with them to foster long term value and sustainability. Triggers for engagement include specific ESG risks or opportunities, voting related issues or breaches of international norms. In actively managed funds, we aim to vote all holdings, but we also believe that it is more powerful to exercise voting in conjunction with dialogue. After reviewing research and analysis of voting agendas from our proxy voting service providers, ISS, agendas. ISS provides analysis of voting agendas, based on a customized voting policy specified by Sparinvest. The value equity investment team reviews that analysis internally, and voting decisions are then made on a case-by-case basis at the discretion of the team, based on our voting principles. Our decisions can, and do, vary from ISS recommendations. As noted earlier, on controversial items we are keen to have a constructive dialogue with the company in question. 4 8
Actively managed quantitative funds and Passively managed index funds. The engagement focus for these funds is on normative issues. We use screening services provider ISS-Ethix to screen our portfolios for companies which are alleged or confirmed to have breached international norms in human rights, labour rights, corruption, and the environment. Where such breaches are identified, we join collaborative engagements run by ISS-Ethix. In leading collaborative engagements for Sparinvest and other institutional investors, ISS Ethix represents combined AUM of USD 1.1 trn. This is a scalable and efficient approach, whereby their specialist knowledge of the issues is carried through into constructive dialogue with the companies, giving them ideas and targets for risk mitigation. In our quantitative and index funds, bearing in mind the overall focus on low costs, we choose to vote only on holdings of a significant size. We currently vote on holdings in which our funds invest over EUR 1 million. Where a company falling into this category is also held in our actively managed fundamental equity funds, we will vote in line with the voting instructions directed by the portfolio managers of those funds. Otherwise voting for all Sparinvest funds is conducted in line with Sparinvest s voting policy whereby our guiding principle is to serve the long-term interests of our investors. Stewardship in Fixed Income Funds Actively managed fundamental corporate bond funds. Whilst bondholders do not have the same voting and ownership rights as shareholders, we believe that our position as creditors, financing companies operations, gives us both the potential and the responsibility to influence investee companies towards more sustainable behaviour. A number of studies have also demonstrated that on average companies that have a clear management focus on ESG have been able to reduce financing costs compared with companies where ESG is less of a priority. So, where companies with strong ESG profiles seek financing, the credit premium required by investors like Sparinvest will be lower. Sparinvest has been actively engaging with portfolio companies on ESG issues since 2015 and our experience to date is that companies are responsive to bondholders concerns. We use a combination of direct, collaborative and service provider engagement. Triggers for engagement include: ESG risks revealed in credit analysis, ESG risks that develop in portfolio companies, relevant thematic collaborations. Actively managed sovereign bonds. We recognize that it is both difficult and potentially undemocratic to attempt to influence nation states Where the option exists to join coordinated initiatives targeting heads of state in order to raise awareness of ESG concerns or to improve human rights conditions in their nations, we will always consider adding our voice to these. Actively managed securitized bonds. If a security in the portfolio universe were to be in confirmed or alleged breach of international norms, our service provider would engage with them on our behalf and if we found it appropriate to do so, we would also engage directly with the issuer. Supra-company EngagementS Sparinvest works collaboratively with a number of investment industry organisations to promote ESG integration and awareness and shape policy at a supra company level. This can mean being involved in engagements conducted at an international level for example, as active members of Eurosif who lobby for the integration of ESG considerations in pan-european financial legislation. We are also actively involved in the PRI Sustainable Stock Exchanges initiative which encourages exchanges to issue guidance to listed companies about ESG reporting Supra-company engagement can also be at an industry level. For example, we are signatories of the PRI Statement on ESG in Credit Ratings which called up on the main credit rating agencies to recognize the importance of ESG elements in assessing the creditworthiness of borrowers. 5 8
Responsible Investment Governance The development and implementation of responsible investment practices are driven by our Responsible Investment Committee, which is chaired by the Head of Responsible Investment and includes the Head of Asset Management, representatives from each of Sparinvest s investment teams, a representative of Sparinvest s distribution team. Sparinvest Investment Committee Chaired by CIO Responsible Investment Committee Chaired by Head of RI Deputy CIO Representative Fundamental Equity Funds Representative Fundamental Bond Funds Representative Quantitative and Index Funds Representative Sparinvest Distribution The RI Committee reports on a regular basis to both the Investment Committee (bi-monthly) and the Board of Directors (annually). Sources of ESG Information At the heart of our internal security or credit analysis process is publicly-available information on fundamental (including ESG) issues from the company in question. This can be found on websites, given in Company meetings, in financial reports, Annual Reports, CSR reports. Our core provider of fundamental data is Bloomberg LLP. In addition, we typically write to new investments detailing our voting policy and general approach to investment, and take this opportunity to further stress our interest in ESG issues and raise certain questions (which may lead to more detailed engagement). In addition to these sources of ESG information, we also rely on external service providers as follows: MSCI ESG Research provides us with both quantitative data and qualitative research at both the company and the sector level on ESG issues. MSCI Carbon Metrics provides carbon footprinting for those of our funds that have signed the Montreal Carbon Pledge ISS-Ethix, provides our screening services and is thus a source of norm-based and sector-based ESG risk information. ISS provides proxy voting related corporate governance research and voting advice. Sell-side research occasionally provides insight on ESG issues (particularly governance) World Governance Indicators assist us in assessing country risk Press and NGO investigations as they come to our attention ESG information from service providers is held within a centralized database and is accessible to all investment staff. We find that the various sources of ESG information complement each other and can inform different parts of the process. For example, ISS reports can give useful pre-investment insight into corporate governance; MSCI IVA reports can provide useful insight for engagement on specific ESG or voting-related issues; and so on. 6 8
Carbon The Montreal Carbon Pledge is an initiative aimed at addressing climate change. Signing the Pledge commits an asset manager to measuring and disclosing the carbon footprint of some or all equity portfolios on an annual basis. The aim is that the Portfolio Manager will use this information either for engagement purposes or to set carbon reduction targets. Sparinvest signed the Montreal Carbon Pledge for the following funds and their carbon footprints are available to view on our websites: Sparinvest - Ethical Emerging Markets Value Sparinvest - Ethical Global Value Sparinvest - Ethical High Yield Value Bonds RI Community Where we see meaningful opportunities aligned with our responsible investment aims, we participate in external organisations and initiatives. This enables us to observe industry-wide sustainability trends, helping us to keep our Responsible Investment Policy up to date. It also gives us representation in the shaping of responsible investment legislation and involvement in supra-company initiatives designed to promote ESG transparency more widely. Sparinvest is a member, signatory or affiliate of the following organisations, codes and guidelines: OECD Sparinvest applies the due diligence recommendations for institutional investors under the OECD Guidelines for Multinational Enterprises. PRI The UN-supported Principles for Responsible Investment (The PRI) is the world's leading proponent of responsible investment. Sparinvest first signed the Principles in December 2009. Montreal Carbon Pledge Commits an asset manager to measuring and disclosing the carbon footprint of some or all equity and fixed income portfolios on an annual basis. Sparinvest first signed for two ethical equity funds in 2015 Sustainable Stock Exchanges Initiative Sparinvest is lead investor with the Luxembourg Stock Exchange to promote this initiative, described by Forbes Magazine as one of the world s best sustainability ideas. Eurosif Eurosif (amongst other things) lobbies for the introduction of European regulation and legislation supporting the development of responsible investment. Sparinvest has been a member since 2009. European SRI Transparency Code The Transparency Code aims at increasing accountability and clarity of SRI practices for European investors. Sparinvest first adopted the code in 2016. International Corporate Governance Network (ICGN) ICGN's mission is to promote effective standards of corporate governance and investor stewardship worldwide through the ICGN Global Governance Principles. Sparinvest joined in 2013. Anbefalingerne for aktivt Ejerskab (Danish Active Ownership Principles) Danish stewardship principles designed to promote long-term value creation for the companies and contribute to long term returns for investors. 7 8
Sparinvest signed in XXX and our Stewardship Compliance Statement is available on our website. LuxFLAG ESG Label Designed to reassure investors that ESG considerations are incorporated throughout the fund s investment process, an applicant fund must screen 100% of its invested portfolio according to one of the ESG strategies and standards recognised by LuxFLAG on an annual basis How we report to our investors We report on our responsible investment activities (including a summary of our voting and engagement activities) each calendar year in our first Responsible Investment Review of each year and through our annual PRI Transparency Reporting. Our PRI Transparency Report is available to view on our website. For our Ethical Funds, we supply a carbon footprint report annually on our websites In addition, our Value Bonds team provides quarterly ESG reporting for investors in the Ethical High Yield Value Bonds Fund. 8 8