Ecofin Sustainable Global Water Fund (“The Sub-Fund”)
EU Sustainable Finance Disclosure Regulation (EU) 2019/2088 (“SFDR”)
Dated 1 December 2022
This Fund promotes environmental and social characteristics pursuant to article 8 SFDR, as referred to in Annex I and Annex II of this Supplement.
The Sub-Investment Manager, Ecofin Advisors Limited, believes that companies with a thorough understanding of, and strategy around, environmental, social and governance (ESG) factors are more capable of mitigating risks and enhancing their performance over the long-term. Knowledge of ESG factors and risks and active ownership are, therefore, integral to the Fund’s investment philosophy and process. For each of the portfolio companies in the Fund, the Sub-Investment Manager analyses ESG credentials with a particular focus on principal ESG issues and risks.
The disclosures in this section are made pursuant to Article 8 of the SFDR.
Information on how the environmental, social and governance characteristics of the Fund are met:
As already provided within the Supplement, ESG research is thoroughly incorporated into the investment process for the Fund.
The Sub-Investment Manager’s portfolio managers and analysts utilizes a variety of company filings, engagements with management teams, and third-party research in their ESG analysis for risk tier ratings and qualitative analysis.
The Sub-Investment Manager believes that a thorough understanding of ESG factors empowers companies to potentially mitigate risks and take advantage of the opportunities resulting from these issues. The research process integrates both traditional fundamental analysis with ESG factors, which may impact and reflect into the company’s overall shareholder returns. Each company has an assigned analyst who is responsible for all aspects of the research process and for engaging with company management, including ESG-related factors, in populating the risk-based model to seek to provide better risk-adjusted returns.
Within the investment process, the ESG screen is an important metric in the risk identification and modeling process. In the risk tiering process, each of the three ESG components are evaluated individually and become the basis for the Sub-Investment Manager’s ESG scoring. This ESG score is then considered along with other quantitative and qualitative evaluations of management quality, asset quality, and cash flow stability to create a composite risk score. A company scoring low in the ESG assessment usually scores poorly on the management quality metric, so there tends to be additional compounding of the ESG assessment. A poor ESG assessment can preclude the Sub-Investment Manager’s investment in a security or reduce the amount of a name held in the portfolio of the Fund. Risk tier ratings, including the ESG components, are reviewed at least on a quarterly basis or if there is a material change to a company. With the Sub-Investment Manager’s tiering process in its risk model, the Fund’s portfolio will own higher weights in companies that score well on the Sub-Investment Manager’s ESG ratings process, therefore maximizing the ESG characteristics of the Fund.
The manner in which sustainability risks are integrated into investment decisions
Sustainability risk is defined as “an environmental, social or governance event or condition that, if it occurs, could cause an actual or potential material negative impact on the value of the investment”.
It is concerned with the risk that the value of an investment could be materially negatively impacted as a result of environmental or social risks. It is also worth noting that such risks need only be considered where they could have a material negative effect on the value of the relevant investment.
Sustainability risk analysis is also a part of stock assessment; the primary aim of this process is to assess how any ESG risks can derail or materially impact the underlying investment case of a company.
The Sub-Investment Manager believes that analysis of sustainability risks is an essential element of the investment management process and that companies exhibiting good ESG credentials in this Fund’s sectors are more likely to perform well over the longer term. Engagement and proxy voting are integral parts of active management and a case-by-case assessment is made for decisions relating to all proxies, corporate actions and events relating to portfolio holdings. The integration of sustainability risk analysis has a positive impact on research quality and portfolio returns for this Fund.