ESG is Embedded in Our Investment Process
Sustainability and ESG are tightly woven into Power Pacific’s investment philosophy and process. Through our investments in select quality and sustainable businesses, we promote:
Decarbonization - transition to a low-carbon economy and the creation of affordable clean energy;
Smart Society - transition to a more innovative, equitable, better educated and informed society;
Quality Growth - improve the quality of products, services, supply chains and community impact while taking into account the fact that resources are scarce and the importance of using such resources efficiently.
Investment Research and Due Diligence
We will do a first round of selection, screening out tobacco, armaments and gambling.
We then use external ESG scores to prioritize its research, retaining issuers whose ESG scores are higher than BB. We then identify companies with average ESG performance above that of its peers, allowing for a small number of exceptions due to lack of an external rating or where the ESG scores are not considered by us to be a true reflection of the companies ESG performance.
We will analyze and retain the best investment opportunities based on an initial set of financial criteria, using profitability and growth factors. The resulting list of companies will go through a deep financial and ESG analysis, using ESG issuer level scores from an external ESG database, and comparing to our proprietary ESG scores. Our proprietary ESG scores are based on:
- Environment and Social impact: Our estimates and metrics on what a company’s negative or positive impact is in the environmental (e.g., carbon footprint, contribution to climates solutions) and social areas (e.g., gender issues, treatment of employees, community engagement, contribution to social improvement/education/health goals etc.)
- Governance quality: We conduct extensive analysis to understand management and ownership structures. This includes a deep dive into management incentives and underlying management philosophy. We avoid firms with unclear and/or misleading financial reporting. When the opportunity arises, we offer thought leadership to help management teams further elevate their governance frameworks such as improved disclosure, decision-making transparency and investor-aligned management incentives.
The proprietary ESG scores will rate each issuer from 1 to 10. The score is then compared to peer companies within a sample stock pool (chosen by us to be competitors within the same industry). In choosing identifying investment opportunities, only companies with a score of at least 7 out of 10 will be considered.
A further analysis will be conducted on the remaining companies based on financial and ESG criteria, using the proprietary ESG score. We seek out firms playing a role in driving real world sustainability solutions to decarbonization, smart society and transition to quality growth.
We recognise that if a sustainability risk associated with an investment materialises, it could lead to the loss in value of an investment. However, we believe that its ESG framework helps identify companies that will provide long-term performance, therefore, reducing the impact of sustainability risks on the Fund. By integrating both financial analysis and ESG analysis within the investment decision process, we seek to understand relevant long-term sustainability risks for the targeted companies.
Consideration of Principle Adverse Impacts of Investment Decisions on Sustainability Factors
Principal adverse indicators – diligence phase
We consider principal adverse impacts of its investment decisions on sustainability factors. Each issuer in which the Fund invests is assessed by us to evaluate how its revenue streams could adversely impact the environment and communities, within the meaning of the Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment and amending Regulation (EU) No 2019/2088 (the “Taxonomy Regulations”), and in particular with respect to:
- Climate change mitigation
- Climate change adaptation
- Sustainable and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems.
We conduct investment due diligence on the investments within our universe on an on-going basis. This investment due diligence will evaluate a variety of factors including (for the purposes of this policy) an assessment of the proposed investment against the following non-exhaustive list sustainability indicators:
- Greenhouse gas emissions;
- Carbon footprint;
- Exposure to companies active in the fossil fuel sector;
- Share of non-renewable energy consumption and production;
- Energy consumption intensity per high impact climate sector;
- Activities negatively affecting biodiversity-sensitive areas;
- Emissions to water;
- Hazardous waste ratio;
- Violations of / lack of processes to monitor compliance with UN Global Compact principles and Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises;
- Unadjusted gender pay gap;
- Board gender diversity; and
- Exposure to controversial weapons (anti-personnel mines, cluster munitions, chemical weapons and biological weapons).
We shall go through a deep financial and ESG analysis, using ESG issuer level scores from an external ESG database, and comparing to our proprietary ESG scores. Our proprietary ESG scores are based on:
- Environment and Social impact: Our estimates and metrics on what a company’s negative or positive impact is in the environmental (e.g., carbon footprint, contribution to climates solutions) and social areas (e.g., gender issues, treatment of employees, community engagement, contribution to social improvement/education/health goals etc.); and
- Governance quality: We conduct extensive analysis to understand management and ownership structures. This includes a deep dive into management incentives and underlying management philosophy. We avoid firms with unclear and/or misleading financial reporting. When the opportunity arises, we offer thought leadership to help management teams further further elevate their governance frameworks such as improved disclosure, decision-making transparency and investor-aligned management incentives.
We seek out firms playing a role in driving real world sustainability solutions to decarbonization, smart society and transition to quality growth.
Non-availability of data: We must use reasonable efforts to obtain the required data. If the data is not reasonably available, that fact shall be recorded instead of the quantitative data point.
Non-relevance of sustainability metrics: We may conclude, using their reasonable judgment, that a particular metric is not commercially relevant to the assessment of a particular proposed investment, given the asset class of that proposed investment or the proposed investment strategy. For example, for liquidity and cash management purposes, the portfolio may hold a very small position in cash and/or cash equivalents. Cash has no ESG exposures. Where we reach the conclusion that sustainability metrics are not relevant, that conclusion shall be recorded instead of the quantitative data point.
Recording the sustainability metrics: ESG raw data is stored in our internal databases once sent from vendors. Specific metrics are used for different measurements across the various ESG scores (e.g., carbon output is useful when measuring emissions, but not useful when measuring labour practices) to ensure the maximum usefulness of the data. This raw data is saved both in raw form and also in a final adjusted form that is suitable for comparing ESG across the companies within the investment universe. Both forms are available for portfolio managers and researchers, but only the final form is used when the model is making investment decisions.
This diligence assessment then feeds into the investment phase, as outlined at section 6 of this Investment Manager, below.
Principal adverse impacts – investment phase
Having completed the diligence assessment as noted above, the investment model has been designed to evaluate the merits of a proposed investment and then determine the extent to which the results of the diligence exercise should weigh on the investment decisions, taking into account the sustainability values as articulated below.
Generally speaking, the investment model will seek to invest in investment positions which do relatively less adverse impact to environmental sustainability, as measured by (i) climate change mitigation, (ii) climate change adaption, (iii) sustainable and protection of water and marine resources, (iv) transition to a circular economy, (v) pollution prevention and control, and (vi) protection and restoration of biodiversity and ecosystems. The investment model will assess if the proposed investment does significant adverse impact, in light of those sustainability values.
Significant impact - We seek to ensure that the investments of the Fund have an appropriate aggregated ESG score on its proprietary ESG scorecard. All ESG metrics and rankings are carried out within our investment model, which has been tested and vetted by both the research and portfolio management team. We seek to ensure that all investments will have positive ESG scores at least 7 out of 10 on its proprietary ESG scorecard. If the conclusion of the analysis is that there is a significant adverse impact because a negatively scoring investment must be held for risk or investment purpose, the intention is to make off-setting investments to balance or hedge the adverse impact on the relevant sustainability indicator as a result of holding this investment. However, we shall have complete discretion as to what mitigating actions to take. We will record what mitigating actions, if any, are appropriate to take and have been taken. We closely monitor investee companies on core ESG issues. ESG performance is based on the portfolios’ (and individual investments’) ESG score year-over-year. Significant harm is assessed throughout the ESG and investment processes by expert judgement based on both qualitative and quantitative data, and using the EU taxonomy guidelines. If a material negative development in any of the core issues is identified, we will re-assess an individual investment’s ESG score in light of the new information and will act accordingly if the score changes substantially, including potential divestment.
No significant impact - If the conclusion is that there is no significant adverse impact, then that shall be recorded in our internal databases.