Ecofin Sustainable Global Water Fund (“The Sub-Fund”)
EU Sustainable Finance Disclosure Regulation (EU) 2019/2088 (“SFDR”)
Tortoise Capital Advisors, LLC, as the Investment Manager of the Ecofin Sustainable Listed Infrastructure Sub-Fund, promotes environmental and social characteristics pursuant to article 8 SFDR.
As already provided in the Prospectus, ESG research is thoroughly incorporated into the investment process for the Sub-Fund. Research on ESG matters is undertaken by the Investment Manager’s investment team; it believes that engagement on environmental and social issues is much more powerful when it comes from the person committing the money to the investment, rather than from a separate sustainability team.
Portfolio managers and analysts primarily utilise company filings and engagement with management teams in their ESG analysis for risk tier ratings, and we also access to third-party ESG research which can serve to augment our in-house research.
The main factors the Investment Manager assesses in undertaking its ESG analysis on portfolio investments for the Sub-Fund are as follows:
Environmental: Preservation and enrichment of the world
- Scrutiny on carbon footprint and disclosure (and other greenhouse gas emissions)
- Company’s time horizon for carbon neutrality
- Water use and land use
- Emission and waste reduction programs
- R&D, innovation and thought leadership for sustainability
- CAPEX, maintenance and capital integrity
- Risks linked to stranded assets
- Climate change-related physical risks on assets (fire, weather, droughts, etc.)
- Adverse policy support
Social: Consideration of people, communities, and relationships
- Impact on communities
- Customer satisfaction
- Commitment to safety standards
- Diversity in board, management and employees
- Employee engagement
- Commitment to fair and safe employment practices
Governance: Standards for operating, managing and sustaining a company
- Protection of minority shareholders
- Conflict of interests
- Insider ownership
- Management compensation
- Financial and strategic transparency
- Board independence
- Engagement and proxy voting
The 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.
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. At the core of the Investment Manager’s stock selection process is the understanding and mitigation of ESG risks in an effort to provide better risk-adjusted returns to investors. It is also becoming more evident through formal academic studies that better ESG profiles often deliver better absolute performance, thus underscoring the importance of ESG from both a risk management and value creation perspective.
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 our ESG scoring. This ESG score is then considered along 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 our investment in a security or reduce the amount of a name held in the portfolio. 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 our tiering process in our risk model, the Sub-Fund’s portfolio will own higher weights in companies what score well on our ESG ratings process, therefore maximizing the ESG characteristics of the Sub-Fund.
The Investment Manager is transparent with management teams regarding our assessment of their ESG scores and engage with companies to improve their metrics. We also vote proxy statements in alignment with this engagement for improving ESG metrics.
Examples of the sustainability risks which the investment team can look to evaluate in the risk-based model are:
- exposure to fossil fuel production and consumption, emission intensity and the corollary risks of economically impacted assets, facing adverse regulatory/legal decisions, incurring rising operating costs and pollution remediation costs;
- pollution, land/water use and business practice impact on local population health and wellbeing;
- treatment of minority shareholders on issues where important ESG considerations may be present;
- impacts on how technology innovations are adapting to meeting ESG policy goals on climate change, and how those innovations may reflect to shifting relative competitive positioning for a company’s existing assets or operations; and
- management behaviour and track record dealing with important or relevant ESG criteria. This may include transparency and disclosure initiatives but also reflect on specific issues, for example in successful completion of environmental impact studies.