Ecofin Sustainable Listed Infrastructure Fund (the “Sub-Fund”)
EU Sustainable Finance Disclosure Regulation (EU) 2019/2088 (“SFDR”)
Ecofin Advisors Limited, as the Sub-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 of the Sub-Fund, ESG research is thoroughly incorporated into the investment process for the Sub-Fund. Each company that the Sub-Investment Manager follows in the Sub-Fund’s investment universe has an assigned analyst who is responsible for all aspects of the research process and for engaging with company management. Portfolio Managers and Analysts primarily utilize company filings and engagement with management teams in their ESG assessment for qualitative analysis. We do have access to third-party specific ESG research which can serve to augment and check our in-house research.
The main factors the Sub-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 Sub-Investment Manager’s perspective or edge relates to its significant expertise in dealing with and evaluating policy frameworks within some of the major GHG emitting industries, in particular utilities and sustainable infrastructure, for this Sub-Fund’s investment universe. The principal area of market inefficiency the team is looking to exploit relates to its views on how policy frameworks (and laws) around climate change and emission efficiency, together with technology innovations, can conspire to create substantial deviations in market expectations.
In the power sector, which is a majority exposure in this Sub-Fund, its investment strategy is to invest predominantly in companies investing to achieve their own or government targets for emissions reductions and greener grids and eventually decarbonisation. The Sub-Fund’s portfolio is oriented, therefore, toward clean generators and suppliers of electricity.
As attention on the impacts of climate change on our planet intensifies, corporate strategies are changing quickly to meet the demands for more and cleaner electricity and to prioritise the mitigation of environmental risks. Population and GDP growth and the electrification of transportation, industry and buildings are driving increasing demand for electricity and, at the same time, there is a race globally for lower carbon footprints. The Sub-Investment Manager’s strategy is to focus on those companies which are strategically focused on renewable energies and network infrastructure build-outs.
The investment needs for power are matched when we look more broadly at the network infrastructure – water, roads, airports, railways – required to support economic growth and to meet the UN’s Sustainable Development Goals. The gap between investment requirements and current spending commitments will have to be addressed by governments and private sources and the latter will need to be adequately incentivised by regulators. The adoption of climate change targets such as ‘carbon neutrality’ and ‘zero emission’ by an increasing number of countries and companies bodes well for an acceleration in the development in clean energy, and this transformation represents a powerful growth driver for our investment universe.
Sustainability focus integrated in decision-making
Sustainability risk analysis is integral to every part of our investment approach and ESG factor analysis is an ongoing and fundamental part of the investment team’s research process. A consistent risk identification framework is used to help assess the potential principal adverse impacts of investment decisions on sustainability factors and to help ensure that Ecofin’s positive sustainability focus is represented in investment decisions.
In order to mitigate the risks and potential principal adverse impacts of investment decisions on sustainability factors in this Sub-Fund’s investment universe, The Sub-Investment Manager may exclude (a) companies which are increasing activities which are detrimental to sustainability (such as increasing coal power generation, for example) or (b) companies which do not play a role in the development of a sustainable economy.
Sustainability risk analysis is also a part of the Sub-Investment Manager’s stock assessment process. We seek to identify actual or potential ESG risks to a company or its business model and to ascertain the materiality of such sustainability risks. The primary goal is to understand the nature of potential risks and whether they could derail or materially impact the underlying investment case for a company’s shares.
Investment decision-making components and process
The investment process comprises analysis of macroeconomic and regulatory factors relevant to the Sub-Fund’s sectors, but it concentrates first and foremost on grass-roots fundamental analysis of companies. The investment team utilizes a multi-pronged approach to regional sector and company research which includes qualitative, quantitative, and relative value analyses, and the study of ESG factors is an important component of our qualitative analysis. For each company we consider a host of non-financial data points and risk attributes and examine supplementary disclosures and materials around sustainability or ESG factors provided by the company or by a review agency. This ESG analysis is then considered along with other quantitative and qualitative evaluations of management quality, asset quality, and cash flow stability to create a composite qualitative picture of a company.
This qualitative analysis is amalgamated with three other first-hand information sources as follows, being quantitative analysis, relative value analysis, and carbon analysis to arrive at investment decisions:
- Qualitative analysis: The team uses proprietary risk models to assess a company’s asset quality, management, stability of cash flows and ESG factors.
- Quantitative analysis: The team employs proprietary financial models to understand a company’s growth prospects, liquidity position and sensitivities to key drivers.
- Relative value analysis: Valuation models and equity markets indicators guide portfolio weightings; screening tables allow the investment team to compare companies and stocks according to different criteria (for example, regulatory risk profile, valuation metrics, ESG scores, historical valuation ranges).
- Carbon analysis: In partnership with a specialist third-party ESG data provider, the team updates annually a global proprietary database of power generation companies with detailed CO2 emissions by source of power and by company.
The consistent approach to research laid out above and the well-defined investment universe generally allow the team to plan research and drive research rather than react to events.
The Sub-Investment Manager is transparent with management teams regarding our assessment of their ESG profiles and engage with companies to help them improve their metrics with respect to our key ESG concerns. It also votes proxy statements in alignment with this engagement for improving ESG metrics.
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 Sub-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 Sub-Fund.