abrdn Emerging Markets Corporate Bond – a sub fund of Premium Selection UCITS ICAV

 

SFDR Disclosures – Effective 29/11/2023

 

Summary Document– A summary document of the main features of the Fund is available to download from this page. Translations into the official language of the EU jurisdictions into which the fund is distributed are also available.

Sustainable Investment Objective – This Fund does not have as its objective a sustainable investment. It promotes Environmental & Social characteristics and while it does not have as its objective a sustainable investment, it will have a minimum proportion of 15% of sustainable investments.

Social and Environment Characteristics of the Fund – Environmental and social characteristics can cover a wide range of themes and issues and can vary over time. A non-exhaustive list of the characteristics the Fund may promote at any given time is shown in the table below.

Theme Characteristic
Climate change GHG emissions
Air quality
Energy management
Environment Water management
Waste management
Materials resourcing
Ecological impacts
Labour management Labour practices
Employee health & safety
Engagement, diversity & inclusion
Human rights Product quality and customer welfare
Community relations
Privacy and data security
Supply chain management

 

The Fund promotes these environmental and social characteristics by aiming to invest in issuers that:

  • avoid severe, lasting or irremediable harm;
  • appropriately address adverse impacts on the environment and society; and
  • support a decent standard of living for their stakeholders

 

The first point is achieved using ESG screening criteria and the latter two using ESG assessment criteria. The Fund aims to promote environmental and social characteristics holistically. In doing so, the Investment Manager does not consider all characteristics for all investments, but rather focuses on the most relevant characteristics for each of the Fund’s positions based on the nature of the investment’s/issuer’s activities, areas of operation, and products and services.

 

The Investment Manager uses its proprietary research framework to analyse the foundations of each business to ensure proper context for the Fund’s investments. This includes the durability of an issuer’s business model, the attractiveness of its industry, the strength of its financials and the sustainability of its economic moat. An economic moat is a distinct advantage a company has over its competitors that allows it to protect its market share and profitability.

The Fund is underpinned by the Investment Manager’s well-established active management approach of security selection tailored to the overall environment, which combines fundamental ESG considerations into individual, sector and top-down portfolio construction decisions. An assessment of an issuer’s sustainability is supported by the Investment Manager’s proprietary rating models and a deeply embedded ESG framework utilising on-desk fixed income and central ESG resources.

The Fund will:

  • Exclude companies with poor ESG business practices. This is achieved through a set of exclusions which identify controversial business activities and ESG laggards, i.e. companies rated poorly based on their management of ESG risks within their business;
  • Engage with companies to gather a forward-looking insight into the management of ESG risks, opportunities and actively influence the management of these factors in line with best practice standards;
  • Target a lower weighted carbon footprint compared to the Benchmark. For the avoidance of doubt, the Benchmark referenced herein is the general market financial index further described in the Supplement and is not a specific sustainable benchmark designated for the purpose of attaining the environmental and/or social characteristics promoted by the Fund.

The Fund seeks to:

  • Generate consistent risk-adjusted outperformance using the Investment Manager’s active management approach of instrument selection tailored to the overall environment.
  • Benefit from the Investment Manager’s active engagement with corporate issuers, encouraging positive changes in corporate behaviour.
  • Construct a portfolio that invests in issues from companies with strong ESG practices.
  • Leverage the support and insights of the Investment Manager’s large, dedicated fixed income team and ESG specialists’ resources.

The Investment Manager also applies a Sustainability Risk rating to each issuer. This is credit profile-specific and represents how impactful the Investment Manager believes the ESG risks are likely to be to the credit quality of the issuer now and in the future. The key areas of focus are the materiality of the inherent environmental and social risks of the sector of operation (e.g. extraction. water usage, cyber security) and how specific companies manage these risks, combined with the quality and sustainability of their corporate governance. This materiality assessment is combined with a judgement on the timeframe over which these ESG risks may have an impact. The Investment Manager utilises an ESG risk rating framework to support making these assessments. This is a proprietary tool designed to help focus the knowledge and expertise of credit analysts in a systematic way to substantiate the overall ESG risk rating assigned to debt issuers.

Additionally, the Investment Manager’s proprietary ESG score is used to identify companies with potentially high or poorly managed ESG risks. The score is calculated by combining a variety of data inputs within a proprietary framework in which different ESG factors are weighted according to how material they are for each sector. This allows the Investment Manager to see how companies rank in a global context.

To complement this, the Investment Manager also utilises active stewardship and engagement activities.

A reference benchmark has not been designated for the purpose of attaining the environmental and/or social characteristics promoted by the Fun.

Fund Investment Strategy – The Fund aims to achieve its investment objective by investing primarily (and at all times at least 67% of its Net Asset Value (NAV)) in debt securities and debt-related securities issued by corporate issuers (including government-owned corporate issuers) with their registered office or principal place of business in an emerging market and/or which carry out the preponderance of their business activities (as determined by the Investment Manager) in an  emerging market, and/or by holding companies that have the preponderance of their assets invested in corporations with their registered office in an emerging market and/or by holding companies that carry out a preponderance of their business activities (as determined by the Investment Manager) in an emerging market as at the date of investment (together, “Emerging Market Corporate Issuers”). The Fund may invest up to 100% of its NAV in debt securities and debt-related securities, specifically bonds, emerging market bonds, high yield bonds, convertible bonds, green bonds, social bonds, sustainability bonds, sustainability-linked bonds, hybrid bonds (specifically perpetual bonds, and contingent convertible securities, including AT 1 and Tier 2 bonds (“CoCos”)), and distressed/defaulted debt.

Convertible bonds are debt securities that can be converted into a predetermined amount of an underlying company’s equity at certain times during the bond’s life, usually at the discretion of the bondholder. The convertible bonds in which the Fund may invest will not embed leverage.

 

Green bonds are fixed income securities in which the proceeds will be exclusively and formally applied to projects or activities that promote climate or other environmental sustainability purposes through their use of proceeds. Sustainability bonds are issues where proceeds are used to finance or re-finance a combination of green and social projects or activities. Sustainability-linked bonds are bonds for which the financial and/or structural characteristics can vary depending on whether the issuer achieves predefined sustainability / ESG objectives. Social bonds are fixed income securities, the proceeds of which, or an equivalent amount, will be exclusively applied to finance or refinance social projects or activities that achieve positive social outcomes and/or address a social issue. Green, social sustainability bonds or sustainability-linked bonds will only be held by the Fund where they are attractive investments from a credit perspective.

 

The green, social, sustainability bonds and sustainability-linked bonds in which the Fund may invest will be identified as such by their issuers. Where a) the Investment Manager intends to buy a green, social or sustainability bond although the issuer of the bond would be excluded based on the Investment Manager’s environmental screens mentioned below, and/or b) where the Investment Manager wants to determine if a green, social or sustainability bond can contribute to the percentage of Sustainable Investments held in the Fund, the Investment Manager performs an additional assessment of these bonds, including if they have been subject to an external review, which may include second-party opinion, verification, certification or a rating. Such second-party materials are typically published by the issuers of the green, social, sustainablility bonds and sustainability-linked bonds, having been prepared by rating agencies such as S&P Global Ratings. In addition, these bonds  will be checked by the Investment Manager for alignment with at least one of any widely acceptable green, social or sustainability bond standards. The Investment Manager will also view positively alignment to regional guidance and taxonomies such as those from the EU, China and the Association of Southeast Asian Nations (ASEAN), in particular in relation to the clear disclosure of use of proceeds. The sustainability-linked bonds in which the Fund may invest will be purchased only based on a relative value assessment and will not be specifically purchased for their sustainable characteristics.

For risk management purposes, the Investment Manager applies various top-down overlays of risk analytics using its proprietary risk system. One of the functionalities of the Investment Manager’s proprietary risk system is to apply sensitivity analysis based on a number of macro risk factors and scenarios. This allows the Investment Manager to make checks during the portfolio construction process to assess if the Fund is excessively sensitive or correlated to one or more macro factors and helps the Fund break down the sources of risk in a number of different ways. The Investment Manager also considers the portfolio active risk positions versus the Benchmark, considering the breakdown in regions, countries, sectors and credit ratings. All this aims to achieve that the Fund has an appropriately diversified portfolio of holdings with broadly diversified risks.

Investment in all corporate debt and debt-related securities in which the Fund will invest will also follow the Investment Manager’s “Emerging Markets Corporate Bond Promoting ESG Investment Approach”. Through the application of this approach, the Fund has an expected minimum of 15% in Sustainable Investments. Furthermore, the Fund targets a lower carbon intensity than the Benchmark.

 

Binding Elements of the Investment Strategy

The Fund’s weighted carbon footprint score will be lower than the Benchmark.

Binary exclusions are applied to particular areas of investment. The Fund excludes issuers that:

  • Fail to uphold one or more of the UNGC principles;
  • Have any tie to controversial weapons; cluster munitions, anti-personnel landmines, nuclear weapons, chemical and biological weapons, white phospurus, non-detectable fragments, incendiary devices, depleted uranium ammunition or blinding lasers;
  • Have a revenue contribution of 5% or more from tobacco wholesale or are tobacco manufacturers;
  • Have a revenue contribution of 5% or more from thermal coal extraction and/or have a revenue contribution of 20% or more from thermal coal power generation unless identified as a transition focused company (a company with an ambitious and credible target to decarbonise their operations, as determined by the Investment Manager) and/or are directly investing in new thermal coal capacity in their own operations.

The Fund excludes issuers with the highest ESG risks, as identified by the Investment Manager’s proprietary ESG score. The 5% of issuers in the Benchmark with the lowest ESG scores are excluded from consideration.

The minimum proportion of the investments used to meet the environmental and social characteristics promoted by the Fund in accordance with the binding elements of the investment strategy will be 57%. This includes the minimum proportion of sustainable investments, which will be 15% of the Fund’s NAV. The remaining portion the Fund’s NAV will be invested in cash and ancillary liquid assets for liquidity purposes (no more than 10% of the NAV), and FDIs for EPM and/or hedging purposes and sovereign bonds. The minimum extent to which sustainable investments with an environmental objective are aligned with the EU Taxonomy is 0%. The minimum share of sustainable investments with an environmental objective is 5%, of which 100% will not be aligned with the EU Taxonomy. The minimum share of sustainable investments with a social objective is 5%.

The fund will invest a minimum of 15% its NAV in sustainable investments. These investments will contribute to the either the environmental or social objectives, or both. Where the objective relates to the environment, the investment will contribute to at least one of the following objectives: climate change mitigation, climate change adaptation, the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems. Where the objective relates to social matters, the investment will contribute to social objectives in line with one of the Sustainable Development Goals (SDGs) which are a collection of 17 interlinked objectives, formulated by the UN, designed to serve as a shared blueprint for peace and prosperity for people and the planet. The objectives of the sustainable investments may vary from time to time depending on the specific activity or investment. No specific environmental or social objective is being targeted, from those listed above. An economic activity must have a positive economic contribution to the above environmental or social objectives to qualify as a sustainable investment.

Principal Adverse Impacts

The Investment Manager does consider PAIs within the investment process for the Fund, which may include considering whether to make an investment, or for use as an engagement tool. For example, where there is no policy in place and one would be beneficial, or where carbon emissions are considered to be high, the Investment Manager may engage to seek the creation of a long-term target and reduction plan. The Investment Manager assesses PAIs by using, amongst others, the PAI indicators provided in Commission Delegated Regulation (EU) 2022/1288.

How does the Fund ensure that the sustainable investments it will make does not cause significant harm to any environmental of social sustainable investment objective.

The Fund’s sustainable investments are ensured not to cause significant harm to any environmental or social sustainable investment objective.

The Investment Manager implements a three-step process to ensure sustainable investments do not to cause significant harm to any environmental or social sustainable investment objective.

  1. Sector exclusions

The Investment Manager has identified a number of sectors which will automatically not quality for inclusion as a sustainable investment as they are considered to cause significant harm. These include but are not limited to a) defence; b) coal; c) oil and gas exploration, production and associated activities; d) tobacco; e) gambling; and f) alcohol.

  1. The ‘do no significant harm’ binary test

This is a binary pass/fail test which signals if an issuer passes or fails. A “pass” indicates under the Investment Manager’s methodology that an issuer has no ties to controversial weapons, less than 1% of revenue coming from thermal coal, less than 5% of revenue coming from tobacco-related activities, is not a tobacco producer and has no severe ESG controversies. If the issuer fails this test, its issues cannot be considered a sustainable investment. The Investment Manager’s approach is aligned with the adverse impacts indicators set out in Annex I of Commission Delegated Regulation (EU) 2022/1288 (as amended) and is based on external data sources and the Investment Manager’s internal insights.

iii. The ‘do no significant harm’ (“DNSH”) materiality flag

Using a number of additional screens and flags, the Investment Manager considers the additional principal adverse impacts (“PAI”) indicators set out in Annex I of Commission Delegated Regulation (EU) 2022/1288 (as amended). These additional principal adverse impacts indicators are not considered to be indicative of significant harm but are generally indicative of a potential area of concern e.g., lack of a specific policy or process and should be monitored over time and resolution sought. Therefore a company with active DNSH materiality flags may still be considered a sustainable investment. The Investment Manager aims to enhance the engagement activities to focus on these areas and seek to deliver better outcomes by resolving the issues.

How have the indicators for adverse impacts on sustainability factors been taken into account?

Throughout the investment process, in relation to the sustainable investments made by the Fund, the Investment Manager takes the indicators for adverse impacts set out in Table 1 of Annex I and all relevant indicators in Tables 2 and 3 of Annex I of Delegated Regulation (EU) 2022/1288 into account.

Pre-investment, the Investment Manager also applies a number of norms and activity-based screens including screens that are linked to the PAIs, including but not limited to: Companies involved in violations of the UNGC and OECD Guidelines (PAI 10), Companies exposed to controversial weapons (PAI 14), and a number of carbon related screens or assessments (PAI 1) including thermal coal extraction.

UNGC: The Fund uses norms-based screens and controversy filters to exclude issuers that may be in breach of international norms described in the OECD guidelines for multinational enterprises and the UN guiding principles on business and human rights, as well as state owned entities in countries which violate norms.

Controversial Weapons: The Fund excludes issuers with business activities related to controversial weapons (cluster munitions, anti-personnel landmines, nuclear weapons, chemical and biological weapons, white phosphorus, non- detectable fragments, incendiary devices, depleted uranium ammunition or blinding lasers).

Thermal Coal Extraction: The Fund excludes issuers with exposure to the fossil fuels sector based on percentage of revenue from thermal coal extraction.

Post-investment the following PAI indicators are considered:

  • The Investment Manager monitors all mandatory and additional PAI indicators via its ESG integration investment process using a combination of its proprietary house score and 3rd party data feeds. PAI indicators that either fail a specific binary test or are considered above typical are flagged for review and may be selected for company engagement.
  • Consideration of portfolio carbon intensity and GHG emissions via the Investment Manager’s climate tools and risk analysis
  • Governance indicators via the Investment Manager’s proprietary governance scores and risk framework, including consideration of sound management structures, employee relations, remuneration of staff and tax compliance
  • On an on-going basis the investment universe is scanned for companies that may be in breach of international norms described in the OECD guidelines for multinational enterprises and the UN guiding principles on business and human rights, as well as state owned entities in countries which violate norms.

 

Methodology and Data Limitations –

The sustainability indicators used to measure the attainment of each of the environmental or social characteristics promoted by the fund are

  • ESG assessment criteria;
  • ESG screening criteria;
  • The Fund’s weighted carbon footprint compared to the Benchmark;

Promotion of good governance is done via the exclusion of companies with the highest Sustainability Risks, as identified by the Investment Manager’s ESG score. This is implemented by excluding the 5% of issuers in the Benchmark with the lowest ESG score.

In addition, the Investment Manager will use external data to identify green and/or social bonds, and to calculate environmental or social revenues through disclosed data or estimates. Then, the Investment Manager will use its own insights and overlay the quantitative methodology with a number of internal data sources including proprietary on-desk ESG scoring frameworks, central proprietary ESG scores, economic contribution sector estimates or disclosed data through the Investment Manager’s own engagement activities or primary research to select the specific green, social,  or sustainability bonds.

The Investment Manager’s approach to evaluating the ESG profiles of securities within its eligible investment universe may be constrained by the availability, quality and relevance of sustainability related data available to the Investment Manager. The availability, quality and relevance of ESG data within the eligible investment universe may be limited, both in an absolute sense and in comparison to ESG data within other sectors or markets.

Due Diligence and Engagement – Investee companies are assessed for good governance, in particular with respect to sound management structures, employee relations, remuneration of staff and tax compliance. This will be demonstrated by the monitoring of certain PAI indicators for example corruption, tax compliance and diversity. This will be undertaken via the Investment Manager utilising its proprietary central ESG scores within its investment process, and screen investments with low governance scores. The governance scored assess companies’ corporate governance and management structures, including policies concerning staff remuneration, and the quality and behaviours of management and leadership. A low score is given where there are concerns in relation to financially material controversies, poor tax compliance, governance concerns or poor treatment of employees or minority shareholders.

The Investment Manager also utilises active engagement and seeks to interact with company management before the Fund invests. This is typically on a one-to-one basis, keeping in regular contact, aiming to build a meaningful, long-term relationship which ensures the Investment Manager will have access to the company management, even in times of stress. Furthermore, the Investment Manager regularly engages directly on ESG Factors with companies and underwriters, seeking to learn more about the companies’ sustainability strategy and performance, appraise company management on their ESG credentials and drive better corporate behaviour. Underwriters are firms that purchase debt securities from their issuers for resale. The Investment Manager’s research visits are a core part of the Fund’s fundamental research and the Investment Manager conducts over 1,100 meetings every year.

 

Benchmark – No reference benchmark has been designated for the purpose of attaining the environmental or social characteristics promoted by the Fund.

The Fund is actively managed by the Investment Manager with reference to the JP Morgan CEMBI Broad Diversified Index (USD) (the “Benchmark”) in that it will use the Benchmark as a reference point for portfolio construction and as a basis for setting risk constraints. It will also aim to outperform the Benchmark before charges. It is not, however, constrained by reference to the Benchmark or any index.

The Investment Manager has broad discretion to deviate from the Benchmark’s constituents, weightings and risk characteristics within the Fund’s objective and investment policy. The degree to which the Fund may resemble the composition and risk characteristics of the Benchmark will vary over time and the Fund’s performance, composition and risk characteristics may be meaningfully different from, or more closely aligned with, that of the Benchmark.

 

The Benchmark is a comprehensive USD corporate emerging markets bond index which captures: (i) issuers that are headquartered in an emerging markets country; (ii) issuers with 100% of their assets within emerging market economies; and (iii) issuers with 100% of their assets secured by assets within emerging markets economies. The Benchmark is a suitable benchmark for the Fund as it covers a large universe of emerging markets corporate bonds and thus provides wide issuer coverage and diversification. It is currently one of the most widely followed benchmarks in its class.

 

The list of benchmark administrators that are included in the Benchmarks Regulation Register is available on ESMA’s website at www.esma.europa.eu. As at the date of this Supplement, the following benchmark administrator is availing of the transitional arrangements afforded under the Benchmarks Regulation and, accordingly, does not appear on the Benchmarks Regulation Register: J.P. Morgan Securities Plc (JPMS plc).

 

 

Further details on the investment strategy employed by the Investment Manager to achieve the Fund’s sustainable investment objective can be requested via – https://www.threerockcapital.com

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