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One of the main drawbacks in using third- party scorecards is the lack of transparency. By using an in-house scorecard, we have access to greater granularity and thus can more accurately determine the drivers of a score to identify specific areas of strength and weakness – as opposed to an overall score that is not useful for due diligence purposes. Drivers of a weak score, for example, might derive from a lack of company disclosure, or conversely strong disclosure but weak absolute and growth levels. Whilst the ESG scorecard provides us with an insight to the ESG practices of a company, we must be aware of the several drawbacks from existing data and the issues around disclosure, quality of self- reporting, consistency, and frequency:

• Disclosure – Most ESG data has been provided for less than a decade, and with no regulatory requirement for disclosure, companies can report as much or little as they please. Though disclosure seems to be improving, particularly driven by new European regulations, coverage remains particularly patchy among smaller- caps and companies domiciled in Asia and Emerging Markets. This can make comparison difficult.
• Quality – ESG data is largely self- reported, naturally raising questions of reliability and consistency.
• Consistency – Individual ESG metrics are weighted differently by various data providers. This means ESG scores from different providers have a low correlation with one another – unlike credit ratings, for example. We attempt to overcome this by building our own in-house, standardised scoring model.
• Frequency – Many ESG metrics are only updated annually. This makes it harder to fi nd timely insights to manage risk or enhance returns.

Our qualitative assessment begins with an in-depth analysis of a business’s products and services. As outlined previously, the Fund prioritises the identification of companies whose products and services have a positive environmental or social effect. To assess this, we use sustainability themes and sub-themes to guide our assessment. In doing so, we can more accurately and systematically conclude what is and what is not a sustainable product or service. To be considered for the portfolio, a company must derive the majority of its sales from our sustainability themes, which are outlined in this paper under ‘Screening’.

Using our quantitative scorecard, alongside the other sources outlined above, we evaluate the magnitude of exposure to the material risk factors, the company’s management of these risks and whether there are any relevant company initiatives that perhaps mitigate some of them. We fi nd that third-party risk frameworks are usually constructed on an industry basis, so our assessment enables us to evaluate the nuances between various companies within an industry, delving into whether a certain risk factor is material to the company specifically.

Understanding what each company does and how it operates enables us to assess whether the company is exposed to creating any negative externalities. The Fund goes beyond our company-wide exclusions to actively avoid exposure to common social and environmental exclusions. Here we assess any possible exposures to our exclusion list as well as past or current controversies that could have meaningful investment implications in the future. We detail this further in this paper under ‘Screening’.

Further, a particular focus of our qualitative assessment is on a company’s governance and its management’s remuneration. We believe governance should incorporate a strong and effective board with the necessary skills, background, and experience to provide objective oversight of management, positive employee relations with clear and effective policies in place, and a well-structured management compensation scheme. This should comprise clear, specific, and challenging long-term performance criteria which are fully disclosed to shareholders and incentivise long-term value creation for the benefit of shareholders. Our assessment here takes a checklist approach based on the transparency, design, and alignment of short and long-term remuneration. The results not only allow us to assess the company’s governance, but also often form the basis of our proxy voting decisions and any further engagement. For more information, please refer to our paper on Our Approach to Executive Remuneration, published on our website

Another key feature of our qualitative sustainability assessment involves analysing the carbon transition risk of a company. Whilst environmental factors may not be deemed material for every company, we believe it is an important exercise nonetheless to assess how companies are contributing to the global risk of climate change, and what is the company’s financial flexibility given changing regulations and policies. We look at a company’s emissions over time and stress test the company’s margins, earnings, return on equity, and net debt-to-equity to differing carbon prices. Alongside this we assess the company’s broader ability to cover higher ESG-related costs (e.g., higher cost of goods from more sustainable sources) and increase investment in more ESG-related projects through higher capital expenditure or R&D (e.g., more energy efficient machinery). Ultimately, our scenario analysis allows us to assess a company’s exposure to possible carbon- related costs – through either internal investment or externally imposed costs. As part of our carbon intensity review, we also look at the company’s initiatives to reduce its carbon footprint. Initially we find out whether the company reports data to the Carbon Disclosure Project (CDP), and then aim to evaluate whether the company has adequate science- based emission reduction targets. Again, the results of our evaluation here often form the basis of our proxy votes and engagement. Overall, our qualitative sustainability assessment enables us to better understand the materiality and fairness of ESG scores, the risks to business models and valuations, as well as company- specific issues and opportunities. It allows us to form more complete and meaningful investment conclusions, and for this reason, both the quantitative and qualitative sustainability reviews are conducted in-house by the investment analysts and portfolio managers working on the Funds; we do not outsource this responsibility to an internal or external ESG team. It would be remiss of us not to point out that incorporating ESG factors into investment decision-making is in its infancy compared to traditional financial analysis. While negative factors (such as oil spills or harassment) can cause a short and sharp correction in a share price once in the public domain, and therefore can lead to a long-term negative reputation for the company, positive factors (such as improving governance or management remuneration alignment) can take years to play out. It is precisely for this reason that we believe investment managers who have already established their ESG credentials, and who are actively engaging with the companies they invest in on ESG issues, can leverage a potential competitive advantage over those that do not.

We believe that engagement is an effective tool to achieve meaningful change and we are committed to engaging with companies in which our clients’ assets are invested on a wide range of topics. Engagement gives us an opportunity to improve our understanding of investee companies, which enhances our investment decisions. By engaging with a company to achieve specific goals, we are improving our understanding of the material ESG risks it faces, challenging its behaviour in relation to ESG considerations and in turn increasing its awareness of regulatory and societal changes. Engagement also lets us share our philosophy and approach to investing and corporate governance with a company and enhances its understanding of our objectives as shareholders. We will engage on our own, or with other investors that share our concerns through collaborative initiatives.

All engagement is conducted by the investment management team. This helps to ensure that the results of our engagement and monitoring activities feed directly into the investment decision making process. We focus on sustainability issues which we determine to be most material to the long-term value of our investee companies. When material and relevant, we believe that companies that address these factors will drive improved financial performance for our clients. These issues reflect expectations and trends across a range of stakeholders including employees, customers, and communities, to the environment, suppliers, and regulators. By strengthening relationships with that range of stakeholders, business models become more sustainable. The governance structure and management quality that oversee these stakeholder relationships are also a focus for our engagement discussions. Our engagement framework is composed of three tenets: dialogue, monitoring, and escalation. We prioritise the quality and materiality of our engagements over the volume of activity.

Our quantitative and qualitative fundamental and ESG assessments play a pivotal role in highlighting material risks which present an opportunity to engage with an investee company. For example, we may pursue dialogue based on areas of improvements outlined in our quantitative and qualitative ESG assessments, or a broader industry-level risk that we have identified. We may engage with companies and their management via the following:

• Formal correspondence
• Company meetings
• Proxy voting
• Shareholder resolutions
• Collaborative engagement

The purpose of our dialogue with companies is to understand if and how they are preparing for the long-term sustainability challenges they face. We also encourage greater ESG data and information disclosure.

In order to track and monitor our engagement activity, we have created a central engagement database used by all investment teams to record interactions with investee companies. The database allows us to analyse the range of interactions that have occurred over a period and the range of topics that have been discussed. Matters include long-term strategy, attitudes to capital structure, environmental and social impact, key governance issues and remuneration policies, as well as other non-financial risks and controversies. Monitoring includes recording the following:

• When the engagement was initiated
• The nature of the issue raised
• The company’s acknowledgement of the engagement and issue
• Description of the desired outcome
• Result of the engagement

The result of the engagement can often include a commitment to change, an implementation of change, or may require escalation. Whilst we regularly monitor progress against the engagement objectives, we recognise that the length of time to achieve an objective will vary depending upon its nature, and that key strategic changes will take time to implement into a company’s business processes. A measurable outcome from our engagement upon completion of an objective could take a range of forms, including additional disclosure by a company, influencing the company strategy on a particular issue, or a change to the governance of an issue. We recognise that success factors may be subjective, and that our influence is rarely the sole driving force for change. Regardless, we believe it is critical to track companies’ progress and measure the outcomes of our engagement, no matter how large or small our influence may be.

We recognise that effective engagement requires continuous monitoring and ongoing dialogue. Where we have engaged repeatedly and seen no meaningful progress, we will escalate our concerns. Decisions on whether and how to escalate are based on the materiality of each issue, its urgency, the extent of our concern and whether the company has demonstrated progress through previous engagements. We identify a number of methods at our disposal to escalate our engagements. These may take place in any order or frequency:

• Further formal correspondence signalling discontent
• Additional meetings or communication with executives or non-executive directors
• Signalling discontent via exercising our votes against individual directors or non-director resolutions
• Publicly voicing discontent
• Seeking to understand whether other shareholders share our concerns, to then collaborate

Whilst divestment is also an option, we believe that divestment can simply transfer ownership of problematic companies to less responsible owners. Ultimately, we believe that ownership matters, and so our preference is to influence and effect change through engagement and the escalations identified above. However, as stewards of investor capital, if we have exhausted our options, have seen insufficient progress, or believe that there is a clear risk to shareholder value, we would divest in the best interest of our clients.

At Empire Crypto Market, we also believe in collaborative action around ESG issues: focused programmes of engagement where the sum of parts is significantly more effective than if each participant attempted to engage alone.

For companies that make a significant contribution to global greenhouse gas emissions, we are engaging to encourage them to adapt their business models to align with the transition to a low- carbon economy. We also appreciate the significance of discussing with these companies the importance of greater transparency with regards to climate- related disclosure as well as tangible targets for reducing greenhouse gas emissions. As concerns about climate change have intensified, the desire to engage with companies on this issue has grown. We participate in the CDP non-disclosure campaign, which offers investors the opportunity to engage with companies that have received the CDP disclosure request but have not yet provided a response. The objective of the annual campaign is to drive further corporate transparency around climate change, deforestation and water security, by encouraging companies to respond to CDP’s disclosure requests. Our participation includes the opportunity to lead engagements with investee companies where relevant. Further, Empire Crypto Market holds a membership with Climate Action 100+ (CA100+), which is widely regarded as the world’s leading engagement group on the issue of greenhouse gas emissions. By becoming a signatory, we acknowledge in our sign-on statement that we ‘are aware of the risks that climate change presents to our portfolios and asset values in the short, medium, and long term. We therefore support the Paris Agreement and the need for the world to transition to a lower-carbon economy consistent with a goal of keeping the increase in global average temperature to well below 2°C above pre-industrial levels’.

We understand that participation in relevant industry initiatives is essential to the development of best practice in responsible investment. We participate in several initiatives in order to promote proper functioning of markets, improve our understanding in the area and contribute to the industry. These include the following: