Investment Impact Report 2023

LEADERSHIP IN SUSTAINABLE FINANCE INVESTMENT MANAGEMENT

Our cover image this year highlights a sustainability identity crisis, reflecting the struggles within the finance sector as society increasingly scrutinises greenwashing, evolving regulations, and the true impact of sustainability efforts. Practitioners remain divided on how to define and approach sustainability while addressing both financial and non-financial risks and opportunities. In this report, we explore this identity crisis, the barriers it presents, and how both the public and private sectors are advancing towards decarbonisation and a more circular, sustainable economy.

Welcome To our 6th Impact Report

As an investment team we have been managing sustainable investment solutions on a discretionary basis since January 2018. During this period we have seen a dramatic shift in societal focus and expectations.

It is not that long ago – November 2021 – when world leaders were jostling to be pictured with celebrities like Leonardo DiCaprio, Stella McCartney or Emma Watson at the much-vaunted COP26 climate conference in Glasgow. Joe Biden (US), Fumio Kishida (Japan), Scott Morrison (Australia) and Narendra Modi (India) were among 120 heads of state and government who flew in to be hosted by Boris Johnson and help set the global sustainability agenda for this decade and beyond. Back then, it was hip to be green and being an attendee at the events in Glasgow was the political equivalent of the fashion week front row.

Little more than two years later, the period under review for this report, the ‘sustainability’ mood music has changed with politicians and campaigners finding themselves caught in the crosshairs of a mounting public backlash to green policies. In our view - based on conversations with our investors, the fund management community and policy makers - sustainable finance finds itself facing an identity crisis.

On the one hand, society is increasingly denouncing greenwashing and questioning the impact (and affordability) of the transition to a sustainable economy. On the other hand, practitioners are divided on the double materiality definition and the levers that have an extra financial impact. Double materiality acknowledges the risks and opportunities from both financial and non-financial perspectives. This concept requires companies to disclose not only how sustainability issues affect them, but also how their operations and activities affect the environment and society at large.

This identity crisis is a significant headwind to progress. Mobilising capital for good is a core objective for the Affinity investment team and the challenging environment we have faced in recent years has tested our resolve. We also recognise it has been a frustrating period for investors. Through this report, we will explore this identity crisis in greater depth and discuss potential solutions, while providing examples of the progress the private sector continues to make towards decarbonisation and a more circular global economy.

Sustainable finance and its identity crisis

What is it really achieving?

According to the Global Sustainable Investment Alliance (GSIA) sustainable investment represented about 38% of all professionally managed assets in 2022 (latest report published). To further calibrate the growth in sustainable investing, the number of financial institutions adhering to the Principles of Responsible Investment (PRI) has risen from fewer than 250 in 2006 to 5,345 as at the end of 2023. Despite this acceleration, sustainable finance is facing a double identity crisis; firstly with respect to credibility, and secondly around divergent definitions and principles. While regulations aimed at sustainable activities and investing have developed, as we go to press, there is still no consensus on the actual definition of a sustainable investment. Within the realm of finance this ongoing ambiguity is triggering criticism driven by conflicting perspectives. Proponents champion the integration of sustainability into financial businesses, services and products, viewing them as essential for long-term success and planetary health, others remain sceptical, voicing concerns about financial returns and the politicisation of sustainability efforts. This debate rumbles on against the backdrop of a warming planet and a lack of cohesive collective action across regions.

Readers of last years Impact Report will recall our belief that sustainability was moving from a period of idealism to realism. This evolution in mindset reinforced to us (as committed sustainable investors) the importance of listening to alternative views and pushback. Barry Norris, the very vocal anti-ESG fund manager of London-based, Argonaut Capital, has come to exemplify for us the ‘opposition’ to sustainable investing;

“The fund management industry is currently sleepwalking into a dystopian ESG future. Far from “creating wealth and doing good”, ESG will destroy societies through an absence of economic growth that will inevitably come with the neglect of the profit motive. The consequences of ESG are profoundly immoral.

The logical endgame of compulsory ESG is that all public capital is allocated – not primarily for profit – but according to the political values of organisations which are not democratically accountable….

Always and everywhere compulsory ESG should be given the cold-shoulder by principled and profit - rather than politically - focused investors.”

While we believe a focus on profitability which fails to take into account the long-term health and habitability of the planet those earnings are produced on, is ultimately flawed, it is important to understand such criticism and be able to defend the credibility and viability of our approach.

The purpose of this Impact Report is not to present a detailed argument dismissing such views, but to acknowledge these voices are getting louder, and that tangible change still seems some way off. Greenhouse gas (GHG) emissions continue to rise, beyond what is compatible with the targets set in the Paris Agreement. The financial sector cannot be held solely responsible for this development, but the IPCC (Intergovernmental Panel on Climate Change) points out a lack of financing on climate mitigation and adaption solutions on one side and persistently high levels of both public and private fossil fuel related financing on the other.

Meanwhile, the UN Sustainable Development Goals (SDGs) established in 2015 have proved popular across all sectors of the global economy for measuring and reporting extra financial impact. However, these also highlight progress which has been inconsistent at best, with

the UN reporting in 2023 that progress on more than 50% of targets of the SDGs is weak and insufficient. Based on many key metrics, it is legitimate to argue that sustainable finance has not, thus far, contributed real positive change to the global economy. What is clear, is that for meaningful progress to be made, a great deal more capital will need to be mobilised than has been to date:

The $3 Trillion Clean Energy Investment Gap Global Investment needs to rise significantly for net zero Breakdown of annual investment needed for every sector by 2050

Measuring and demonstrating impact – the double materiality dilemma

Accounting concepts rarely become headline news, but the idea of double materiality has prompted articles in news outlets ranging from Reuters and Bloomberg to Forbes magazine and the Washington Post. The idea has stirred concern in some quarters while energising advocates in others. The concept of double materiality is a key feature in the EU Corporate Sustainability Reporting Directive (CSRD) and the starting point for all businesses on their sustainability journey. It is legislation that requires them to assess their business model and economic activities according to two dimensions:

Impact materiality

Financial materiality

Impact materiality for companies assesses their impact on the environment and society (looking from the inside out). In the case of financial materiality, the impact of these same factors is measured from the outside looking in, particularly in the context of cash flow generation, profitability and creating value.

In the double materiality process, topics that are specific to a company are analysed in a structured manner according to the two dimensions described and the risks are assessed. The aim is to identify and prioritise the most relevant topics for sustainability management and reporting. Topics that are not relevant are deprioritised and do not have to be included in sustainability reporting. An important feature of the CSRD is that it is sufficient for only one of the two dimensions to be material in order to trigger reporting obligations.

Source - Bloomberg NEF (BNEF)*BNEF’s net zero 2050 scenario

The way double materiality is conceived could mean considering the organisation’s impact on multiple stakeholders, raising a multitude of issues, and not all stakeholders or issues are likely to be equal.

The frameworks around sustainability reporting have been driven by the EU and there is increasing momentum behind adopting global standards based on the EU framework. However, as outlined above, reporting data to the standard imposed (ultimately to redress greenwashing criticism) is requiring huge investment in time and resources. The end goal is admirable - as uniform sustainability reporting remains a large piece of the puzzle still missing - but some corporate leaders are questioning the value creation associated with these obligations. Moreover, it is apparent to us that capital markets are not yet sufficiently rewarding those companies demonstrating strong sustainability credentials.

SOURCE - Double Materiality – really costly, when done wrong | VIRIDAD

Reviewing choices to build sustainable investment solutions

In light of the identity crisis described, together with the ongoing challenges associated with delivering attractive returns, we have been reflecting on ‘where next’ for sustainable investing. Rising anti-ESG rhetoric, wavering public policy at the margin, and waning public support, have encouraged a growing chorus of doubters with respect to the durability of this approach. Some of the criticism being voiced is no doubt justifiable, however we remain galvanised by the huge commitments and spending which are being made by corporates, particularly at the mega-cap level. These convince us that sustainability is steadily becoming further embedded in strategic business planning - more on this later.

With this in mind, and reflecting on the experience we have gained since 2018, we thought it would be helpful to pose the following question; Knowing what we now know, how would we go about building a sustainable investment solution from scratch?

We believe building portfolios today requires making choices about themes, levers and data.

Themes - from local ESG to global SDG

The origins of sustainable investing can be traced back to Jewish, Christian and Islamic traditions. In the 1960s it took on a political role, notably in response to the Vietnam war. The concept of incorporating extra financial considerations in investment decisions faced criticism, epitomised by Milton Friedman’s assertion that profit maximisation is a business’ sole responsibility - the business of business is business. Environmental disasters in the 1970s and 1980s spurred further development, aligning with the rise of corporate responsibility.

Climate change emerged as a powerful new catalyst for sustainable investing from the mid 2000s, emphasising a global challenge that would necessitate collaboration across countries and sectors. The subsequent introduction of the UN SDGs provided a shared framework to achieve this through addressing both global environmental and social issues.

Returning to the question posed, thematic investing based on the SDGs arguably makes sense from a storytelling perspective, however investors must recognise not all the themes lend themselves to delivering an attractive return on capital deployed. Moreover, sustainable businesses are those able to return a profit whilst NOT relying on government subsidies/ incentives.

Through the course of this reporting period, we have increasingly focused on corporate value creation, alongside delivering impact, exiting some holdings where the appropriate balance was lacking.

Levers to influence companies

Decarbonisation of the global economy requires behavioural change from companies. Sustainable investors face the challenge of identifying the most effective levers available to then instigate these changes. Although there is no consensus on categorising these, they can be simplified into three types: exclusion, inclusion and engagement.

Of these three, we believe active engagement is the most likely mechanism available to investors to encourage the behavioural change required. However, it requires significant time and resources to be successful and there is a need to prioritise specific themes or companies. Moreover, its effectiveness is only enhanced when accompanied by a clear exclusion threat (divestment) which is shared by other investors and extended via other key contacts. This is ‘field building’ i.e. engagement with peers and regulators which acknowledges broader influences.

In the absence of reliable impact data (see next paragraph) we have placed great stall in active engagement as being a powerful lever for us to pull. This has been a key component of our impact reporting since year one and is featured once again in this sixth iteration. We firmly believe this lever to catalyse change is as important as ever and we are encouraged by the commitment of our underlying managers to use it during their dialogue with investee companies.

Data

Primary data for sustainable investing is becoming increasingly standardised, with metrics aligned to carbon reporting front and centre. Technological advances including increased use of artificial intelligence, and the ability to number crunch vast data sets, are slowly delivering more reliable and plentiful sustainability metrics. Readers of our earliest impact reports will be aware we purposely avoided quoting impact metrics as we were uncomfortable with the quality and consistency of the data. Today and going forward, a point has been reached where this decision making is increasingly being driven by sustainability metrics and associated considerations. We accept this is not yet universal across global capital markets but we expect, particularly in Europe, businesses with demonstrable sustainability credentials will be able to finance themselves with a lower cost of capital than those without. This should boost profitability and create value for like-minded investors.

Companies leading the way

Despite our previous reference to public policy wavering at the margin, and anti-ESG rhetoric, the corporate sector is making great strides. A recent report published by Goldman Sachs* which analysed green capex, climate adaptation, and the circular economy, reinforced their view that, (a) companies remain committed to decarbonisation and climate goals despite headwinds on costs, (b) regulation in the EU continues to drive commercial outcomes for circularity and decarbonisation and (c) energy and resource efficiencies’ contribution remains under appreciated. It remains the case that sustainable product parity in terms of quality and cost (versus traditional products) is considered critical for mainstream adoption.

A final takeaway was the increasing use of carbon pricing for internal budgeting as this commodity is increasingly accepted as an important component of corporate P&L.

The circular economy - entering the resource efficiency era

The need to move towards a circular economy - one in which consumption of earth’s resources is equal to or less than what the planet can regenerate – becomes ever more crucial, as resource consumption is expected to nearly double by 2060 vs 2017. Resource consumption per capita has increased over 50% in the past 50 years, standing at 75% more than earths’ regeneration capacity in 2021, while material consumption is forecast to nearly double to 167Gt in 2060 versus 89Gt in 2017. According to the European Investment Bank, the world today is only 10% circular. A commodity super-cycle and looming critical material crisis are likely to bring a greater emphasis on resource utilisation, efficiency and recovery in the coming years. This is an important theme for us and examples are highlighted later in this report (see Lombard Odier Circular Economy fund).

Decarbonisation- why do we continue to commit capital to support the energy transition?

2023 was confirmed as the warmest year on record, driven by human-caused climate change and boosted by the natural El Niño weather event. Almost every day since July saw a new global air temperature high for the time of year. What struck scientists the most, was not just that 2023 was record breaking but the amount by which previous records were broken. See chart below:

Daily global average air temperature, 1940-2023

Despite the escalation of extreme weather events - heatwaves, floods, droughts, wildfires and cyclones causing misery and mayhem - sentiment surrounding the pace of the energy transition and investment returns has rarely been as negative. This has been undermined by a confluence of higher interest rates, geopolitical tensions and an increasingly populist policy backdrop.

Notwithstanding all of this, the shift to a decarbonised world is continuing at pace. Clean energy investment in 2023 hit a record $2 trillion, almost 2x the sum invested in fossil fuels. The largest driver was China, where investment climbed nearly 75% year-on-year.

Avoiding high GHG emitting assets clearly helps minimise emissions in portfolios but has little influence over decarbonisation in the real world. As such, we need to reframe the challenge to influence the decarbonisation strategies we want from underlying companies. To complicate matters, evidence that strategies prioritising reduced portfolio emissions are struggling to keep up with traditional benchmarks has never been more evident than through 2023.

Companies leading the way

To achieve lower GHG emissions, the world needs to produce much more electricity from renewables. This statement is well understood and investment into producing clean electricity is firmly established. What has emerged over the course of the last twelve months, is the significant problem faced in connecting new sources of electricity to the grid. Nowhere is this more evident than in the US, where the electric grid is in dire need of an infrastructure overhaul. America is plagued by one of the highest power outage rates of any developed nation and by most estimates, incapable of satisfying growing energy demand. Decades of underinvestment have left the grid antiquated and there have been no major modernisation initiatives since its construction in the 1960’s. This bottleneck to electrification - and subsequent decarbonisation - is a commonplace theme across the developed world. Grid modernisation is essential to adequately support economic growth, the proliferation of digitisation, a clean energy transition and improved national security.

It is estimated that power load demand across the US grid will grow at a 4.7% annual rate over the next five years. To put this into context, during the previous decade, annual load demand grew at just 0.5%. This serves to highlight the compelling investment opportunities potentially available to providers of electrical equipment and smart grid operators. This high conviction theme is expressed across a number of our funds in our sustainable solutions, as it neatly encapsulates the dual mandate of growth with impact. One of our funds, Ninety One Global Environment, illustrates the investment and decarbonisation potential in this space using the example of Scheider Electric, a global specialist in energy management and industrial automation.

Source: Ninety One, Net Zero Investing, Searching for Returns and Real World Change, April 2024

Global equity returns compared to a proxy for a low-carbon fund universe

Source: Ninety One, Global Envirnment Impact Report 2024

The following chart also illustrates how investment performance has shifted in favour of management of the grid (Schneider Electric) from clean energy production (Vestas Wind Systems) in recent years.

Daily global average air temperature, 1940-2023

Source: Google Finance

The future of sustainable investing – how do we think this identity crisis will be resolved?

This first section of our report has hopefully demonstrated the journey to a decarbonised and more circular global economy has not only just started but is now well underway. Policy makers, corporate leaders and asset owners, in our view, can be proud of the progress being made. However, we accept the jury is still out as to whether this style of investing offers the rate of return sufficiently attractive to become mainstream. Moreover, we share concerns that the sustainable finance ecosystem has become overly complex in terms of reporting and falling short on delivering on real world ambitions.

Is the answer to be less ambitious and more pragmatic?

DNSH vs positive contributions

The EU Commission has guided financial institutions to define sustainable investment by emphasising three criteria: avoiding harm to environmental or social objectives; contributing to these objectives; and adhering to good governance standards. We should remind ourselves, the concept of sustainable development can be traced back to the seminal 1987 Brundtland report for the UN which defines sustainable investment as meeting present needs without compromising future generations to meet their own needs. In modern sustainable finance terms, this original definition of sustainable development is closer to the ‘do no significant harm’ (DNSH) ethos which underpins the EU taxonomy, rather than a call to make a positive contribution. As a result, focusing on companies that conduct their business without causing significant harm to the planet or people may become a more widely adopted approach to sustainable investing. We appreciate implementing this requires a specific definition of the word ‘harm’ considering both activities (what is produced) and behaviour (how the company produces).

Investing to DNSH is not enough on its own, and we would argue allocating to companies whose products and services are helping to solve the world’s environmental and social problems is crucial. However, we now appreciate too high a weighting to these companies can encourage an overallocation to small and mid-cap businesses, along with the added volatility and drawdown potential they tend to bring during market stress periods. Meanwhile, large behemoth companies – with a substantial environment footprint, but investing significantly for change - i.e. BMW building a plant that recycles 10k cars a year, can be hugely impactful. Indeed, the latter example is really at the heart of the energy transition, and progress towards a more circular economy.

A quick recap on the fast-evolving regulatory environment – the reporting Trinity

As the cornerstone of the European Union’s ambitious Green Deal, the EU Taxonomy aims to standardise what qualifies as a sustainable economic activity, promoting transparency and consistency across the market. The framework creates a pathway for investors and financial institutions to make informed green investment choices, understand financial and risk components and perform comparative analyses based on sustainability metrics.

Due to the uniqueness of the EU Taxonomy and the fact it is only one element of a broader reporting Trinity, the European Commission decided to phase in its application - both in the context of reporting requirements and the companies that fall into scope.

The power of three

The EU sustainable finance framework encompasses the EU Taxonomy, the Corporate Sustainability Reporting Directive (CSRD – referenced earlier) and the Sustainable Finance Disclosure Regulation (SFDR). These three regulations are closely interconnected, working together to direct investments toward activities aligned with the Taxonomy by enabling investors to identify these activities. The classification system created by the Taxonomy is applied within both the CSRD and SFDR.

The CSRD requires that companies include a distinct section for disclosures related to the EU Taxonomy in their annual reporting. Additionally, investments aimed at enhancing alignment with the Taxonomy should be included in the transition plans outlined in the CSRD report.

The pre-contractual and periodic disclosures required by the SFDR also work within the Taxonomy. Investment firms managing Article 8 or 9 funds should utilise alignment metrics of their investee companies or Principal Adverse Impact (PAI) data published in the CSRD report to demonstrate the sustainability strategies of their funds.

What benefits do reporting companies derive?

To comply with these regulatory demands the corporate sector is having to interpret extensive legal documents and understand the complexities, requiring significant investment in training and resources. This includes sophisticated systems and management processes being implemented to collect and analyse large volumes of data from different sources. Associated costs are highly meaningful for businesses, especially more boutique firms, and the rapidly evolving landscape means it will be challenging to stay updated with ongoing changes.

In return, proponents of the legislation argue there are several clear benefits to this reporting framework. Greater alignment builds a positive brand image, potentially leading to improved terms in accessing capital; the best sustainability practices promote operational efficiencies which boost competitiveness; alignment builds trust and strengthens long-term relationships with key stakeholders, and – finally – sustainability winners will be able to influence the future agenda, perhaps to their advantage.

Principles for Responsible Investment (PRI) - our first appraisal

As signatories of the UN PRI we work to promote the incorporation of environmental, social, and corporate governance factors into investment decision-making. In common with all signatories, this is achieved by adhering to the PRI’s six key principles and filing annual reports on their progress.

Principle 1: incorporate ESG issues into investment analysis and decision-making processes

Principle 2: active owners and incorporate ESG issues into ownership policies and practices

Principle 3: seek appropriate disclosure on ESG issues by investee companies

Principle 4: promote acceptance and implementation of the Principles within the industry

Principle 5: work together to enhance effectiveness in implementing the Principles

Principle 6: report on activities and progress towards implementing the Principles

This year we made a voluntary submission ahead of compulsory reporting which fell due in July 2024. This proved a valuable undertaking as it enabled us to further define and strengthen the governance structures associated with our responsible and sustainable investment process. These included revisions to our Responsible Investment Policy and Exclusions Framework.

To provide some context, we undertook this work in the knowledge our four-star rating (out of five) from the PRI in the category of ‘Confidence Building Measures’ (CBM) meant our internal controls were already robust. CBM emphasises increasing internal organisational confidence, as well as external stakeholders’ confidence, that there is a rigorous and robust process to collect the information presented in external ESG reports, such as the PRI Transparency reports.

Finally, a comment on investor flows into sustainable funds.

Given the challenging investment environment, it is unsurprising to note the global universe of sustainable funds saw redemptions of close to USD 2.5 billion in the last quarter of 2023, which was the first time on record that net quarterly flows fell into negative territory. However, over the year in full, global sustainable funds gathered USD 63 billion, albeit this is less than half of the USD 161 billion committed in 2022.

Europe remains the biggest market for sustainable funds. Over 2023, such funds raised over USD 76 billion, although – again - this number is half the annual net flows of USD 149 billion seen in 2022 (see chart above). Given everything we have written in this report, some observers may be quick to shout ‘the end is nigh’ for this style of investing. In reply, we believe it is noteworthy to highlight European conventional funds suffered annual outflows of USD 50 billion during this same period. Based on these metrics, we are confident to state sustainable investing remains ‘alive and kicking’.

Source: Morningstar Direct. Data as of December 2023.

Exhibit 6 European Sustainable Fund Flows Compared With Conventional Fund Flows (USD Billion)

Over to you

If you have read this Impact Report and reached this section, we recognise your commitment to sustainable investing and delivering positive impact is important to you. As an Investment Team, we are grateful for the patience you have shown over recent years, and hope you take significant comfort from the positive impact your capital has been facilitating, even through a period of frustrating investment returns. Each member of our Investment Committee has invested their own capital in these solutions, demonstrating our ongoing commitment to mobilising capital for good.

We believe we have continued to develop further, as sustainable investors, and our comments throughout this report highlight the investment community and policy makers have been learning along the way too. There is no doubt the raft of legislation, taxonomies and regulatory demands have resulted in unintended consequences, and this has morphed into the identity crisis we have discussed. Sustainability ambitions are admirable and well-meaning, but pragmatism and realism have now brought the topic of what investors are trying to achieve into sharper focus. Rewiring the global economy was never going to happen overnight, however we are confident the transition is in progress, and investors in our sustainable solutions should feel good about the contribution they are making toward this vital evolution.

Your Investment Team

(Left to right) Angus, Jack, Jon, Connie, Cristina, Dougy, Russell, Ben and Lydia.

Durrell Wildlife Conservation Trust

By investing in Affinity’s sustainable mandates you also helping Durrell Wildlife Conservation Trust (Durrell).

A fixed percentage of the discretionary fees you pay are donated to this Jersey-registered charity, supporting their work around the globe to save species from extinction.

Durrell’s efforts largely target rare and overlooked species, which, though less iconic, these “little brown jobs,” as Gerald Durrell endearingly referred to them, play a key role in revitalising ecosystems and achieving a more thriving natural world.

BELOW ARE SOME EXAMPLES SHOWCASING HOW AFFINITY’S SUPPORT HAS ENABLED DURRELL TO CONTINUE THEIR MISSION OF SAVING SPECIES FROM EXTINCTION:

ASSAM, INDIA PYGMY HOG RELEASES

50 camera traps - The pygmy hog, the world’s smallest pig and one of the most endangered mammals, lives only in Assam’s tall grasslands. To monitor released populations, camera traps are arranged in a grid pattern using GPS points.

8 transmitters - Transmitters track pygmy hogs after their release, providing data on their behaviour and range to inform future release strategies.

THE SAINT LUCIA RACER CONSERVATION PROGRAMME

Funding supports 24 staff trips over four months to monitor the Saint Lucia racer, the world’s rarest snake with only 80-100 surviving in the tiny Maria Major island off Saint Lucia.

MADAGASCAR POCHARD BREEDING PROGRAMME

BIOSECURITY TRAINING

Biosecurity training for local partners to prevent invasive species like rats and mongooses from causing the extinction of the Saint Lucia Racer on Maria Major island.

The Madagascar pochard, the world’s rarest duck, was once thought extinct. Durrell’s work with the species began in 1989, and a captive breeding programme was established in 2009.

Funding for four groups of captive-bred pochards to be released into Lake Sofia aims to establish a wild population. The number of birds released depends on breeding success and covers transport, equipment, and staff costs.

MADAGASCAR, BIG-HEADED TURTLE (LOCAL NAME “RERE”, PRONOUNCED “RAY-RAY”)

The Rere is threatened by overfishing, hunting, and climate change. Since 1998, Durrell have worked with local communities to protect them. Funding for 10 radio tags helps track turtles and gather data to better protect their habitats.

The protection of 400 nests - wire mesh costs USD 200 per roll. Community members guard the nests and are paid for each successful hatch.

Learn more about the important work Durrell do by visiting www.durrell.org.

Affinity’s social responsibility

Our commitment to sustainability extends beyond this mandate. As a firm, our Ethical Charter (accessible on our website) sets the tone for our business. We aim to be good corporate citizens, active in our community and supporting global efforts towards a more sustainable world. Our Sustainability Policy Statement (also on our website) presents a set of pledges to the key stakeholders of our business and approved by our Board.

Jersey Finance Sustainable Finance Awards 2023:

In 2023, the Investment Team were winners of the Jersey Finance ‘Leadership in Sustainable Finance - Investment Management’ award for the second year running. According to the judges, this award recognises the firm which best exemplifies the embedding of environmental, social and governance factors into its business. Particular attention was paid to those in the financial services space supporting the transition to a more sustainable economy, contributing to the allocation of capital towards long-term environmental and social development goals, with a strong culture around social responsibility, and a commitment to operating as a sustainable business.

Balancing our carbon footprint:

For a fourth consecutive year we balanced our carbon footprint through the Rewild Carbon programme run by Durrell Wildlife Conservation Trust. Our measured emissions through the last reporting period had increased, due to broadening the scope of our carbon calculations to include train travel and further enhancing our employee office commute data. Despite this increase, for the third year running, we chose to invest in extra carbon credits above and beyond our measured emissions.

By participating in the Rewild scheme, we have actively contributed to Durrell’s efforts to restore Brazil’s Atlantic Forest, an effort that is increasingly urgent given the loss of 178 million hectares of this vital ecosystem to agricultural activities since 1990. In 2023 alone, we contributed to the planting of 312 trees, bringing our total to 550 trees since joining the scheme. These trees have been strategically planted to link fragmented forest areas, enhancing habitat connectivity and expanding the living space for threatened species. Supporting biodiversity in this region is crucial, as many of the 569 species that call the Atlantic Forest their home are not found anywhere else on earth.

Among the saplings pictured above are those we have proudly funded. They will create a corridor to the established forest within Morro do Diabo State Park.

Charity Committee:

Throughout the year, our Charity Committee gave support to two local charities. Our chosen environmental charity for 2023 was the Jersey National Park, which aims to protect, conserve and enhance the natural beauty, wildlife and cultural heritage of 2,145 designated hectares of Jersey’s coastland and grassland.

Our chosen social charity was Healing Waves, who harness the ocean’s transformative powers to deliver free life-changing ocean therapy to individuals living with disabilities and other challenges. Our efforts involved arranging fundraising events and volunteering days, in addition to providing financial contributions to both charities. Last Christmas this included hosting the Santa Sled Dash with Funktion Gym in support of Healing Waves. The event brought teams from various companies together for the physical challenge of pushing a 100kg sled as far as possible in a given time, helping to raise funds for this fantastic cause.

The Diversity Network, Jersey:

We remain committed to supporting The Diversity Network, particularly through the ‘51 Employers’ initiative, which encourages employers to create a workplace where employees experiencing menopause receive the necessary support and understanding.

Being part of Eco Active:

We are pleased to continue our partnership with Eco Active for the sixth year in a row. This government-backed environmental management initiative focuses on reducing the environmental footprint of various industries on the island, including the finance sector.

Carbon Literacy Collaboration:

We are proud to partner with Highlands College and Eco Active to sponsor and help deliver six Carbon Literacy courses in 2024, reflecting our commitment to sustainability and environmental awareness in Jersey. These courses, accredited by the Carbon Literacy Project, equip participants with the knowledge to reduce carbon emissions and promote decarbonisation at individual, community, and business levels. By fostering green skills and requiring actionable commitments, this initiative aims to drive positive change and support our collective response to climate change.

UN Global Compact:

We continue to be participants in the UN Global Compact (UNGC) and this requires us to submit an annual Communication on Progress (COP), detailing the development of our business across the Ten Principles underpinning the UNGC. We completed our 2023 submission in June and this is available to review via Affinity Private Wealth | UN Global Compact

Image: One of the Affinity teams in the sled dash for Healing Waves

Recapping the purpose of the mandate

For us sustainability means making economic prosperity long lasting, more socially inclusive, and less dependent on exploitation of finite resources and the natural environment. Today, companies which provide solutions to the challenges faced are well placed to grow strongly. We believe, by investing in these firms, our clients can make a positive contribution towards a more sustainable world, align wealth with their values and generate attractive capital gains.

The purpose of the Sustainable Growth mandate is to provide growth with impact. The strategy targets inflation plus 3%, over a long-term investment horizon of at least ten years. The purpose of the Sustainable Balanced mandate is to provide risk-adjusted returns and positive impact. The strategy targets inflation plus 2% and aims to maintain the real value of capital invested over a five to seven year time horizon.

Sustainable Growth - weighted revenue alignment by goal as at December

Source - Clarity AI

We are excited to share over the past year, we have partnered with Clarity AI, a leading sustainability data provider, to enhance our data collection, analysis and presentation of impact metrics. This enables us to report more valuable insights to our investors through this annual impact report and relevant fund factsheets.

The UN SDGs adopted by all member states in 2015, provide a universal framework to tackle global challenges by 2030. These 17 goals focus on eradicating poverty, protecting the planet, and ensuring prosperity and peace. For investors, the SDGs serve as a valuable tool to evaluate how their capital contributes to sustainable development, enabling alignment with global efforts towards these goals. This strengthens collaboration between governments, businesses, and civil society to create a more equitable and sustainable world

The chart above, derived from Clarity AI’s database, illustrates the distribution of the investee companies’ revenue alignment across the SDGs within our Sustainable Growth strategy. This aggregation reflects the portfolio’s contribution to each goal; in some cases, company revenues may support multiple goals.

This chart clearly illustrates demonstrable impact towards SDG 7 Affordable and Clean Energy, SDG 11 Sustainable Cities and Communities

and SDG 13 Climate Action. This is consistent with those areas of the market where we believe the most attractive investment opportunities lie. These two points in combination should be reassuring to our investors as it provides evidence of our adherence to the dual mandate embedded in our sustainable strategies; namely seeking to deliver investment returns with impact.

8 themes

We allocate capital, using funds, across 8 key themes; each relating to important long-term challenges and trends. The funds we use to access these are focused on addressing and contributing towards the themes over the medium to long-term, rather than value-diminishing short-term reactions. Each theme maps to one or more of the 17 UN SDGs.

The impact of your investments

Before we discuss sustainability metrics individually, we wanted to provide additional context. At first glance some of the sustainability metrics for our portfolios may appear surprising, as many would associate a Sustainable strategy with a lower carbon footprint for example. This is a subject we have discussed previously, but to reiterate, the ‘dark green’ sustainable investing approach we continue to believe in and apply, can result in higher near-term emissions, to pave the way for lower emissions over the long-term.

There are three key reasons for this:

1. Investments in hard-to-abate sectors - in companies striving to make their higheremission businesses more sustainable, show higher near-term footprints, but have the potential to make a larger positive impact over time.

2. Substantial exposure to renewable energy producers – which we consciously and deliberately maintain – raises current carbon footprints significantly, in pursuit of disproportionately large emissions reductions over the long-term.

3. Global equity indices have relatively light near-term carbon emissions - especially with mega-cap tech companies having grown to represent a historically large proportion of these. However, the figures for these ‘asset light’ tech giants are misleading in terms of their ultimate footprints.

The above factors can make for some difficult benchmark comparisons in the near-term, at least optically, however we believe exposure to major equity indices lacks anything like the equivalent positive impact of our Sustainable solutions.

Rather than shy away from these figures, we prefer to be transparent and to explain them, while also seeking to highlight the ways our portfolios are helping to work towards key sustainability goals.

In the future, data around potentially avoided emissions (‘PAEs’) - and other more forwardlooking measures of positive impact - should be more robust and plentiful, and we look forward to being able to share these figures once they are credible.

Benchmarks: The benchmarks given are calculated based on blended MSCI ACWI (global stocks) and Bloomberg Global Aggregate (global bonds) figures. For Sustainable Balanced the mix is 65/35, and for Sustainable Growth 80/20, to represent the asset allocations of the two strategies in 2023.

Carbon footprint: As prefaced above, both our Sustainable strategies had somewhat higher carbon footprints than their benchmarks in 2023. Sustainable Balanced was responsible for 51.7 tons CO2e, per $mn invested, while Sustainable Growth accounted for 64.8 tons CO2e, versus benchmark figures of 46.5 and 45.3.

Carbon intensity: Sustainable Growth also had a slightly higher carbon intensity figure than its benchmark, at 142.8 tons CO2e per $mn of (underlying company) revenue, compared to 133.0

for its benchmark. However, by virtue of a favourable comparison between its substantial fixed income exposure and that of the benchmark, Sustainable Balanced had a substantially lower carbon intensity than its comparator in 2023, at 122.8 tons CO2e versus 165.0.

% of women on boards: These figures remain an unbalanced reflection of a long-standing societal issue, with women representing just 32% of benchmark companies’ boards. Despite being pulled down by our higher weightings to emerging markets, the figures for Sustainable Balanced and Sustainable Growth improved since the previous report, to 33.7% and 30.7% respectively. Excluding our emerging markets focused funds, these figures would be substantially above the benchmark levels. Our managers continue to engage with companies around board diversity, and we expect to see further steady improvement.

% of companies with science-based carbon emissions reduction targets (SBTs): SBTs allow companies to define emission reduction targets in a more credible, standardised way, looking at the emissions reductions needed to limit global warming to 1.5 degrees. We were pleased to see the % of underlying companies within Sustainable Balanced and Sustainable Growth with SBTs continue to improve, with these figures reaching 45% and 46% respectively. Again, these figures would be substantially higher if excluding our emerging markets focused funds.

Sustainable Growth Metrics

Sustainable Balanced Metrics

Aikya Global Emerging Markets

The Aikya Global Emerging Markets fund aims for steady returns with limited downside by investing in global EM equities through a long-term, low-turnover strategy. Prioritising sustainability, it focuses on highquality businesses with strong fundamentals and sustainable practices. The fund relies on disciplined valuations, patience, and in-depth on-the-ground research. Lead manager Ashish Swarup has applied this strategy for over 15 years, consistently outperforming the MSCI Emerging Markets Index.

Foshan Haitian (China)

Foshan Haitian, a Chinese condiment manufacturer, is a compelling sustainable investment due to its strong environmental and social responsibility credentials. By implementing energy-efficient practices, waste reduction initiatives, and a commitment to sustainable sourcing and production, they align with the growing consumer demand for eco-friendly products. Additionally, their efforts to improve labour conditions and engage with local communities further strengthen their overall sustainability profile.

Mahindra & Mahindra (India)

Mahindra & Mahindra (M&M), a leading Indian conglomerate, excels in automotive and agribusiness with a focus on sustainability. Their “Rise for Good” philosophy drives investments in electric vehicles, renewable energy, and green manufacturing. M&M is the only Indian auto company on the Dow Jones Sustainability World Index for three years and is featured in World Economic Forum case studies. With awards like the IGBC Green Champion and participation in COP28 and G20, M&M offers strong growth potential and positive impact for investors.

Engagement

Engagement is a cornerstone of Aikya’s longterm investment strategy. They believe in the importance of actively collaborating with senior management to guide them towards more responsible practices. Aikya views sustainability issues as integral to investment performance. Therefore, proactive involvement in these matters is a key strategy for driving shareholder value and enhancing client portfolios.

Aikya’s investment team conducts thorough stewardship analysis, fostering long-term relationships with management teams in these emerging markets. This approach not only builds trust but also provides a competitive edge. These relationships enable meaningful discussions about critical sustainability issues with top management. For instance, Foshan Haitian, which previously did not disclose its scope 1 and 2 emissions, has now included this information in their latest annual report following persistent engagement with Aikya. This disclosure is a significant first step toward emission reduction and holds Foshan Haitian accountable for its environmental impact.

ENVIRONMENT

Carbon footprint (tons CO2e per $mn invested) not available

Weighted average carbon intensity (tons CO2e per $mn revenue) 51.0

% of companies with science-based carbon emission reduction targets 23%

SOCIAL

Average % of women on the board 8%

BlueBay Impact-Aligned Bond

This investment-grade corporate bond fund focuses on global sustainable debt, including labelled (green, social, sustainability-linked) bonds, as well as unlabelled bonds from considered ESG leaders. The portfolio includes around 100 bond issues, diversified across geographies and sectors, selected from issuers addressing key environmental and social challenges. Managed by My-Linh Ngo and her experienced team, the fund targets strong returns while making a positive impact. We highly value My-Linh’s pragmatic approach to sustainable investing and are confident in the strategy’s potential for attractive returns.

UCB (Belgium) – 4.25% 03/2030

UCB is a biopharmaceutical company focused on neurology and immunology diseases globally. Recognising the interconnectedness of global challenges like the climate crisis and inequality, UCB considers the impact of its business decisions on people and the planet. Their Sustainable Access Framework uses tiered pricing to make medicines accessible to underserved patients. UCB also has an SBTi-backed goal to achieve 100% renewable energy by 2030, fully integrated into their strategy.

Trimble (US) - 6.1% 03/2033

Engagement

While active stewardship is an aspect of BlueBay’s strategy, it does not constitute the primary focus of their ESG approach. The strategy is primarily centred on positive selection, targeting economic activities that address environmental and societal challenges. Given the fixed-income focus of the fund, engagement efforts take precedence over proxy voting. Therefore, direct engagement is particularly relevant in this context, often concentrating on enhancing disclosure, especially among smaller, private or emerging market issuers. This improved transparency is crucial for demonstrating the positive impact these issuers contribute to.

Notably, over the past year, BlueBay has engaged with UK water utilities on pollution, particularly focusing on illegal discharges of untreated sewage, often caused by storm overflows. This engagement is driven by the urgent need for access to safe drinking water and the growing concerns about water scarcity, which are intensified by wasteful practices in agriculture and industry. In response to these issues, the Department for Environmental, Food & Rural Affairs (DEFRA) has set a ban on storm overflows, except during unusually heavy rain, to take effect after 2050.

ENVIRONMENT

Carbon footprint (tons CO2e per $mn invested)

Trimble is a leader in technology solutions focused on enhancing energy and resource efficiency, promoting a circular economy. With expertise in geospatial, modelling, connectivity, and data analytics, Trimble addresses complex global challenges. Over the past year, the company launched the Responsible Business Alliance’s Conflict Mineral survey, achieving a 95% supplier response rate. This led to improvements in identifying conflict minerals in the supply chain and auditing the certifications of smelters and refiners involved in processing them. Average % of women on the board

Weighted average carbon intensity (tons CO2e per $mn revenue)

% of companies with science-based carbon emission reduction targets

SOCIAL

Boston Common Global Impact Equity

Boston Common’s Global Equity Impact Fund is built on the belief that companies actively addressing global sustainability challenges and capitalising on related opportunities are positioned to experience greater-than-expected demand and build longterm competitive advantages. The team believes these dynamic investment opportunities are often undervalued by the market. Through an ESGintegrated investment research process, Boston Common seeks to identify alpha-generating impact opportunities while using shareholder engagement and stewardship to help companies achieve their sustainability goals and align with the UN SDG targets.

Sprouts Farmers Market (US)

Sprouts, a US grocer specialising in fresh, local, and organic products, targets health-conscious customers with smaller store formats and a strengthened regional supply chain, while reducing its carbon footprint. This strategy is driving unit growth, profitability, and attractive valuations. Sprouts is also advancing sustainability, aiming for Zero Waste by 2030 and disclosing CDP climate goals in 2023.

ORIX (Japan)

Engagement

Boston Common has a strong voting and engagement track record, with the team voting against the boards of 50 companies based on board diversity, as well as engaging 29 companies to examine D&I practices during the last year. Suggestions made include racial equity audits, gender and racial pay equity assessment and Diversity, Equity and Inclusion-linked performance and compensation. They also engaged with Sprouts to recommend improvements in refrigerant management and the adoption of a public goal to increase the use of low Global Warming Potential refrigerants.

Boston Common’s first year under the Net Zero Asset Managers (NZAM) Initiative targeted the top 10 highest GHG-emitting companies in its portfolios. The aim was to enhance understanding of their climate strategies, transition plans, supplier engagement, and energy mix. Additionally, Boston Common joined the Investors for Sustainable Solar coalition to support the solar industry’s transition to net zero, focusing on improving worker health and safety by eliminating hazardous substances in solar manufacturing companies and their supply chains.

ENVIRONMENT

ORIX, a financial services conglomerate with Japan’s largest rental car fleet, has diversified into fastergrowing sectors like green energy and real estate. Leveraging its expertise, ORIX’s environmental services business is thriving, driven by global decarbonisation efforts. Its renewable energy portfolio, especially in solar financing and installations, is a key growth driver. As of March 31, 2023, women held 29.8% of ORIX’s management positions, showing progress toward their goal of exceeding 30% by 2030. Average % of women on the board

Carbon footprint (tons CO2e per $mn invested) 23.9

Weighted average carbon intensity (tons CO2e per $mn revenue) 54.1

% of companies with science-based carbon emission reduction targets

SOCIAL

Federated Hermes Sustainable Global Equity

The Federated Hermes Sustainable Global Equity fund combines fundamental analysis with a focus on business strength, as well as ESG and engagement factors. Federated Hermes views the current period as pivotal for sustainability, reshaping companies and markets and they believe that markets often undervalue businesses prioritising stakeholder interests. The fund adopts an unconstrained, high-conviction approach, emphasising long-term growth and innovation while overlooking short-term market fluctuations.

WEG (Brazil)

WEG (Brazil) is a leader in electrical machinery, offering products like electric motors, power transformers and panels. With a strong track record of sales and profit growth, WEG is well-positioned to benefit from global net-zero targets. Its focus on energy-efficient solutions and renewable technologies highlights its sustainability credentials, making WEG a compelling investment aligned with long-term green initiatives.

Credicorp (Peru)

Credicorp is a leading financial services company with operations in insurance, pension funds, asset management, and the largest microfinance unit in Latin America (MiBanco). As a dominant player, Credicorp is well-positioned to capitalise on Peru’s economic growth and Andean expansion. Its focus on financial inclusion and innovations like Chile’s first digital wallet, enhance its social impact. With a strong emphasis on expanding access to financial services, Credicorp offers a compelling investment opportunity aligned with economic and social inclusion.

Engagement

Federated Hermes, through its stewardship arm ‘EOS’, engages with portfolio company boards and executives to drive positive change. These engagements, tracked through a proprietary milestone system, focus on specific objectives and monitor progress, from concerns raised to implementation. EOS’s diverse team, with expertise across fields and languages, enhances engagement effectiveness.

A recent engagement with Credicorp centered on equal access to finance, ESG due diligence, and ethical AI. In meetings with Credicorp’s CEO and Chief Innovation Officer, they reviewed progress on gender-focused finance initiatives and the development of an ESG due diligence framework. They also urged Credicorp to formalise ethical AI principles. Credicorp’s CEO highlighted their ‘Yape’ mobile banking app’s role in advancing financial inclusion. 49% of Yape’s new users were unbanked women, and 56% of microloans were issued to women. Improved procedures and training reduced bias, helping 33,000 women access loans via Credito Mujer, up from 20,000 in 2021. As a result of Federated Hermes’ engagement, Credicorp is now implementing a new ESG risk management and due diligence framework and is committed to establishing ethical AI principles across its operations.

ENVIRONMENT

Carbon footprint (tons CO2e per $mn invested)

Weighted average carbon intensity (tons CO2e per $mn revenue)

% of companies with science-based carbon emission reduction targets

SOCIAL

Average % of women on the board

Lombard Odier Circular Economy

From bio and performance materials, circular brands, waste management, to smart packaging – the fund invests in companies embracing systems changes within materials. The strategy offers investors the opportunity to benefit from companies harnessing natures regenerative power via the circular bioeconomy and the need to preserve natural capital by transitioning to leaner industries. The team at Lombard Odier also aims to understand the policy environment, technological and economic viability of innovations, and consumer behaviour driving shifts in profit pools.

Norsk Hydro ASA (Norway)

Norsk Hydro ASA (Norsk) is a leading integrated aluminium company, operating refineries and smelters across Europe, Canada, Australia, Brazil and Qatar. It powers 76% of its capacity with 15TWh of hydropower, achieving the industry’s lowest emissions per ton. As a circular economy leader, Norsk maximises resource efficiency through recycling, positioning itself to meet rising demand for sustainable materials and drive long-term value in a rapidly shifting global market.

Symrise (Germany)

Symrise is a leading global provider of fragrances, flavourings, cosmetic active ingredients and raw materials. The company is renowned for its commitment to sustainability, sourcing predominantly from natural materials. Strategically positioned with robust backward integration, Symrise maintains a direct sourcing network, enhancing efficiency and ensuring traceability, reinforcing its reputation as a innovative industry leader.

Engagement

Lombard Odier’s engagement programmes are tailored for each company allowing them to have clearly defined objectives and track progress.

In 2023, they initiated a dialogue with Symrise through the Net Zero Engagement Initiative (NZEI). Symrise have been receptive to their engagement, having already set short-term reduction targets approved by the SBTi. These targets include achieving net-zero emissions by 2050, including setting long-term targets. Symrise have also released product-level carbon footprint data, enabling customers to assess and potentially reduce the greenhouse gas emissions associated with each product through component substitution via their product scorecard. While progress has been made, Lombard Odier continue to engage Symrise to ensure that their capital expenditures align with their decarbonisation strategy. Additionally, given the company’s reliance on natural ingredients, the team are emphasising the importance of integrating biodiversity protection measures alongside their climate actions to holistically address sustainability challenges.

ENVIRONMENT

Carbon footprint (tons CO2e per $mn invested)

Weighted average carbon intensity (tons CO2e per $mn revenue)

SOCIAL

Lord Abbett Climate Focused Bond

Leveraging Lord Abbett’s deep expertise in fixed income investing, the fund is designed to deliver total returns by investing in securities from issuers that are making, or are poised to make, a positive impact on the climate. The strategy identifies companies and opportunities that not only contribute to environmental progress but also stand to benefit from the global shift towards addressing climate challenges. Employing a diversified and active approach, the Fund remains flexible, allowing it to capitalise on opportunities across various sectors of the global fixed income market.

Tideway (UK) – 2.75% 01/2034

Tideway UK offers an investment opportunity through its Thames Tideway Tunnel project, which is modernising London’s sewer system. This project enhances water management and environmental protection. Supported by a regulated revenue model, government backing, and a favourable regulatory environment, Tideway is positioned for long-term growth. The bond proceeds will fund the ongoing project, set to be fully operational by 2025.

Scatec (Norway) – 6.50% 01/2025

Scatec is a renewable energy company delivering clean electricity through a 3.5 GW portfolio of solar, wind, and hydro projects. It minimises its greenhouse gas footprint by reusing components and optimising water use. This year, Scatec began building an additional 0.3 GW of renewable capacity and finalised new projects in South Africa and Pakistan, while promoting local value through community engagement, local job creation and human rights initiatives.

Engagement

Engaging with issuers allows Lord Abbett to gain deeper insight into each company and influence long-term performance. This is part of their fundamental research process or proxy voting and includes management meetings, site visits, industry conferences and ongoing communication. The frequency of engagements and methods used vary depending on the situation, but the focus is always on issues most likely to enhance performance. Proxy voting is a critical engagement tool for Lord Abbett, promoting good governance and corporate practices that support long-term shareholder value. All proxy proposals are evaluated based on their potential impact on clients’ long-term interests, with proxyrelated topics integrated into ongoing issuer dialogue. During 2023, Lord Abbett engaged with issuers over 3,700 times. Of these, sustainability was a topic of conversation in more than 1,300 engagements.

Before purchasing bonds, Lord Abbett ensures they meet the firm’s standards for having a positive climate impact, thereby reducing the need for further engagement on these issues. However, the team remains committed to taking action if any concerns arise.

ENVIRONMENT

Carbon footprint (tons CO2e per $mn invested) 130.6

Weighted average carbon intensity (tons CO2e per $mn revenue)

343.1

% of companies with science-based carbon emission reduction targets not available

SOCIAL

Average % of women on the board 36.6%

PIMCO Climate Bond

This fund supports the transition to a net-zero economy while seeking risk-adjusted returns in line with an investment-grade portfolio. It offers a global, multi-sector credit strategy that mitigates climate risks and promotes long-term climate solutions. Managed by Jelle Brons, Regina Borromeo, and Grover Burthey, the fund invests in green bonds and leading in carbon reduction, financing projects in renewable energy, green buildings, and sustainable food production.

AES Corporation (US)- 5.45% 01/2028

AES is a global leader in carbon-free energy solutions, recognised for pioneering grid-scale energy storage. With bold decarbonisation targets, including a netzero electric business by 2040 and net-zero carbon emissions by 2050, AES is driving the transition to a sustainable energy future. Their leadership in renewable energy and commitment to cutting-edge technologies positions AES for strong growth and long-term value for investors focused on sustainability.

Ford Motor Company (US) – 3.25%

12/2032

Engagement

Engagement and analysis are central to PIMCO’s sustainability strategy. Alongside comprehensive research into issuers and investments through a sustainability lens, PIMCO’s analysts maintain regular dialogue with the companies they cover. These discussions include corporate strategy, leverage, balance sheet management, as well as key sustainability issues such as climate targets, environmental initiatives, human capital management and board composition.

During 2023, PIMCO engaged with EQT, the largest natural gas provider in the US, regarding measurement-based methane reduction targets and disclosure. EQT has since become the largest producer of responsibly sourced natural gas certified under the EO100TM Standard for Responsible Energy Development. This effort by EQT indicates the company is committed to direct measurement and transparency of their methane emissions, which PIMCO regard as a leading industry standard.

footprint (tons CO2e per $mn invested)

This bond supports sustainability initiatives, including clean transportation, renewable energy, green manufacturing, low-carbon transport, sustainable water management, and the circular economy. It aligns with Ford’s commitment to power all facilities with 100% locally sourced renewable energy by 2035. As a RouteZero signatory, Ford aims for a 100% zero-emission global fleet by 2040, reinforcing its leadership in the transition to a sustainable future. Average % of women on the board not available

% of companies with science-based carbon emission reduction targets

D&I

CARBON

Polar Capital Emerging Market Stars

The fund targets future ‘Star’ companies positioned to thrive as global trade shifts towards local currencies and away from the US dollar, benefiting from strong growth in developing economies. Polar’s team uses a rigorous investment process to identify firms that can enhance Economic Value Added (EVA) and deliver long-term shareholder returns. They focus on companies likely to outperform market expectations, considering both structural and cyclical economic factors, while integrating ESG criteria to ensure ethical and sustainable practices.

Samsung Electronics (South Korea)

Samsung has led the memory semiconductor industry since 1993, dominating DRAM and NAND markets through innovation. While semiconductors make up 24% of Samsung’s sales, they contribute 55% of operating profit, demonstrating the importance to the company’s growth. Samsung is also advancing renewable energy, aiming for net-zero emissions in its Device Experience (DX) Division by 2030 and company-wide by 2050.

Reliance (India)

Historically a petrochemical giant, Reliance is transforming into a ‘New Energy Materials’ business by building a comprehensive renewable energy value chain, from solar modules to battery manufacturing and storage, aiming for net-zero carbon emissions by 2035. An operational inflection point is expected in about three years, a milestone that the market has yet to fully price in. Polar Capital holds the company and its management team in high esteem.

Engagement

The team at Polar Capital remain co-lead investors in a long-term collective investor engagement program under Climate Action 100+, focused on holding invested companies accountable and ensuring continued oversight. The team assess engagement success on a case-by-case basis, tailoring their approach to each company. At the outset of each engagement, they establish clear objectives and define criteria for success, ensuring these align with the specific circumstances. Success measures can vary depending on the engagement topic and its anticipated timeframe, with the flexibility to include interim goals as needed.

The fund managers have recognised the success of their engagement with Reliance, as evidenced by the company’s significant strides in aligning with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and its proactive steps, such as overhauling board committees and establishing a new ESG Committee. These developments demonstrate the positive impact of the ongoing collaboration and the effectiveness of Polar’s efforts in guiding Reliance’s transition towards its net zero 2035 goals.

ENVIRONMENT

Carbon footprint (tons CO2e per $mn invested)

Weighted average carbon intensity (tons CO2e per $mn revenue)

% of companies with science-based carbon emission reduction targets 9%

SOCIAL

Polar Capital Smart Energy

The Polar Capital Smart Energy fund aims for longterm capital growth by investing in global companies that offer technological solutions for decarbonising the energy sector. The fund focuses on sustainable investments, believing that such companies will outperform peers and deliver lasting shareholder value. The investment process is disciplined, relying on fundamental analysis to select stocks. The team at Polar Capital integrates sustainability expertise throughout, focusing on companies with significant contributions to smart energy through their technologies and solutions.

MP Materials (US)

MP Materials is the largest producer of rare earth oxides outside of China. It currently mines and processes these materials; however, it is moving into manufacturing high strength rare earth magnets for use in energy efficient motors, which has applications across EVs, wind turbines, robotics and other industrial sectors. They are in a strong position to enable a sustainable and diversified supply of critical minerals for a clean energy future.

Linde (Ireland)

Linde holds a leading position in the global industrial gas and engineering markets, essential for decarbonising various industries. Their solutions include low-carbon hydrogen for fertiliser production, steelmaking, and mobility, as well as carbon capture from gasifiers and hydrogen plants. With expertise across the hydrogen value chain and over 1,000 kilometres of pipelines and nearly 200 refuelling stations globally, Linde is well-equipped to meet growing demand and has a robust backlog of decarbonisation projects.

Engagement

Polar Capital typically engages in direct dialogue with selected portfolio companies for 1-3 years, focusing on those where they can achieve significant impact. They diligently track, monitor, and report on the outcomes of these engagements. The investment team leads this dialogue, ensuring a strategic approach and clear objectives throughout the process.

Over the past year, Polar Capital engaged with MP Materials to gain insights into its management of environmental risks and to encourage more comprehensive climate-related disclosures. MP Materials responded positively to this engagement, leading to the publication of its inaugural sustainability report in 2022, followed by an enhanced report in 2023. The latter report featured improved disclosures and incorporated several of the requested metrics. Additionally, MP Materials is actively pursuing projects to reduce water consumption by recycling large volumes of water from process operations and optimising heating and cooling flows through offsetting heat exchangers.

ENVIRONMENT

Carbon footprint (tons CO2e per $mn invested)

41.6

Weighted average carbon intensity (tons CO2e per $mn revenue) 235

% of companies with science-based carbon emission reduction targets 39%

SOCIAL

Average % of women on the board

Schroder Global Cities Real Estate

By 2050, nearly 70% of the global population is projected to live in urban areas, and identifying these cities helps investors uncover promising opportunities. Investing in real assets in vibrant urban centres provides access to diverse sectors likely to outperform national averages. This fund focuses on global cities where people want to live, work and play, targeting companies and real estate with strong infrastructure, diverse economies and high quality of life.

Klépierre (France)

Klépierre is a leading French real estate company specialising in owning, managing and developing shopping centres and malls across Europe. The company focuses on enhancing retail properties through development, fostering strong tenant relationships and integrating sustainability initiatives. With a decade-long reduction in supply and slowed e-commerce growth post-COVID, the retail sector’s outlook has improved. Klépierre’s strong balance sheet enables it to acquire distressed assets at attractive prices. The firm offers a high, sustainable dividend and is seeing earnings growth.

Instone Real Estate (Germany)

Instone is a prominent German real estate developer focusing on residential properties. They also engage in modernising urban living spaces through redevelopment projects, ensuring highquality standards and sustainability. Instone target 50% of their build to affordable housing by 2030, aligning with the UN SDG of sustainable cities and communities. They are also on the way to achieving carbon neutrality by 2045, along with reaching the SBTi target of a 42% reduction in scope 1+2 emissions by 2030.

Engagement

The team at Schroder’s view active ownership as a cornerstone of the value they deliver to clients. They employ their ‘Engagement Blueprint’ to outline their strategic focus for active ownership, detailing their approach to driving meaningful change within the companies they invest in.

Using their Blueprint Schroder engaged with Klépierre to review their decarbonisation goals, renewable energy efforts, governance and how management compensation ties to climate targets. As a result, Klépierre is committed to a low-carbon future, with targets aligned with the 1.5°C Paris Agreement pathway, validated by the SBTi. They’ve cut portfolio energy intensity by over 40% and greenhouse gas emissions by 80%. The company has also been named the top global performer by GRESB (Global Real Estate Sustainability Benchmark) for three years running with a score of 98/100 and are on CDP’s (Carbon Disclosure Project) ‘A List’ for environmental transparency. This progress is incredibly impressive and a testament to Schroders’ ongoing engagement with the company.

ENVIRONMENT

Carbon footprint (tons CO2e per $mn invested) 9

Weighted average carbon intensity (tons CO2e per $mn revenue)

% of companies with science-based carbon emission reduction targets

SOCIAL

Average % of women on the board

Schroder Global Energy Transition

The Schroder Global Energy Transition Fund is a global equity strategy focused on clean energy, excluding fossil fuels and nuclear power. It invests in 30-50 highconviction companies driving the shift to lower-carbon energy sources, targeting long-term, sustainable growth. The fund covers seven key segments of the sustainable energy value chain: renewable energy equipment, generation, transmission & distribution, batteries, hydrogen, electrical equipment, and clean mobility, with at least 75% of the portfolio in businesses supporting the energy transition.

LG Chemical (South Korea)

LG Chemical is a leading global player in the chemical and materials industry, with strong growth prospects driven by its leadership in advanced battery materials, electric vehicle (EV) batteries, and sustainable chemicals. The company benefits from robust research and developments capabilities, a diversified product portfolio, and strategic investments in cutting-edge technologies, particularly in energy storage and green chemistry. With rising global demand for EVs and sustainable products, LG Chemical is well-positioned to capitalise on these trends.

Array (US)

Array Technologies is a leading manufacturer of solar trackers that enhance solar site efficiency by up to 25%.

Positioned to meet the growing demand for renewable energy vital for global decarbonisation, Array has set ambitious sustainability goals for 2025. These targets include selling an additional 90 GW of solar power, reducing direct emissions intensity by 30% from 2021 levels, sourcing 50% of energy from renewables, and increasing female representation in the workforce and on the board by 10% and 22% respectively.

Engagement

Schroder’s engagement process centres on five key areas: materiality, regional context, realistic outcomes, progress monitoring and engagement duration.

Recently, the Energy Transition Team collaborated with the Global Emerging Markets Team to engage with LG Chemical on their climate ambitions. The focus was on understanding the climate-related risks in their petrochemical sector and evaluating their emissions reduction targets. While Schroder is encouraged by LG Chemical’s initial steps, including setting preliminary targets and outlining strategies, the company still needs to submit scope 3 emissions targets to the Science Based Targets initiative (SBTi) by 2024.

Schroder is also pleased with LG Chemical’s investment in transitioning towards sustainable petrochemicals and bio-based products. Moving forward, Schroder will continue to work closely with LG Chemical to ensure they stay on track to meet their targets and capitalise on batteryrelated opportunities.

ENVIRONMENT

Carbon footprint (tons CO2e per $mn invested)

Weighted average carbon intensity (tons CO2e per $mn revenue)

SOCIAL

Average % of women on the board 32.9%

Schroder Sustainable Food and Water

This Fund adopts a thematic approach, investing in global equities that support the transition to sustainable food and water systems. Managed by Mark Lacey, Felix Odey, and Alex Monk, it draws on the same team behind the Global Energy Transition Fund. The team use a blend of bottom-up and top-down analysis, leveraging extensive industry experience. The fund offers an all-cap, style-agnostic strategy with inherent factor balance, especially in the undervalued food sector, including legacy businesses and defensive stocks for diversification.

Darling Ingredients (US)

Darling Ingredients are global leaders in creating sustainable food, feed and fuel from organic waste streams, servicing a range of industries including agriculture, food, biofuel, and pharmaceuticals. The company plays a significant role in reducing food waste, lowering greenhouse gas emissions and promoting the circular economy by transforming otherwise discarded materials into meals and renewable diesel. The company’s diverse revenue streams, particularly within renewable diesel and sustainable aviation fuel, show resilience and growth potential.

Danone (France)

Danone is a leading food and drink company built on four key business lines: essential dairy, plantbased products, specialised nutrition, and water. Aiming to be a leader in sustainable food, they are poised to benefit from the robust growth of the alternative protein market. Danone generates 100% of its revenue from food products and technologies that offer notable carbon emissions savings. It provides exposure to a growing, health-focused market with strong sustainability credentials.

Engagement

Schroder practices active ownership through three key approaches: engaging in dialogue to understand how companies are preparing for longterm sustainability challenges, working closely with them to assess and address the impact of these challenges, and exercising voting rights to ensure that necessary changes are made.

For instance, Schroder recently engaged with Darling Ingredients to discuss their decarbonisation efforts. Darling reported a 20% reduction in emissions intensity since 2019 and identified that 85-90% of its emissions come from its truck fleet and natural gas use for steam. They are considering alternatives such as hydrogen and heat pumps and are working on finalising their Science Based Targets initiative (SBTi) submission by the end of the year.

Over the past year, Schroder cast 502 proxy votes in support of management and 59 against. They specifically voted against the Chair of the Nomination and Governance Committees at Tyson Foods due to governance concerns. Female underrepresentation at board level is an issue and the company has not addressed its dual class share structure, which can entrench management and dilute shareholder power. These issues indicated governance shortcomings, justifying the teams’ vote against the director responsible.

ENVIRONMENT

Carbon footprint (tons CO2e per $mn invested) 168 Weighted average carbon intensity (tons CO2e per $mn revenue)

SOCIAL

Schroder BlueOrchard EM Impact Bond

BlueOrchard is a leading global impact investment manager founded in 2001 as part of a UN microfinance initiative, promoting inclusive and climate-smart growth through top-tier investment solutions in credit, private equity, and sustainable infrastructure. Managed by Evariste Vercher, Louis Leutenegge, and Ana Gavtadze, the Schroder BlueOrchard Emerging Markets Impact Bond fund invests in bonds issued by governments and companies in emerging markets, targeting investments that generate measurable social and environmental impact aligned with the UN SDGs.

CIMB Bank (Malaysia) - sustainabilitylinked bond – 2.1% 07/2027

CIMB Bank is a leading financial institution in Malaysia, offering a wide range of services in Southeast Asia. Through digital banking platforms and partnerships, CIMB empowers individuals and SMEs in underserved communities by enhancing access to banking and promoting financial literacy. The bank is dedicated to long-term economic development while upholding ethical responsibility and social and environmental stewardship.

Peru’s Sustainability Bond (Peru) -

3.6% 01/2072

Peru’s Sustainable Bond Framework highlights the impact potential in listed debt markets by combining granular reporting with strong additionality to target underserved populations. The government has issued one social bond and two sustainability bonds under this framework, prioritising regions with the widest social gaps through the Household Targeting System. This ensures capital is directed to extremely poor communities, aligning with the fund’s goal of advancing the UN SDGs and creating lasting social impact.

Engagement

BlueOrchard’s approach to stewardship emphasises impactful outcomes in active ownership, prioritising the depth of engagements over quantity. They focus on material sustainability issues that affect long-term value, considering regional contexts and realistic goals. Engagements typically span 12 to 24 months, with progress tracked using SMART objectives. While recognising their influence as part of broader change, the team launched the ActiveIQ™ tool to track and monitor active ownership activities effectively.

In 2023, the team engaged a Middle Eastern bank about issuing a green bond, aligned with their investment team’s sustainability goals in renewable energy, energy efficiency and natural capital preservation. They advised the bank to improve disclosures by shifting from qualitative to quantitative impact metrics to better monitor key performance indicators (KPIs). BlueOrchard provided guidance on best practices and suggested alignment with international standards like ICMA’s green bond principles. Through ongoing discussions, they ensured the bank was developing the necessary systems for robust reporting. By March 2024, the bank had implemented these recommendations, including third-party verification of quantitative metrics, and joined the Net Zero Banking Alliance, with plans to continue enhancing their impact reporting.

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T. Rowe Price Global Impact Credit

The T. Rowe Price Global Impact Credit Fund is an actively managed fixed-income strategy focused on corporate bonds from issuers with a positive social or environmental impact. The fund invests globally across countries and sectors while excluding non-impact areas. By identifying securities with clear impact and financial return potential, it addresses complex challenges facing our planet and communities, believing that resilience and a patient, impact-oriented approach are essential for meaningful change.

NatWest (UK) - social bond - 4.69% 03/2028

NatWest was the first European financial institution to issue a social bond specifically to fund womenled businesses. NatWest’s 500M EUR social bond is dedicated to loans for female-led enterprises. Mentorship and support will also be provided in order to improve the gender imbalance observed in startup businesses. Despite growth in UK SME lending in reaction to the pandemic, SMEs led by women remain particularly disadvantaged in accessing finance.

Ørsted (Denmark) - blue bond - 5.13% 09/2034

Ørsted was founded in 1973 as an oil and gas company but established the world’s first offshore wind farm in 1991 and pivoted to green energy in 2017. Ørsted’s blue bond promotes sustainable use of ocean resources through its offshore wind and sustainable shipping fuels business while preserving marine biodiversity. Capital raised from this bond will scale up efforts on marine biodiversity and support the transition to sustainable shipping.

Engagement

T. Rowe Price aims for successful engagement with the companies in their portfolio through regular dialogue with management teams, allowing them to monitor outcomes over time. This consistent communication provides the necessary information to alleviate concerns or observe improvements in the company’s practices.

As an example, T. Rowe have engaged with AES, the second-fastest growing renewable company in the US, regarding its energy transition strategy and to advise on the best practices for green bond frameworks and impact metrics. This was highly successful as AES responded with their commitment to exit coal by 2025. Following T. Rowes advice, AES also disclosed carbon emissions impact metrics in their post-issuance bond report alongside renewable energy generation and capacity data within its green bond issuance reporting. This positive engagement resulted in T. Rowe deciding to invest in the company in early 2023. The investment team will continue to monitor progress as well as AES’ journey towards its coal exit.

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Vontobel Global Environmental Change

This fund invests in companies that provide technologies or services promoting essential global environmental changes, focusing on sustainable urbanisation and industrialisation. It targets businesses that minimise human impact on the planet, operating in lifecycle management, resource-efficient industry, building technology, clean energy, low-emission transport, and clean water. Vontobel, a pioneer in sustainable investing and an early signatory of the UN Principles for Responsible Investing (PRI), has shown compelling returns over the past 18 months.

Alstom (France)

Alstom is a rail transport equipment manufacturer benefiting from structural growth drivers like urbanisation and eco-friendly transport. The company operates high-speed trains and urban transport, with significant growth in its high-margin service business and development of hydrogen-powered commuter trains. Alstom has validated its 2030 carbon objectives with the SBTi, increasing its renewable electricity purchase from 42% in 2022 to 57% in 2023.

NextEra (US)

NextEra is one of America’s largest capital investors in infrastructure focused on renewable electricity and is a leading generator of wind and solar energy globally. The company aims to increase its renewable energy generation assets while decommissioning conventional power plants, with a goal of becoming carbon emissions-free by 2045. Their Zero Carbon Blueprint has been encouraged for approval by the SBTi. From 2005 to 2021, NEE’s CO2 emissions improved from 37% to 51% better than the US electric power sector average.

Engagement

Vontobel consider active ownership as vital for developing sustainable economies, societies, and the environment. Material ESG issues can affect a company’s future success and investment potential, therefore Vontobel see direct engagement with portfolio holdings, focusing on environmental issues and related opportunities, as a core aspect of their research activities.

A key area of focus for Vontobel is identifying key ESG risks and obtaining detailed reports on Potentially Avoided Emissions (PAE). To achieve this they ensure access to the latest ESG data by maintaining strong communication with portfolio companies, enabling them to monitor progress towards the SBTi Net Zero Strategy or achieve SBTi approval for example.

The team’s recent engagement efforts succeeded when Alstom provided quantitative metrics on the environmental benefits of rail over other transportation options. Vontobel continues to work closely with Alstom to obtain data for calculating an absolute PAE indicator.

of companies with science-based carbon emission reduction targets

Wellington Global Impact Bond

The Wellington Global Impact Bond fund aims to improve access to essential life resources, reduce inequality, and mitigate climate change effects. Each company is vetted using an impact framework based on materiality, additionality, and measurability. This bottom-up approach fosters a deep understanding of the issuers, reinforcing the impact and financial case for investment. Reporting at both the fund and issuer levels helps enhance processes and increase the potential for positive, real-world change.

The Conservation Fund (TCF) (US) –

3.4% 12/2029

The issuer is a nonprofit dedicated to safeguarding America’s natural resources, including forests, wildlife habitats, and waterways. Proceeds from the green bond will support the Working Forest Fund, aiming for lasting conservation outcomes and community support. The organisation focuses on acquiring at-risk private forests, implementing sustainable harvest programs, and developing wildlife restoration initiatives. To date, TCF has successfully conserved over 8.5 million acres of land across the US.

Verisure Holding AB (Switzerland) -

3.9% 07/2026

Verisure, a leading security solutions provider in Europe and Latin America, offers monitored alarms like burglar and smoke detectors with 24/7 monitoring for rapid emergency response. By focusing on danger prevention and detection, it supports vulnerable community members and enhances safety and wellbeing. Verisure is also committed to reducing its environmental impact through energy-efficient operations and sustainable product development.

Engagement

Engagement allows Wellington to identify investment risks and opportunities while ensuring issuers create meaningful impact annually. In 2023, they engaged on various topics, from product sustainability to corporate culture, and developed an engagement tracker for publicmarket corporate and sovereign issuers. This tool records and collaborates on engagement topics, providing a feedback loop.

Recently, Wellington engaged with TCF to address a low annual increase in their CO2e stored KPI since 2021 and discuss impact reporting best practices. They learned that TCF’s CO2e storage is affected by a decrease in new projects post-2021 due to various constraints, though TCF remains optimistic about future capital deployment. Wellington recommended transparent KPI display and detailed green bond reports for better impact reporting. TCF’s certification under the Sustainable Forestry Initiative (SFI) highlights their commitment, and Wellington is confident in TCF’s positive environmental and social impact, looking forward to enhancing impact metrics and SDG integration in future engagements.

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Disclaimers

Affinity Private Wealth is a trading name for APW Investors Limited and Affinity Trust Limited, which are both regulated by the Jersey Financial Services Commission. Registered office 27 Esplanade, St Helier, Jersey JE4 9XJ

This document is for discussion purposes only and is not an advertisement and does not constitute an offer to sell or a solicitation of an offer to buy shares in any fund. This document has been provided to you in a private and confidential manner and may not be reproduced or disseminated to third parties without prior written consent.

This document concerns certain investment strategies and does not purport to disclose details about any particular existing investments. This document is accordingly provided for informational purposes only and does not constitute investment advice. This document does not give exhaustive details about the parties, structures or investment processes. The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. Please consult independent tax, legal, accounting or other advisors in the course of assessing any strategies mentioned in this document.

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