Sustainable investment report: ESG — a key tool for emerging and frontier market investments Sustainable investment report
About East Capital
East Capital is an independent asset manager Long-term specialised in emerging and frontier We focus on companies with long-term markets, founded in Sweden in 1997, with growth prospects and position our strategies offices in Dubai, Hong Kong, Luxembourg, to outperform their respective benchmarks Moscow, Oslo, Stockholm and Tallinn. We within three to five years. While we can make manage public equity funds, real estate funds some short-term adjustments, we do so with- and separate accounts, for a broad out sacrificing the overall long-term focus and international client base, including the low core turnover of the portfolios. leading institutions.
Our investment strategy is based on in-depth Local company knowledge gained through Meeting frequently with company owners, proprietary fundamental analysis and management teams and policymakers is an frequent company meetings. We carefully integral part of the investment process. Such consider ESG-related risks and opportunities meetings give us in-depth local knowledge in our investment process, and favour that help us make better informed investment companies with long-term, sustainable decisions. growth prospects and responsible owners.
Since day one, we have set out to be a long- Research-driven term, active and responsible investor. Over Diligent research is essential for identifying the years, our investment teams have key performance drivers and correctly interacted with thousands of companies, assessing risk. We rely on our own research, management teams, regulators, governments including risk scenarios and a proprietary and other investors. We have consistently ESG analysis, in our investment process. worked on developing how we address sustainability and ESG to ensure that we are able to offer sustainable investment products Active stock pickers to our clients. This has resulted in a unique We are index-agnostic in idea generation, and proprietary approach that has been contrarian at times, and invest by conviction diligently carried out by our investment on a company by company basis. Our teams for over 20 years. portfolios typically have a high active share.
Our ultimate goal remains the same: to make better informed investment decisions and Global research platform and enhance the value of our portfolio companies regional teams with local know-how through active ownership, while contributing • 5 research/investment offices to the advancement of sustainability in our • 30 investment professionals investment universe. • 20 languages
Important information Every effort has been made to ensure the accuracy of the information in this document, but it may be based on Cover page: Shenzhen, China. unaudited or unverified figures or sources. Full information about East Capital’s funds, such as the prospectus, key In four decades the city has transformed itself investor information document (KIID) and other fund documents can be obtained free of charge from East Capital, from a small fishing town to a 20 million people from our local representatives and are available on East Capital’s website. The availability of East Capital’s funds may be megalopolis and is now a global powerhouse of limited or restricted in some countries. The information about East Capital’s funds is only directed at those investors innovation and technology, where we can find located where East Capital is authorized to make this information available, and is not intended for any use which some of the fastest-growing and most exciting would be contrary to local law or regulation. companies. Investment in funds always involves risk. Past performance is no guarantee for future performance. Fund units may go up or down in value and may be affected by changes in exchange rates. Investors may not get back the amount invested. © East Capital 2019 Graphic design and production: East Capital & BjornSthlm AB. Photos by East Capital staff, Gui Jun In Dubai this document is distributed by East Capital (Dubai) Limited (“ECL”), which is regulated by the Dubai Financial Peng/Shutterstock (cover), Fredrik Reuterhäll (page Services Authority, (“DFSA”). The information contained in this document is intended for Professional Clients with 5,7), SIPA Asia/Suma Wire (page 6), Peter Nguyen/ sufficient investment knowledge and experience as defined in the DFSA COB Rules and no other persons should act Unsplash (page 8), Maria Kukatova (page 13), upon it. Further, the information contained in this document is not intended as financial advice and should not be Snežana Vučetić Bohm (page 11, 23), PRI Association treated as such. (page 12, 13), Rensource/Adamola Adesina (page 31).
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Erik Haukaa (Sales Contents Director), Olle Olsson (Head of Sales Europe & Latin America) and Partners Karine Hirn & 4 Rising ESG imperative Peter Elam Håkansson A word from Peter Elam Håkansson, Chairman and CIO at PRI in Person 2018.
6 Thanks to China, solar power has Sharing our perspectives on ESG entered a new era During the year, members of East Capital’s investment team were frequently quoted in the media and we were invited to Francois Perrin, Head of Asia, reflecting on how China’s share our investor perspective on ESG as speakers at numerous leadership in clean energy is transforming the economics of our conferences and other events globally. Notably during 2018, we global energy system joined one of the plenary panels at the PRI in Person event.
Page 12 8 Frontier markets through the ESG lens Five questions to Portfolio Advisor Emre Akcakmak We believe that responsible investment 10 East Capital as an active investor is a great alpha contributor and risk David Nicholls, Senior Analyst, illustrates our approach to management tool for long-term engaging with our portfolio companies investors, especially in emerging and frontier markets, where data can be 12 A lot of (green) energy at the extremely scarce and ESG challenges world’s largest responsible can be daunting. investment conference Our main take-aways from PRI in Person 2018 where we contributed to panels and conversations with peer investors, asset owners and service providers.
More than 14 East Capital as owner Since day one, we have set out to be a long-term, active and 1,000 responsible owner. company meetings every year and our 15 How we generate value engagement to impact and drive change Our investment philosophy and portfolio management approach Page 21 16 ESG in each step of the investment process New role for Karine Hirn How we systematically select the companies with the best Partner Karine Hirn takes on the risk/return profile position of Chief Sustainability Officer, signaling the strategic importance we attach to the 17 Our ESG tools pursuit of Agenda 2030. 18 Sector exclusions (negative screening) Page 11 18 Controversy (norms-based) screening 19 Proprietary ESG scores 21 Active ownership: engagement and voting
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accounting for most of the increase Rising ESG imperative despite strong renewables growth. The panel attributed the increase to the “robust global economy” and higher heating and cooling needs in The transition to a greener and more sustainable world is taking shape some regions. Energy-related CO2 — as we speak. This is undeniably a major convergence trend, and it which accounts for the vast majority reminds me of the Eastern European convergence story we identified as of all CO2 emissions — climbed by 1.7% last year, following a slightly an extraordinary investment case at the end of the 1990s, which went on smaller increase in 2017. China, to create the premise for East Capital. India and the U.S. jointly accounted for 85% of the net emissions growth. China is making progress however, What we saw then was the assess the true quality of these with a really interesting develop- combination of a harmonising companies and thereby adequately ment in the field of clean energies regulatory framework, of invest- price the risks and opportunities where we have reached grid parity, ments from the West into the East they were offering. Throughout the as my colleague Francois Perrin, and changes in consumption years, our ESG framework has Head of Asia based in Hong Kong, patterns to catch up with Western developed and has been fine tuned describes on page 6. Europe, and we understood that this to cover a broader scope and to 24% would create attractive invest-ment include additional tools, which are opportunities for active in- vestors described on pages 17–30. The ESG impetus able to navigate this sea of changes framework will keep evolving, as market growth and pick the winners. Regulations the world itself is evolving, with for sustainable Responsible investments are becoming stricter, investment flows accrued focus on planetary investments increasingly on the top of agendas and changing consumption patterns boundaries, and with the feeling globally since of asset managers, and investor are also major elements of the that time is running out in respect 2016* interest in ESG is reaching ongoing transition to a low-carbon of Agenda 2030, now less than 12 new heights across geographies economy and a more sustainable years away. There will also be – and asset classes. The concept model as envisioned by Agenda thanks to technological innovation – of sustainable investing remains 2030; and investment opportunities new tools made available to do a quite generic and covers a variety also pro-liferate – for investors able better job as responsible owners. of approaches. The four to identify and benefit from them, main types are negative exclu- that is. East Capital sionary screening (which is the Environmental threat embraces negative simplest and most popular, with exclusionary USD 20tn of Assets under Manage- From day one 2018 will be remembered as a year screening, ESG ment globally), ESG integration where climate change awareness integration, (which has grown the most, jumping We usually say that our active rose to new heights. The UN’s corporate from USD 10tn in 2016 to almost ownership journey started on day Intergovernmental Panel on Climate engagement and 20tn in 2018), corporate engagement, one, when we set up East Capital in Change found that to stay within norms-based and norms-based screening (the 1997, convinced that when looking 1.5ºC of change, the aspirational goal screening for all only part actually declining during for opportunities outside of the of the Paris deal, net human-caused strategies. the last two years). The highest Russian and Eastern European CO2 emissions must decline by 45% growth rate can be seen in indices – which were (and still often by 2030 compared to 2010 levels, sustainability-themed investing. are) dominated by incumbent oil & gas and reach “net zero” by roughly Our sustainability- Assets under management in producers, old economy firms and mid-century. At the same time, themed strategies: this category have almost state-owned companies – having our overall energy consumption rose by East Capital China doubled in two years. boots on the ground and interacting 2.3% last year, which is almost twice Environmental & with companies’ management teams the average growth rate since 2010, Global Emerging and owners were essential ways to the IEA said, with fossil fuels Markets Sustainable *As of end of 2018, source: GSIA
1997 2002 2004 2007 2010 2011
East Capital is founded. Send our fi rst annual letters Launch of East Implement sector Start semi-annual controversy Expand Based on sound Nordic to all portfolio companies, Capital Awards, to exclusion criteria screening of all funds using external voting and values, we set out to be detailing our expectations reward the progress (weapons, tobacco, research partner. Establish new nomination long-term, active and as owners. Become active of outstanding pornography) role within investment team: Head and election of responsible owners. Start members of Russian corporate companies in East for all fund of Corporate Governance and independent engagement and voting. governance association, API. Capital’s portfolios. products. Sustainability. directors.
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Data quantity Karine Hirn on a and quality company visit in St Petersburg in With increasing investor appetite 1997. Back in those and interest, it is no surprise to days, the air see a boom in ESG data points, temperature in as corporates, either voluntar- conference rooms ily or forced by regulators, stock wintertime was exchanges and/or investors have indicating if the stepped up the amount and scope company had any of disclosure. Investor satisfaction money to pay their with the quality of ESG data re- heating bill, an mains, however, very low, despite information during increasing levels of corporate sus- the barter economy tainability reporting. Indeed, more time that would not data is not necessarily good when be available in their the data quality is poor and can be financial statements. misleading. This was a key reason why we launched our proprietary ESG scorecards in 2016. Maximum engagement An example from our As an example, according to a reality, working with There’s a lot of work to do in sus- recent Goldman Sachs note, the companies tainable finance. At East Capital, we external ESG ratings agencies The manager of a prominent decided to appoint one of the part- have an enormous amount of metals and mining company in ners – Karine Hirn – who has been data points in their scores Russia recently told us that based in Asia since 2010, as Chief (typically 100 – 200). But it they previously had no child Sustainability Officer, to spearhead follows that as 82% of available labour policy. Child labour is all of our sustainability work, ESG ESG metrics are policies (based inconceivable at large Russian investment work and cooperation with peer investor groups. Karine on one database), a significant companies, due to the harsh is interviewed in this report on why majority of such scores are based labour laws and general on “tick the box” questions she took on this role and what her culture. Moreover, even if it was regarding the existence of certain ambitions are. The challenges are an issue, the presence of a policies. Companies will hence big, and time is short. This means policy would not necessarily improve their ESG scores by we need maximum engagement change the company’s enacting policies. Another survey, and commitment by everyone, and this time by Thomson Reuters, behaviour, as if the company it is the work we put into collabo- indicated that 76% of the top would be prepared to break the ration with others that can bring 50 E&S indicators in the MSCI law, it would likely be prepared about the most tangible results. ACWI universe are binary (e.g., to undermine its own policy. “Do you have a policy in place Yet, by creating such a policy, on issue X? Yes/No”). the company climbed in the ranks, although there was zero Peter Elam Håkansson Eventually, ESG investing becomes fundamental difference in the Chairman and CIO about being an active investor, with ESG profile of the company. boots on the ground, as you can This is a stark contrast to our read in my colleagues’ comments scorecard, where to improve its from Dubai and Moscow on pages score the company must 9-11. implement some tangible and material changes.
2012 2013 2015 2016–2018
Become signatory Join likeminded investors in Integra, a landmark court case, Implementation of ESG scorecards, further of UN-backed external engagement forum puts us on the map for protecting integrating sustainability and SDGs in our Principles which engages on ESG contro- minority investors all over the investment process. China Environmental of Responsible versies. Launch of East world. Creating our fi rst thematic awarded the LuxFLAG Climate Finance label. Investment, PRI. Capital Best Corporate product — China Environmental. Launch of a sustainable global emerging Governance Award. markets strategy.
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Thanks to China, solar power has entered a new era
China’s leadership in clean energy is transforming the economics of our global energy system, with benefits that extend far beyond its borders. Solar power is finally going mainstream as global capacity continues to rise exponentially, with an expected 90% of delivery by countries at grid parity by 2022, up from 50% in 2019.
Solar energy is the most abundant Over the last decade, and thanks to The costs associated with solar energy source on Earth, and the its climate ambitions, China has Grid parity power generation have been rapidly solar radiation received on Earth been the main driver behind the declining in recent years due to during a year far exceeds the total surge in solar power installation. In is the point technological advancement and reserves of finite fossil-based energy 2018, China led the world as the larg- when the economies of scale. Since 2011, the sources. There has been a rapid est solar power installation market cost associated with photovoltaic growth in solar power installation for the sixth consecutive year, with cost of the (PV) systems in China decreased globally in the past decade, and in more than 44GW of installation, and alternative from RMB 17.5/W to RMB 4.5/W in only 7 years, from 2011 to 2018, cumulative solar power generation 2018, while the cost of PV modules cumulative installed capacity capacity in China grew from 2.1GW energy fell almost four-fold during the increased by about 600%, from in 2011 to 175GW by the end of 2018, becomes same period. The issuance by the 70GW to more than 500GW cur- representing a CAGR of 88%. Such Chinese government of its PV grid rently. The total global installed rapid growth is largely attributed to equal to or parity policy in May 2018 only accel- capacity is now 77 times greater a favourable regulatory environment less than erated this trend, and in 2019, the than it was at the end of 2006 and supportive policies related to PV installation cost in China is (6.5GW). the implementation of the China electricity reaching RMB 4/W. Blue Sky Anti-pollution plan and from conven- related PM2.5 reduction targets, in tional energy addition to continuous efficiency improvement and declining cost of forms like solar power technologies. fossil fuels
Photovoltaic power station in Binzhou, East China's Shandong Province.
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Solar panel price trend
1.0
0.8
0.6
USD/W Average Price 0.4
2012 2013 2014 2015 2016 2017 2018 2019 Multicrystalline silicon module - Global Multicrystalline silicon module - China Monocrystalline silicon module - China
Source: Citigroup Research
François Perrin, Head of Asia and the plant manager China is currently the largest and fastest of Daqo New Energy growing solar energy market in the world, in Xinjiang, China. This facility is today and will continue to lead the global demand the most advanced in terms of annual solar power installations and cost efficient polysilicon and capital investment in solar projects in production facility the years to come. in the world. After more than 20 years of development driven by subsidies, the photovoltaic industry is entering The grid parity policy has major a new paradigm in additional capacity delivered in pricing levels, Chinese domestic implications for China and abroad. 2019 with grid 2018, we expect global solar instal- leaders continue to generate posi- It implied installation cost reduc- parity for solar lations to reach 130GW in 2019 and tive free cash flow and they offer tions of 50% over the last 12 months, happening in 150-170GW in 2020. The proportion very attractive structural invest- and it is also positioning solar China. of the global PV market that will be ment opportunities, in particular in energy nowadays as the cheapest delivered by countries at grid parity polysilicon and mono-solar technol- energy source in many countries on will gradually increase from 50% in ogy cell and module production. a global basis, beyond coal or any 2019 to more than 90% in 2022, and Leveraging on the cost of produc- other conventional carbon-emitting it offers sizeable upside. tion achieved by Chinese produc- primary energies. This year, grid ers, we would also expect solar parity has already been achieved in China already dominates the photo- developers in emerging markets like 10 of the 23 provinces in China, and voltaic value chain, with two thirds India, South Africa and the Middle from 2019 onward, emerging mar- of global polysilicon production, East to offer attractive investment ket countries like India, UAE, South 97% of wafer and 82% of PV cells opportunities. These markets will Africa and Mexico, and developed and modules being produced in the be the next areas to watch in order countries like Australia, will also be Mainland. Cost and technology lead- to seize the full set of opportunities benefitting from China’s achieve- ership will continue to be driven by offered by the photovoltaic industry ments in solar cost reduction, with Chinese solar companies and we under the grid parity scenario. solar installation costs for utility expect them to further accelerate power projects falling below their the consolidation of the industry coal generation costs. Solar will be under the “grid parity scenario”. François Perrin reaching grid parity in the US by Head of Asia, 2020, in Germany and Saudi Arabia Overall return at project level could Hong Kong by 2021 and in Japan, the UK and reach 8%-10% in the coming 3 years, Brazil by 2022. and we would continue to favour Chinese solar manufacturers over After 20 years of investments in the Chinese solar developers due to PV industry, 2019 will therefore be their increasing dominance along remembered as the year PV installa- the value chain and their ability to tion finally took off. From 104GW of further consolidate it. At current
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Besides the regulatory front, a well established base of local and foreign institutions are instrumental in pushing companies to implement more sophisticated standards.
Ho Chi Minh skyline, Vietnam. The World Bank expects Vietnam to be among Asia’s fastest- growing economies in 2019 as the country’s ongoing economic reforms combined with geopolitical developments have bolstered the country’s outlook.
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Frontier markets through the ESG lens
To start with, can you please describe your investment Besides the regulatory front, a well-established base of universe and your strategy? local and foreign institutions is instrumental in pushing the companies to implement more sophisticated We see frontier markets as the next generation of standards. In frontier markets, it’s a slower process. We as emerging markets (EM). These markets should follow in investors typically need to deal with a range of issues that the footsteps of EMs in terms of economic growth, income concern both regulators and individual companies, and levels, depth and breadth of capital markets, regulatory we therefore need to be relatively patient waiting for the framework and liquidity. Our universe starts with the outcomes we wish to eventually see. countries that are included in the MSCI FM Index, such as Vietnam and Bangladesh in Asia, Kuwait and Morocco in the MENA region, Nigeria and Kenya in Africa, as well as 5questions to Can you give an example where the underlying ESG analysis Romania, Slovenia and Argentina in Eastern Europe and Portfolio Advisor and active ownership have resulted in a change? Latin America. On top of these, we consider smaller Emre Akcakmak emerging markets, such as Egypt and Pakistan in our Tangible results we have achieved include companies universe, as markets that have considerable growth increasing their dividend payments and improving board opportunities in the future. We believe that being on the structures. In general, we are very keen to achieve ground, identifying secular trends and conducting deep, sustainable changes over many small steps, and this in-house research, along with ESG considerations, are key requires patience, as changes do not happen overnight. to long-term success in frontier markets. Asking a CEO about a sustainability report, questioning the background of board members, requesting further information on how the company contributes to SDGs or, What in your mind are the most challenging features of ESG even more basically, asking for financial reports in investing in frontier markets? English, may be repeated over and over without a clear outcome, and may not seem like big changes. But we think We consider ESG investing to be about the journey (i.e. that every step counts and that having constant process) as much as it is about the destination (i.e. engagement with companies adds up over time to results outcome). There are of course various challenges, ranging visible in tangible changes, improved disclosure and from financial reporting in English to forming well- better returns for all stakeholders. balanced and diversified board structures and from being environmentally friendly to contributing to SDGs. We do, however, see the low level of development as an opportunity to make a more meaningful contribution by identifying strong companies with open-minded management teams so we can constantly communicate with them in order to improve ESG standards.
Where do you see markets making the most progress and where do you think development has been disappointing?
It is difficult to draw conclusions on a market basis, as it also varies a lot from company to company. In some markets, we’re seeing different blue-chip companies ending up at different ends of our ESG Scorecard standings. However, as a general comment, ESG considerations are very well perceived, with the majority of companies understanding that the issues investors like us raise are key action points for their own future.
You have for many years invested in emerging markets like Turkey and South Africa, and then in frontier markets; can you share what the most important differences between them there are in terms of ESG? Emre Akcakmak, Portfolio Advisor for East Capital Global Frontier Markets, The difference is primarily at the company level. However, in Kuwait – the largest country in MSCI Frontier Markets Index. In June 2019, the regulatory framework in markets like Turkey and MSCI upgraded Kuwait equities to its main emerging markets index – a move that South Africa surely gives companies big incentives in is expected to result in billions of dollars of investor inflows into the Gulf country’s terms of their reporting, investor relations activity, and stocks. even board structures and environmental considerations.
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East Capital as an active investor
At a recent meeting with a large Russian state-owned company, the head of investor relations said “you have raised this issue three times now” after we asked about a very low and unambitious return on equity target in the management KPI package. He was right, though. We had raised the issue first with the corporate governance team, then with one of the supposedly independent directors and we had just mentioned it to the CFO. This example clearly illustrates the East Capital approach to engaging with our portfolio companies, which is to use our good relationships and frequent meetings with companies to push for improvement.
ment of a truly independent director to the board. There- fore, together with API (Association of Professional Investors), the leading Russian minority investor protec- tion group, we committed a lot of effort trying to get our preferred candidate nominated. This included reaching out to essentially every investor we have ever met, in order to try and convince them to go through the very laborious and technical process of using their shares to nominate our candidate. Unfortunately, for various rea- sons we just fell short of the 2% hurdle required to be able to nominate. However, we have already had a debrief and have prepared detailed plans on how we can get over the 2% hurdle for the 2020 voting season.
In 2018 we were successful in nominating and getting elected seven truly independent directors to Russian boards. Generally, we feel that this is one of the most important areas of engagement, because we have seen time and time again the value of such directors. In one particular example in 2018, we managed to appoint an independent board member for the first time to a company which went through a very significant transaction shortly after. This director added considerable value through ensuring that this deal was done as fairly as possible for all shareholders.
David Nicholls on a field trip Constructive engagement Often our engagement priorities are highlighted by to Rosneft’s our proprietary ESG scorecard, which is discussed is at the core of our Yurubcheno- on page 19. The scorecard requires that analysts Takhomskoye oil philosophy. A completed and PMs carefully consider the main material ESG field in Eastern issues, and hence on completion it is usually very proprietary ESG scorecard Siberia. Its remote clear which should be the areas of focus. location requires for each company
a three hour For companies with particularly low scores, we tend clarifies which should be helicopter ride to focus on 2-3 key issues that we believe will have the from Krasnoyarsk. the prioritised areas for highest probability of success as well as the biggest impact on the company. For instance, for the Russian engagement. state-owned company mentioned above, the priority engagement has been the nomination and appoint-
10 Sustainable investment report New role for Karine Hirn
Partner Karine Hirn takes on the position of Chief Sustainability Officer, signaling the strategic importance we attach to the pursuit of Agenda 2030. Based in Asia since 2010, Karine is now overseeing the ESG and sustainability work within the East Capital Group, and comments on her ambitions as well as the challenges ahead.
Our ESG journey started on day and we as an organisation are one, when we founded East Capi- committed to these tasks so I do tal in 1997, as our investment pro- not expect resistance the way cess has always taken into consid- some similar roles could have in eration corporate governance, a other organisations. As an inves- Another director we helped nominate was Maria key risk (upside or downside) tor in hundreds of companies Gordon, who was appointed to the board of Alrosa, a when you were a minority share- around the world and managing leader in the diamond mining industry. Maria is a holder in Russian companies. It capital from both retail and insti- Russian national who was previously Head of Emerging has evolved throughout the years tutional investors, we have a Market Equities at PIMCO and Managing Director at with negative screening from responsibility towards our clients Goldman Sachs Asset Management. She has been on the 2007, norm-based screening from and towards the markets, by allo- Alrosa board since 2015. During her tenure on the board 2010, becoming a PRI signatory in cating capital where it should, and of Alrosa we have noticed significant improvements in 2012, implementing our proprie- this way contributing to the the transparency and capital allocation approach of the tary ESG scorecards in 2016 achievement of the SDGs. partially state-owned company. At the company’s recent (enhanced later on with an SDG strategy day, she presented on the board agenda for 2019- module), and launching thematic 2020 and how the company and board are improving and ESG strategies such as China alignment of shareholder interests. Such a presentation Environmental and Global Emerg- would have been inconceivable a few years ago, and we ing Markets Sustainable. We have We have always hope this approach will serve as inspiration for other always believed in the value of Russian issuers. engagement and dialogue with believed in the portfolio companies and see this value of engagement There are many other less visible though equally as a crucial part of our work as an important engagements that occur through the year. For active investor. and dialogue with example, upon completing our ESG scorecard recently portfolio companies for a relatively high-quality energy company, it became The position of Chief Sustainabil- apparent that there was a complete lack of disclosure ity Officer is strategic and covers a and see this as a regarding the remuneration scheme for the management number of areas and objectives, crucial part of our board. Therefore, we wrote a letter to the CFO such as the ESG investment frame- highlighting this issue. Shortly afterwards we received work, our cooperation with asso- work as an active feedback that such a letter was appreciated, as it would ciations and peers, the reinforce- investor. help the finance team push the rest of the management ment of our positioning as a board to increase disclosure on this important topic. So responsible owner in the markets far it is too early to see results, and we do not expect this we operate including in some- one letter to change everything, though this “baby steps” times challenging emerging and approach has proven to be the most successful over time frontier markets, and finally sus- Working in Hong Kong, I have wit- as companies do listen and typically do want to improve. tainability for our own companies nessed the fast growing interest within the East Capital Goup. The for sustainability in the Asian con- Finally, it is worth mentioning that while this idea of role implies coordination on many tinent. Asia is lagging behind constructive engagement is certainly at the core of our levels, which suits perfectly a Europe but it is catching up fast. philosophy, we are not shy to pursue the legal route founding partner who knows the China provides a fascinating where required. Over the last few years, we have been company very well since its start example in the development of involved in two very high-profile cases on the Cayman 21 years ago! Sustainability is key green finance and environmental Islands, one of which went to trial and resulted in a to what we do and a lot of the regulations and Japan is making landmark ruling. Experience of this sort of engagement work is done by the existing significant progress in addressing is certainly helpful when dealing with some of the more investment teams. stewardship. Many Asian coun- challenging governance cases we encounter. tries face enormous challenges in In the short term, my first chal- achieving sustainable develop- lenge will be to set the right priori- ment so we will probably (or David Nicholls, CFA ties. I guess it is the same for any hopefully) see strong alignment in Senior Analyst, based in Moscow new role; I am lucky enough to terms of policies, social pressure have worked closely with the and capital. investment teams for a long time
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A lot of (green) energy at the world’s largest responsible investment conference
In September 2018, we participated in the PRI in Person conference, contributing to panels and conversations with peer investors, asset owners and service providers.
Responsible investment encom- East Capital’s chairman partici- passes several dimensions, but dur- pated, was the fact that the SDGs ing that week in San Francisco, cli- can be considered as the impact mate change took centre stage. The framework the world had been fact that the conference was held in missing. They provide tools for the same city and the same week as measurement, and in the world of GCAS – the Global Climate Action finance, measuring and counting is Summit, organised by Governor something investors and asset own- Jerry Brown - was probably one con- ers like! And as financing remains a tributing factor to this focus. There key issue for the success of the tran- As Al Gore cleverly are also two main reasons why cli- sition to a more sustainable world, pointed out, Sustainability mate change draws so much atten- the SDGs constitute actionable sending a shiver is not only the tion: climate risks are (huge) finan- tools. Collaboration between public down every spine cial risks resulting from natural and private investors to meet the in the room, the single largest calamities, stranded assets, and the SDGs is vital because the demand “5% risk only for investment overall transition to a low carbon for capital is total destruction” economy in line with the Paris so huge. could also be seen opportunity in Agreement. It is somewhat easier as the “one in 20 the history of the for investors to express trends and chance that the preferences in portfolio construc- Action on climate plane you will world, but also a tion and investment processes The iconic champion of the climate board might crash. fiduciary duty, related to environmental factors change fight, former US Vice Presi- Would you dare to and not than to other sustainable develop- dent Al Gore, made very convincing embark?” ment goals. Time is also running remarks about the urgency of the integrating out, hence the urgency as outlined climate crisis, and was greeted by by the shocking conclusions of the standing ovations. He beseeched all ESG as an report released in early October by investors to request companies to asset owner the Intergovernmental Panel on Cli- report on carbon mate Change (IPCC), which high- and was clearly frustrated by the East Capital has and asset lights the extraordinary changes insufficient level of mobilisation, for many years manager is a required to limit global warming to especially at government level, been pushing for violation of 1.5C above pre-industrial levels. while corporations in the US have more disclosure During the week of the conference, now shown more commitment. He from portfolio this fiduciary a new initiative named “The Inves- did however raise hope and con- companies, duty. tor Agenda” was launched, mobilis- cluded that political will is a renew- addressing this ing the efforts of leading impact able resource. According to Al issue during organisations to accelerate and Gore, we are close to a tipping point meetings with Al Gore scale up investor action on climate in terms of policy-making, and the company change. momentum among corporates is management, and also strengthening exponentially as supporting the CDP There was also a significant focus there is now a business case for (formerly the on SDGs, which is also noteworthy being green, both for governments Carbon Disclosure considering the fact that these and companies, especially when Project) since 2014. were agreed upon and released in seen in the light of technological September 2015. One interesting innovation. discussion at the panel, in which
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Our chairman, Peter Elam Håkansson, If you see a murder joined one of the being committed you plenary panels, which focused on have to act, if you invest how SDGs can be in companies that implemented across asset classes. Peter commit acts against spoke about public SDGs, it’s the same. equities, while PIMCO spoke about Pol Paulman fixed income, TPG about private equity and IFC about infrastructure investment. Fighting short-termism investment within low-carbon. The regulators around the world. Unilever CEO Pol Paulman gave Chinese panellist presented the However, data is not always reliable, a passionate speech on the respon- landscape of green finance in China, nor necessarily comparable across sibilities of corporate management specifically the development of geographies and sectors, and teams, kicking it off by stating that green bonds issuance and the sometimes even fails on materiality. his main occupation is trying to coordination momentum between Data accuracy is now increasingly change capitalism, and in his spare regulators and the Environment mentioned as a barrier to ESG time he’s a CEO. He is very critical of Ministry, who endeavour to work integration, and it is expected to the short-termism of management together to create an eco-system. become an enormous focus for data and owners, which he deems in- The mandatory requirement from service providers going forward. adept to the long-term challenges public listed companies by 2020 to we are facing. Short-termism results report environmental indicators in under-investment, and the trend removes impediment challenges. is not supportive. Boards usually Modern slavery comprise of retired people, from One of the other sessions we another generation, with more attended focused on modern focus on safeguarding their own Transforming data slavery. The conversation started off reputations. If consumers see why The panel on how technology is with the lack of a common things must change, how come shaping responsible investment definition globally of what is a living companies don’t? As Vice chair of grouped a few service providers wage and sector specificities UN Global Compact, Paulman and asset managers, and included specially in the developing world. urged for more action on our main impact investors. Service providers One investment manager linked the challenges: de-carbonisation and made the case for how the recent absence of clarity on sourcing origin circular economy. Besides, he feels implementation of AI, a response to San Francisco, to poor management quality within that financial markets must be ever-increasing coverage demanded September 2018. the supply chain. The most intense moved to a longer term perspec- by clients, has transformed the data With over moment of the panel came from an tive, and economic systems must be landscape. On the competitive side, 1 200 delegates Amazon warehouse worker, who made more inclusive. SDGs are “the traditional asset managers must representing nearly described poor working conditions scorecards of what is missing; and face the fact that 2/3 of millennials 600 organisations and the negative impact of tax even though it is quite difficult for trust their preferred brands such as from 37 countries, incentivisation schemes on businesses to know how to translate Google or Nike for wealth PRI in Person 2018 communities. Amazon, one month this, they should try”. Companies management, while the average age became the largest later, would make the headlines can outsource their value chain but of financial advisors in the US is 50. ever responsible when raising the minimum salary not their responsibilities. Paulman Robo-advisors still seem investment level for all their US workers. firmly believes that we have already uninterested in ESG opportunities. conference. entered the era when the cost of not Service providers not surprisingly acting is higher than that of acting. stated that the risk of not using technology in investment processes Regional differences is higher than using it. Human bias, Other main take-aways from the as well as privacy concerns, were conference include the fact that risk Carbon opportunities identified as issues in the field of management and client demand are A panel on identifying new low- responsible investment within seen as the main drivers for ESG carbon opportunities for investors digital financial services. integration globally. Looking at gathered on stage comprised of ESG data availability is increasing, regional differences, many speakers CEOs of European, Chinese, and US at least in developed markets, and highlighted that Europe, where ESG asset owners and managers. The sometimes even leading to other investing originated, is still leading panellists seemed to want to shift problems, such as “green washing”. the momentum, while US investors from carbon exclusion to assessing Disclosure is definitely improving, are now also catching up and Asian opportunities from carbon triggered by investor and customer asset owners still look somewhat transition, but highlighted the diffi- demand, but also voluntary or behind the curve. culties still present in finding mandatory reporting guidelines by
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East Capital as owner
Since day one, we have set out to be a long-term, active and responsible owner.
We are long-term We see beyond the short-term gain and look for long-term investment value
We are active Face-to-face involvement through company visits helps us make better-informed investment decisions, and we constructively engage on issues that are important to us as owner
We are responsible Our fundamental bottom-up research process addresses and integrates investment risks and opportunities associated with relevant and material environmental, social François Perrin (Head of Asia), Felicia Hong (Senior Analyst), Karine Hirn (Partner & and corporate governance factors Chief Sustainability Officer) and Dmitriy Vlasov (Portfolio Manager) visiting BYD’s battery production facility in Shenzhen. BYD’s electric busses can be seen in many airports around the world, including Amsterdam’s Schiphol Airport. Confirming alignment with the main owner Putting theory into A number of policies guide us in our everyday When contemplating an investment in a new work as responsible investors: company, understanding the shareholder practice • Ownership policy structure is key. So, the first page we turn to • Exercising Voting Rights policy in the annual report is the list of Instead of having a dedicated ESG team, all • Conflicts of Interest policy shareholders. Is there a controlling analysts, portfolio managers and portfolio shareholder? What are the incentives and advisors are actively involved in ESG Internally, we are furthermore guided by goals of this shareholder and how do they matters as part of their everyday work; a number of documents, including: align with those of us as minority investors? through the completion of ESG scorecards, • Code of Business Conduct Meeting the main shareholder constitutes participating and contributing in • Procedures against money laundering an important part in determining alignment. engagements and proposing and deciding and terrorist financing policy We also aim to use such meetings to build on voting instructions. • Whistleblowing policy trusting relationships for the future where • Gifts and benefits in external relations we can maintain an open dialogue on the Since 2010, the Head of Corporate policy company’s progress and, if needed, also be Governance and Sustainability (succeeded • Equality and diversity policy able to convey any constructive suggestions in 2019 by Partner Karine Hirn as Chief • Personal trading policy we believe may generate and support shared Sustainability Officer) has been evaluating • Environmental instructions value creation for all shareholders. and structuring the practical ESG-related tools used in investment activities, We encourage all companies’ management supporting the investment team in teams and boards to make sure that rigorous identifying and interpreting the impact and analyses are done to 1) identify and prioritise consequences of existing and emerging ESG their relevant and material environmental related factors on issuers and portfolios, as and social factors on a market, sector and well as ensuring relevant and material ESG operational level, and 2) address and matters are reported and discussed in integrate these into the company’s strategy. investment team meetings. An ESG report, We see this as an additional responsibility updating on the status and results of each of under good governance, making companies our ESG pillars, is presented to both the better positioned to react to changes in Board of Directors and the Investment regulation, consumer demand and other Committee on a quarterly basis. developments, thereby ensuring that they remain relevant in the long term.
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How we generate value
Through our bottom-up approach, we generate most value added from stock decisions. These decisions are in turn aided by the following key characteristics of our portfolio management approach.
Local Long-term Broad investment universe
Regional specialisation improves returns Fundamentals matter over time Including tomorrow’s stars Emerging markets are converging towards We focus on high-quality companies benefit- We believe that a wider investment universe developed markets, resulting in long-term ting from structural growth, as we believe creates more alpha opportunities. Our off- growth prospects and structural growth in that middle-class expansion and broad benchmark exposure includes allocation to many sectors. However, emerging and wealth creation allow superior growth out- smaller companies, frontier markets and local frontier markets are not fully efficient and side of the energy and commodity spaces Chinese shares (so-called A-shares). Smaller information is often not complete, timely in a post super-cycle world. These compa- companies offer a larger exposure to certain available or easily accessible. There are nies have strong and predictable growth fast-growing sectors responsive to local large discrepancies in the performance of profiles, high and consistent return on market dynamics (such as consumer companies and in their ESG standards. It is equity, high free cash flow and high capital discretionary, industrials and health care), often difficult to access the “right” people efficiency. Businesses with these attributes compared to the smaller subset of companies and companies and valuations, as well as are primarily found within consumer staples represented by the broad MSCI EM Index. risk perception, are frequently distorted. and discretionary, information technology Frontier markets are in general both faster- We have a true regional presence, with local and health care sectors, but also among the growing and less correlated to the developed investment expertise in Moscow, Dubai and solution providers to sustainability-related world than emerging markets, and thereby Hong Kong, and can establish and maintain challenges; primarily environmental tech- offer interesting opportunities for well- unique access to management teams, nologies such as clean energy, energy effi- informed investors. To find meaningful owners and policy makers, which is vital to ciency, clean water and air, waste manage- exposure to sustainability-related challenges making informed investment decisions and ment and clean transportation. We position in emerging markets (renewable energy and monitoring existing holdings. our strategies to outperform the respective clean technologies), allocation to local benchmark over a period of three years. Chinese shares is critical. China today offers the largest cleantech universe of all emerging markets by a wide margin, and most of these companies are listed on the local exchanges in Shanghai and Shenzhen.
Active
Integrating ESG in stock-picking is key to success We are index-agnostic in idea generation, and invest by conviction on a company-by- company basis. As companies in emerging markets hugely differ in terms of ESG and performance standards, one needs to be selective, and diligent research is essential for identifying key performance drivers and assessing risk correctly. We rely on our own research, including risk scenarios and a proprietary ESG analysis, in our investment process. Significant overweight positions should have strong or clearly improving sustainability ratings based on a proprietary ESG scorecard with critical ESG areas relating to main shareholders, management, placements, dividends, extraordinary events, accounting, audits, environmental and social factors, corruption and ethical issues.
Jacob Grapengiesser, Partner and Deputy CIO, attending investor day at Etalon, one of Russia’s largest and oldest residential real estate developers, with a market-leading position in St Petersburg and a growing presence in the Moscow Metropolitan Area.
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ESG in each step of the investment process
East Capital’s investment process is designed to systematically select the companies with the best risk/return profile. All East Capital strategies follow the same investment process.
Defi nition of Company Fundamental Portfolio Implementation investable focus research construction & monitoring universe
Focus Overall list with Investable Focus Model Actual investment conviction universe list portfolio portfolio universe and views
The overall investment Identifying quality Company meetings are Key Active Positions* Detailed performance universe is divided into companies with long- an integral part of the Overweight (> versus and risk analysis. regions, countries and term growth prospects investment process to benchmark, level of over- Monitoring of ESG fac- themes and screened support and comple- weight varies between the tors, proxy voting and by market cap and ESG Six investment criteria: ment the fundamental regional strategies) meet ESG engagement. exclusion criteria. 1. Access to structural analysis. Proprietary several criteria: quality Apart from regular risk growth research is performed companies with a sig- reporting, all portfolios on revenue drivers, cost nifi cant upside, quality are screened for norms- 2. Long term competitive drivers, competitive management/owners and based controversies position and strong strength, fi nancial capa- strong ESG standards in twice per year. Our management bilities, management accordance with the pro- ESG scorecards are 3. Strong FCF or highly and on ESG factors such prietary ESG scorecard. reviewed annually, or profi table investments as ownership, manage- These companies we upon a major event, 4. 1-3 areas where we ment, placements, div- endeavour to meet four and voting and engage- diff er to consensus idends, extraordinary times each year, we ment activities are car- events, accounting, engage as active share- ried out continuously 5. Reasonable valuation audit, environmental holders, create our own throughout the year. or signifi cant upside and social factors, model and research to 6. High East Capital corruption and ethical understand key perfor- ESG Score issues. mance drivers in detail.
Our research agenda is prioritized through a number of formalized meetings throughout the year:
• Global Advisory Committee: Macro and • Regional team offsites once a year: • Weekly meetings: Short overview of attribution political trends; regular discussions with Comprehensive review of entire investment and positioning in regional teams. Discussion advisors, through physical meetings and universe and portfolio positioning in regional and analysis of recent events (reporting/news/ continuous dialogue on specific issues. teams. meetings) and also ESG issues such as voting or board appointments. • Investment Management Team conference • Regional portfolio review meetings every once a year: Macro and political trends; second month: Full portfolio review in • Daily meetings: Company results, macro, ESG impact on various strategies; ESG update and regional teams. ESG topics including review of and any other general news that may impact training. current engagements. our portfolios.
* Key active positions (“KAP”) are our largest overweight positions, several of which are not in the benchmark or, in other words, represent how we deviate from the broad market.
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Our ESG tools
The practical ESG tools used in our investment activities are organised in four pillars: sector exclusions (negative screening), controversy (norms-based) screening, proprietary ESG scores, as well as active ownership by engagement and voting. All tools apply to all East Capital strategies.
ESG pillar 1: ESG pillar 2: ESG pillar 3: ESG pillar 4: Sector exclusions Controversy Proprietary Active (negative screening) (norms-based) screening ESG scores ownership Since 2007 Since 2010 Since 2016 Since 1997
What: What: What: What:
All portfolios exclude Semi-annual screen and 10 Red Flags section + more Active ownership to add value companies that are known ”alerts” in between extensive ESG scoring section post investment to generate signifi cant share of revenues from: Alerts us of suspected breach Separate SDG module Communicate our views and — Weapons of international conventions expectations as owner — Tobacco and norms on human rights, Leverage our unique resources, — Pornography labour standards, experience and track record Initiate engagement where environment, health & safety in emerging and fontier relevant or bribery markets
Input for dialogue and Focus on most relevant and engagement material ESG risks AND opportunities in our markets
How: How: How: How:
Screening implemented External research partner Scoring done by analysts/PMs: Proxy voting in analyst’s/PM’s initial own judgment remains critical analysis Filing shareholder proposals Start with Red Flags for all External screen available if holdings, full ESG score and Nominating and electing uncertain SDG module score for all Key independent directors Active Positions and largest Portfolios re-confirmed holdings Letters to portfolio companies annually, controversial weapons confirmed semi- Scores reviewed annually or Engaging on our own annually upon major event Members of external engagement forum
Collaborating with other investors, associations, initiatives if relevant
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ESG pillar 1: Sector exclusions (negative screening)
In 2007, we decided to exclude certain In our view, these exclusions have resulted exclusion criteria. Compliance with the sectors that we do not believe offer our in a non-significant reduction of our controversial weapons criteria, i. e. Cluster clients attractive prospects of long-term investment universe. And rather than munitions, Anti-Personnel Landmines, ABC- returns. The sectors we identified were creating a “special” fund that excludes these weapons, Nuclear Weapons, and similar, is tobacco, weapons and pornography. The sectors, we decided from the outset that it confirmed semi-annually by our external obvious negative social impact of these made better sense to apply this restriction to research consultant. If the investment team sectors, and the significant costs they all our fund products. was to come across a breach of any of the generate for society, have convinced us that exclusion criteria, the team would initiate a they do not make for appealing long-term The criteria are confirmed upon investment divestment of such holdings. investments. in a new company and the process and exclusion thresholds are reviewed annually Results 2018 in conjunction with reconfirming that all No breaches were identified during 2018. portfolios are still in compliance with the
ESG pillar 2: Controversy (norms-based) screening
Since 2010, East Capital has been conducting controversy screening on all portfolios, using an external research partner. The screening alerts us of any holdings that are alleged to conduct business in a manner contrary to well-established and generally agreed international norms on ESG issues, based on the prerequisite that companies have a responsibility to comply with international norms even though they are not legally bound to.
Companies are systematically monitored to Rather than automatically divesting ensure their compliance with international companies with reported allegations, East conventions and guidelines on human rights, Capital has decided to use the screening labour rights, environment, corruption and results and conclusions as an input for any We use screening results controversial weapons. The scope is based decision to initiate an engagement dialogue and conclusions as an on the ten principles of UN Global Compact, with the company, either on our own or input to initiate a dialogue which are derived from: the Universal together with other investors, in order to Declaration of Human Rights, the suggest and encourage that the company with the company, either International Labour Organization’s (ILO) responds to and, if needed, improves on the on our own or together Declaration on Fundamental Principles and specific issue. East Capital’s experience has Rights at Work, the Rio Declaration on shown that an engaged and constructive with other investors, Environment and Development, and the dialogue will more often lead to convincing in order to suggest and United Nations Convention Against the company to initiate positive change — as Corruption. opposed to simply exiting the investment. encourage that the We are, however, upon severe and company improves on The research process seeks to deliver timely, systematic breaches or where active actionable information on issues identified shareholder engagement is deemed to have the specific issue. Our as having severe consequences from an limited effect — as a final resort — either experience has shown environmental or social perspective. The ready to refrain from investing, or exit our analysis includes an assessment of the holding. Read more under Engagement on that an engaged and company’s response to the event, as well as page 22. constructive dialogue an evaluation of relevant policies, will more often lead to management systems and the company’s Results 2018 implementation thereof, in order to During 2018, our research partner logged convincing the company understand the risk of the company being numerous telephone meetings, written cor- to initiate positive change involved in similar controversies in the respondences and physical meetings related future. The criteria for the controversy to 17 cases of potential norms-based viola- — as opposed to simply screening process are decided, reviewed and tions with 12 different companies in our port- exiting the investment. updated by our research partner, whose folios as an integral part of the process to team has significant experience in this type research and assess indications of violations. of norms-based assessments.
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ESG pillar 3: Proprietary ESG scores
In 2016, East Capital took the next major step to further integrate ESG into our The 2030 Agenda investment process by developing and launching a proprietary ESG scorecard. The for Sustainable Development decision to develop our own scorecard was mainly driven by the desire to formalise (SDGs) has been and structure our own knowledge, experience and views of relevant and material ESG- called “A global related risks and opportunities. It was further compounded by the lack of coverage of to-do-list for getting to the world we external ESG research on emerging and frontier markets. want”.
Our scorecard guides us in our assessment analysis, ensuring a more holistic analysis of Results 2018 of relevant and material ESG risks and company quality. The scorecard comprises By the end of 2018 our investment team had opportunities from an emerging and frontier 10 Red Flag questions and 50+ additional compiled 174 scorecards. Scorecards cover in markets’ perspective. As the scorecards are questions within E, S and G, which structures priority the top absolute and relative weights filled in by the relevant research analysts, our review to consider relevant and material (so-called key active positions or KAPS) of the portfolio managers and portfolio advisors, ESG risks and opportunities. Since 2017, it strategies. Several funds, such as Global with the support of our Chief Sustainability also includes a separate SDG module to Emerging Markets Sustainable, Global Officer, we ensure that the entire investment ensure that we integrate risks and Frontier Markets, China Environmental and team integrates relevant and materials risks opportunities related to these goals on the China A-Shares have 100% coverage. and opportunities in their fundamental path to 2030.
The 17 SDGs are grouped into two categories:
1 Goals that we believe may impact the demand for, or attractiveness of, a company’s products, services or technologies. In order to assess the impact of the first • BENEFIT due to greater demand in category of goals above in a structured order to achieve the SDGs, e.g. g clean way, the SDG module contains questions energy, education, health OR and examples per goal that help us to identify streams of revenue from a • SUFFER due to lower demand or total company’s products/services or substitution in order to achieve the SDGs, technologies that are expected to either: e. g. fossil assets or unhealthy food.
2 Goals that we see as the universal responsibility of all companies to address in their operations, regardless of size, market or sector.
For the second category of goals, our • generates a list of issues/questions to expectation is that companies should act research further or raise with the and operate in a manner that is supportive company; of achieving these SDGs, e.g. work toward • identifies areas of improvement that we gender equality and decent work (and not can address through constructive actively contribute negatively). These engagement; goals are addressed in our overall ESG • helps to focus our internal resources assessment of the company, as the and ensures that we bring sustainability proprietary scorecard is cross-referenced topics onto corporate agendas; against each of these goals, with questions • also ensures an integrated approach within the E, S and G sections. and a holistic analysis of company quality due to its being executed by Some of the main benefits of the ESG the investment team; scorecard are that it: • allows us to adjust our scenarios and • ensures that we consider relevant and modelling assumptions, if needed; material E, S, and G related factors, • helps to determine a level of conviction including risks and opportunities related (together with financial quality, to the SDGs; significant upside, etc).
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East Capital’s proprietary ESG scoring model
Red fl ag score Holdings Aim Area covered Score levels
All existing holdings At the outset, considers the Focuses on major Red Flags Maximum 2 Red Flags for 10 most critical ESG related to corporate Key Active Positions When initiating questions in emerging and governance, ethics and research on new frontier markets corruption, and severe or More than 3 Red Flags companies systematic environmental should not warrant further Gives quick ESG overview or social controversies research or investment and understanding unless specific reason to accept higher ESG risk is Helps focus research warranted, accepted and resources documented
ESG score
All Key Active Positions and 50+ questions to consider Governance (75%) Key Active Positions should top holdings to start relevant and material ESG • Shareholders/board/ have an ESG score of at least risks and opportunities in management 70% Over time, other relevant EMs and FMs • Dividend policy long-term holdings and new • Capital allocation Other holdings are typically investments Helps to determine level of • Ethics and corruption scoring above 60% conviction (together with • Transparency financial quality, significant However, specific insight or upside, etc.) Environment (12.5%) reason may allow us to • Impacts on CapEx/OpEx accept a lower score – and Generates a list of issues/ next 5 years higher ESG risk – if questions to research • Management’s warranted, accepted and further or raise with the understanding of relevant documented, for example, company risks and opportunities, if we have sufficient incl. climate change evidence and tangible Allows us to adjust our • Significant controversies triggers for near-term ESG scenarios and modelling improvements. We may, for assumptions, if needed Social (12.5%) certain reasons, such as • Impacts on CapEx/OpEx liquidity requirements, be next 5 years forced to hold certain • Supply chain companies that we see as • Health & safety laggards from an ESG • Significant controversies perspective.
SDG module
All Key Active Positions and Framework to identify 7 SDGs, categorised Determine to which extent top holdings to start with streams of revenue from a in two groups: an issuer can be categorised company’s products/ as being a “solution Over time, other relevant services or technologies 12 Goals that we believe may provider” long-term holdings that are expected to either: impact the demand for, or attractiveness of, a Adjust modelling BENEFIT due to greater company’s products, assumptions, level of demand in order to achieve services or technologies. conviction or stock the SDGs, e.g. clean energy, Goals: 1- 4, 6, 7, 9 and 11-15 selection education, health; OR 5 Goals that we see as the SUFFER due to lower universal responsibility of demand or total all companies to address in substitution in order to their operations, regardless achieve the SDGs, e.g. fossil of size, market or sector. assets or unhealthy food Assessed in the E, S and G sections of our scorecard. Goals: 5, 8, 10, 16 and 17
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ESG pillar 4: Active ownership
As active investors, we hope to play a key role in implementing and enforcing improved ESG standards and strengthening the chain of accountability in portfolio companies through our monitoring capacity and constructive engagement — or in the worst case, through litigation or exit. We believe that engagement and voting constitute two key components of active ownership.
Visiting EV production plant at ChangAn Auto factory in Chongqing, China. ChangAn ranks among top four OEM car producers in China and operates joint ventures with Ford, Mazda and Suzuki. The photo is taken during one of our investor trips, which we organise a few times a year, offering the participants an opportunity to follow us off the beaten track in the regions we invest in, to gain deep insights on key developments and current trends by meeting members of our investment team, local experts and company representatives and to tap into the reality of our portfolio companies during visits to factories, facilities and offices.
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Active ownership: Engagement
There are numerous examples where our Engagement resources assessment of ESG standards has helped us East Capital’s on-the-ground team and exten- avoid investments in companies that later sive local networks provide us with a range of East Capital’s failed, or where we have preserved value by valuable tools that can be used to initiate and blocking unfavourable resolutions at share- advance engagement. These include: experience has holder meetings. But more importantly, • own dialogue with company shown that an East Capital has decided to use its role as representatives; an active owner to engage with portfolio • a letter from our CIO to new portfolio engaged and companies to ensure that the ESG risks and companies, communicating our role and constructive opportunities that, in East Capital’s view, aim as an active owner; dialogue will are relevant to a company’s operations, • membership in an external engagement are strategically assessed and integrated. forum that unites the interests of asset more often lead East Capital’s experience has shown that owners and asset managers with more than to convincing the an engaged and constructive dialogue will USD 1 tr in AUM; more often lead to convincing the company • dialogue with governments, stock exchanges company to initiate to initiate positive change — as opposed to and other authorities and institutions on positive change simply exiting the investment. We are — as a longer term and more universal final resort — either ready to exit our hold- improvements in the market framework; — as opposed to ing or willing to take the legal route, if such • legal action. simply exiting the is deemed to be part of our fiduciary duty. Engagements are formally logged and investment. Prioritising engagements developments and follow-ups are discussed We have a formalised approach for how we at each regional portfolio review meeting, allocate our internal engagement resources: held every second month. The board of • Prioritise engagements in our key active directors is updated on notable positions and 10 largest holdings; developments on a quarterly basis, in • Prioritise any ESG topic seen as especially addition to receiving the full engagement important to our EM/FM investment universe; log.
Engagement process
Identify Assess Engage Monitor/Report
Proactive based on issues or Engagements are then We engage with either the Discussed in team meetings. areas of improvement identified prioritised based on East management team or the in East Capital’s proprietary Capital’s ability to influence a board through: Progress is monitored on research process, which company and add value. • on-the-ground meetings a case-by-case basis. includes our ESG scorecards. with companies as well Portfolio weighting is also as our extensive local Where there are no signs of Reactive based on: considered when prioritising networks progress, there may be changes • current events engagements. • letters, phone calls or to the portfolio (depending on • norms-based screening emails to companies the materiality of the issue). • invitation from other Main goals of the engagement • collaboration with others investors are identified. Sustainable Investment Report is produced annually.
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Own dialogue with company representatives
Background In addition to numerous telephone conferences and written correspondences, East Capital’s research analysts, portfolio managers and portfolio advisers maintain a continuous dialogue with management teams, board members and other owners through more than 1,000 company meetings every year. Typical ESG topics may include working with companies to develop a clear and consistent dividend policy, professionalising board work and processes, raising and addressing environmental concerns, improving transparency, reporting and investor relations, improving rights for minority shareholders or reaching a better fair-value in buyouts. These meetings also provide an opportunity to discuss and understand how the company is positioned in relation to current and future ESG issues.
As part of our review of the investment process and our use of internal resources during the year, we also decided to formalise how we prioritise company meetings: • Key Active Positions: meet 2-4 times/year • Any other top 10 holding: meet 1-2 times/year • Other holdings: at least 1 time/year
The number of conducted company meetings is one of the data sets provided to the monthly investment committee.
Results 2018 During 2018, East Capital pursued 17 company engagements, predominantly on governance issues. Some examples from one of our senior analysts, David Nicholls, are presented on page 10. Our Chairman and CIO Peter Elam Håkansson in Continuous dialogue conversation with the with portfolio companies Chairman and Head of IR at Sinpaş Real Estate Investment Further reading: includes developing a clear Trust – a Turkish real estate East Capital’s company with a leading Ownership Policy and consistent dividend position in developing policy, professionalising innovative residential projects board work and processes, offering high quality living raising and addressing standards in Istanbul. environmental concerns, improving transparency, reporting and investor relations, improving rights for minority shareholders or reaching a better fair-value in buyouts.
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Nomination of Over the years, East Capital has participated benefit of initiating legal action. On average, in the nomination and election of 20-30 East Capital is involved in one to two legal board members independent directors per year in our invest- processes per year. This means that East ment region, primarily in Russia, South East Capital, since 1997, has been involved in 25-30 Background Europe and the Baltics. In Russia, we either legal disputes, some of which have carried on East Capital encourages all portfolio com- nominate directors on our own or in collabo- across more than one year. Not all legal panies to appoint a board of directors that ration with other minority investors through disputes have gone to court. represents an appropriate and diverse range our membership in the Russian Association of competencies and backgrounds to enable of Institutional Investors of Moscow (API). it to effectively carry out its duties. Throughout the years, the API and its mem- bers have contributed to nominating and External engagement forum Board members should be selected based on electing approximately 500 independent skill, integrity and the ability to devote a suf- directors to Russian boards. Background ficient amount of time to their work. East Since 2013, East Capital has been a member Capital also strives to influence companies to Our experience has shown that independent of an engagement forum managed by our ensure that an appropriate ratio of the board directors are able to contribute with many research partner for norms-based screening. of directors/supervisory is independent in improvements to the work of the boards, This forum engages on all confirmed contro- relation to the company and its executive including: versies identified through the Controversy management. Although the definition of screening process described on page 18. The • establishing board committees and independent director may vary between forum provides East Capital with access to improving board practices; markets, the essence is the same — that direc- an experienced team of ESG analysts with tors should have a proven ability to exercise • improving transparency and investor specific sector competence, which is a key objective judgment in making decisions that relations; strength, specifically with regards to assess- are in the best interests of all shareholders. ing more complex environmental and social • proposing revised dividend policies; issues. Engaging through a forum also means • implementing KPI-based executive strength in numbers, which is valuable in compensation plans and new, financials- markets where we are smaller shareholders based KPIs; or have a shorter track record of engage- We strive to influence ment. • challenging and blocking problematic deals. companies to ensure As incidents are identified, they are assessed that each board of and researched in order to confirm the inci- Results 2018 dent and understand the potential impacts directors represents a In 2018, East Capital contributed to nominat- and underlying causes. If the incidents are diverse range of skills ing and electing seven independent directors severe and systematic, the forum, on behalf in six Russian companies and one in Lithua- of its institutional investor members, will ini- and backgrounds, and nia. Although this is fewer in number than in tiate a constructive dialogue directly with the an appropriate ratio of previous years, especially for Russia, it company in order to suggest that the com- independent directors should be noted that the size of these hold- pany addresses and improves on the specific ings remains quite significant. issues, and encourage it to do so. The forum with a proven ability focuses on company actions that will con- to exercise objective All in all, we have actively influenced the tribute to durable change and support con- board composition in companies corre- tinued investment in the company. judgment in making sponding to approximately 9% of the market decisions that are in value of our assets under management, and 18% of East Capital Russia, 9% of East Capital Results 2018 the best interests of all Eastern Europe, 5% of East Capital New During 2018, our research partner managed shareholders. Europe. 10 structured engagements with seven differ- ent issuers that were part of East Capital’s portfolios. In addition to this, they logged numerous telephone meetings, written cor- Legal action respondences and physical meetings related to 17 cases of potential norms-based viola- Since its founding in 1997, East Capital has tions with 12 different companies in our port- invested in more than one thousand folios as an integral part of the process to companies in emerging and frontier markets. research and assess indications of violations As detailed on pages 22-23, we always prefer generated in ESG pillar 2, the Controversy active engagement above exit or legal action screening process. and have a long track record of successfully resolving issues and preserving minority shareholder rights through open and constructive dialogue. However, if dialogue fails and East Capital deems that it has a responsibility and duty to take further steps to protect the capital that our clients have entrusted us with, we will evaluate the cost-
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Collaborating with others
East Capital sees significant potential in col- laborating with other investors on specific ESG topics, especially when issues are more complex. We have identified a number of initiatives that we have decided to support as signatories or active members.
Local governance associations The Association of Institutional Investors in Moscow (API), the Asian Corporate Govern- ance Association (ACGA) and the Baltic Insti- tute of Corporate Governance (BICG) have all contributed to improved standards and initi- ated dialogue around new legislation in their respective regions. Common strengths for these associations are broad networks, a deep understanding of the local financial market, significant knowledge of interna- tional best practice, legal competence, a desire to contribute to educational efforts, active investor members, and not least, a constructive and collaborative approach. Representatives from SISD members, including East Capital’s Magnus Lekander, General Counsel & Results 2018 Head of Group Operations, meeting with Per Bolund, Sweden’s Minister for Financial Markets, During 2018, East Capital continued to partici- pate in several engagements initiated and led to present the joint efforts of the SISD initiative and to discuss challanges and actions to accelerate by investor members of these associations, investments for sustainable development. not least the Independent Director pro- gramme coordinated by the API in Russia.
China has emerged as a country with both During the year, we were particularly active huge ESG challenges and encouraging within the Swedish Investors for Sustainable emerging signs that responsible investing Development (SISD), a partnership formed in It is ground-breaking that does matter. Our team in Hong Kong works 2016, currently comprising 18 institutional closely with the Asia Corporate Governance investors, pension companies, investment asset owners and asset Association (ACGA) and participated in sev- companies and the Swedish International managers within the eral of its activities, both in Hong Kong and Development Cooperation Agency (SIDA). in mainland China. In November 2018, our The members of the initiative are committed SISD network cooperate Head of Asia Francois Perrin held an ESG to working together to address and support in this way to finance integration workshop in Beijing for Chinese Agenda 2030 and the 17 Sustainable Develop- asset owners and asset managers. The ment Goals in their investment activities. SISD sustainable development workshop “What does ESG integration is a stimulating network where participants in the world. We hope to mean in Asia?” covered how different asset and other actors work constructively with give inspiration for more managers are approaching the issue of ESG learning, sharing experiences, voluntary pro- and responsible investment, how their jects and communication around the SDGs. innovative solutions for investment and engagement processes have East Capital is currently part of three working today’s major challenges. changed (or not) over recent years as a groups; Clean water and sanitation/Life result, how they prioritise and utilise the below water (goals 6/14); Sustainable Cities ESG concept (e.g. as a risk management tool (goal 11); and a group that focuses on identify- Carin Jämtin in existing investments and/or a source of ing and removing hurdles for mobilising fur- Director-General, SIDA new investment ideas), whether the individ- ther investment towards the SDGs. Working ual components of E, S and G are all given groups aim to promote learning, support equal weight in their investment analysis or each other in developing processes that whether governance is the more fundamen- address the SDGs in our respective invest- tal thing they study (as is the case for many ment processes, but also to explore future asset managers in emerging markets), and (and potentially collaborative) investments in so on. support of the goals. In July 2018, our Chair- Further reading: man Peter Elam Håkansson joined fellow SISD api-russia.org We also joined as a founding member, the members for a panel discussion on how to acga-asia.org new Hong Kong Green Finance Association, reach the SDGs in Almedalen Week, the bicg.eu which today consists of 106 members, from annual meet-up week for politicians, business cecc-china.org the fund management industry, banking and media taking place in the city of Visby, sida.se sector and listed corporates. We elected to Gotland and considered to be the most impor- hkafa.org participate in the ESG integration group. tant forum in Swedish politics. hkgreenfinance.org
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CDP Principles of Reponsible Investment (PRI) Since 2014, East Capital has been an investor In 2012, we decided that we were ready to signatory of CDP (formerly Carbon Disclo- become a signatory of the Principles of sure Project), an independent, not-for-profit Responsible Investment (PRI), as an impor- The number of UN organisation. CDP has made an important tant next step in our work to integrate the PRI signatories nearly contribution to increasing awareness of and ESG perspective into our investment pro- attention to climate, water and forest issues cess. The PRI, which was initiated in 2006 doubled in the past six by providing a transformative global system with the support of the United Nations, has years as investor interest that helps and motivates companies to meas- over the past 10 years quickly developed ure, disclose, manage and share relevant into the world’s largest investor initiative in ESG is reaching environmental information (emissions data, for responsible investment, representing new heights across water data and most recently, forest data). more than 2,000 investors, from over 50 This is done through sending questionnaires countries, together managing more than geographies and asset to thousands of listed companies around the USD 89 trillion (unpri.org, May 2018). The classes, and responsible world. The response rate from companies in PRI works to encourage its international investment is increasingly our investment universe is unfortunately still network of investor signatories in under- very low, with companies representing 23% standing the investment implications of on the top of agendas of of our AUM reporting to CDP in 2018. East environmental, social and governance asset managers and asset Capital therefore works actively to contrib- (ESG) factors, and to support them in inte- ute to an improved response rate through grating these factors into their investment owners direct engagement with portfolio compa- and ownership decisions. nies, encouraging them to respond, and highlighting the growing importance of car- The PRI also offers access to an organised bon disclosure to investors. clearing house that facilitates investor col- laborations on various topics, as well as the During 2018, East Capital supported CDP important annual “PRI in Person” event, China in encouraging more Chinese issuers which offers an important platform for Read more about our main take-aways to attend reporting workshops. We were also exchanging ideas about ESG and establishing from participation at the PRI in Person invited by CDP China to talk at two work- valuable new contacts for future collabora- 2018 in San Francisco on pages 12-13. shops held in Shenzhen and Guangzhou. tion and engagement. Further reading: Further reading: cdp.net unpri.org Our latest PRI Trans- parency Report and Assessment Report are available here: eastcapital.com/esg
The Association of Institutional Asian Corporate Governance Baltic Institute of Corporate Swedish Investment Fund Association Investors in Moscow (API) Association (ACGA) Governance (BICG) Member of the working group for Member since 2002 Member since 2009 Supporter since 2009 ownership issues and api-russia.org acga-asia.org bicg.eu sustainability since 2011 fondbolagen.se
UN backed Principles of CDP China Environmental Chamber Association of the Luxembourg Responsible Investment (PRI) Signatory since 2014 of Commerce (CECC) Fund Industry (ALFI) Signatory since 2012 cdp.net Member since 2016 Member of the RI working unpri.org cecc-china.org group since 2016 alfi.lu
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PRI principles
Supported by the United Nations, the Principles for Responsible Investment (PRI) provide a voluntary and aspirational set of six investment principles to refl ect the increasing relevance of ESG issues to investment practices. The six principles off er a menu of possible actions for incorporating ESG issues into investment practice, and have been developed by investors, for investors.
PRI Principles Examples of what East Capital does
We will incorporate ESG issues into investment analysis • ESG factors are an integral part of our investment 1 and decision-making processes. approach. No variations or exceptions. Pages 16-19
We will be active owners and incorporate ESG issues into • We engage with companies on ESG factors via our 2 our ownership policies and practices. staff , collaborations or service providers • We cast our (proxy) votes directly or via dedicated voting providers
• We conduct dialogues regarding ESG issues with portfolio companies
• We monitor portfolios to detect violations of international conventions and guidelines Pages 10, 14, 22-28
We will seek appropriate disclosure on ESG issues by the • Typical ESG topics include working with companies 3 entities in which we invest. to develop a clear and consistent dividend policy, professionalising board work and processes, raising and addressing environmental concerns, improving transparency, reporting and investor relations, improving rights for minority shareholders or reaching a better fair-value in buyouts Page 16-23
We will promote acceptance and implementation of the • We are promoting responsible investments 4 principles within the investment industry. independently, as well as together with collaborative organisations/initiatives. This includes participating as speakers in diff erent forums and providing media comments Page 28
We will work together to enhance our eff ectiveness in • We are collaborating with other shareholders and 5 implementing the principles. taking part in relevant stakeholder and investment associations
• Dialogue with governments, stock exchanges and fi nancial regulators to promote improvements in the institutional and legal framework Pages 25-26, 28
We will report on our activities and progress towards • We publish an annual Sustainable Investment Report, 6 implementing the principles. as well as PRI Transparency Report and Assessment Report www.eastcapital.com/esg
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Dialogue with regulators and Results 2018 During 2018, East Capital participated in other market participants many engagements, including the following:
Our experience from over 20 years in emerg- • we held a presentation at a Nasdaq Baltic ing and frontier markets is that an effective seminar for 70 participants, on the topic corporate governance system, not only of ESG as a key tool for emerging and New initiatives we joined: within individual companies, but across the frontier market investments entire capital market, is a clear prerequisite • we shared our views on how ESG analysis to stand out in what today has become a The Climate Action 100+ can be applied to Russian equities at a truly global competition for capital. It also The largest corporate/investor gathering of investors organised by PRI makes life easier for investors who can spend engagement initiative to ensure the and Moscow Stock Exchange time on performing investments, and creat- world’s largest corporate greenhouse gas emitters take necessary action on ing value, rather than fighting to protect and • we joined 2018 Environmental Disclosure climate change by engaging companies regain investments in companies where they Seminar and CDP training workshops as on improving governance, curbing have been mistreated. speakers in Guangzhou and in Shenzhen emissions and strengthening climate- Throughout the years, East Capital has, by • we gave a lecture on the topic of “ESG related fi nancial disclosures. invitation or through own initiative, engaged from an asset manager’s perspective” at climateaction100.org in numerous dialogues with governments, the Ukrainian Corporate Governance stock exchanges, regulators, standard- Academy in Kyiv The Investor Agenda setters, industry initiatives and other market • we spoke at a workshop organised by PRI A collaborative initiative that seeks to participants to promote improvements in in Hong Kong on how investors and speed the transition to a low-carbon the institutional and legal framework of consultants see ESG integration specific markets. We appreciate the economy. This includes elevating the opportunity and see it as a worthwhile • we presented at the Baltic Institute of profi le of existing investor actions investment of our time and knowledge to Corporate Governance Board Education and initiatives on climate change, and constructively contribute with our views on on ESG investing amplifying investor voices calling for what we as investors, believe could government implementation of the • we joined Hong Kong Green Finance strengthen the attractiveness of that Paris Agreement. Association as founding members and the particular financial market in the eyes of theinvestoragenda.org purpose with the association is to support the international investor community. Hong Kong’s strategy to develop its green finance market Tobacco-free • we participated in GRI’s research on the portfolio pledge state of Corporate Reporting Practices on Recognising the leading fi nancial GHG emissions and water. The research Numerous dialogues organisations that have moved to aimed to acknowledge existing gaps in tobacco-free fi nance and to encourage with governments, corporate reporting others to follow suit. We joined as a stock exchanges, • we contributed to PRI and CFA’s ESG founding signatory alongside 90 other report with how East Capital works with asset owners and asset managers with regulators, standard- ESG in our investment process and a case headquarters in 18 diff erent countries. setters, industry study about the Russian company Yandex. The Pledge was launched in September 2018 on the sidelines of the UN General initiatives and other • we joined the judging panel of the Annual Assembly. East Capital has not invested market participants to Report competition organized by Moscow in companies known to generate Exchange promote improvements signifi cant share of revenues from • we held a workshop for Chinese asset tobacco since 2007. in the institutional and owners and asset managers in Beijing on tobaccofreeportfolios.org legal framework of ESG integration organised by the Asian specific markets. Corporate Governance Association My Pledge • we presented at a roundtable on “How to Aimed at ensuring more diversity at improve valuation of Russian companies public events, advocating for gender through corporate governance” organised balance at public forums and actively among others by Moscow Stock Exchange encouraging diversity. and Skolkovo Moscow School of equilibre.lu/my-pledge Management.
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Understanding climate change related impact
Climate change is a global challenge, shared by all nations. The Paris agreement, reached among more than 190 nations in Paris in December 2015, was a major positive milestone in addressing climate change. Agreeing that temperature increases must be capped at two degrees at the very most, ideally closer to 1.5 degrees, now allows governments, companies and individuals to shift focus to executing on national action plans detailing how they intend to decrease national emissions in contribution to the common global goal.
From a fund perspective, we need to consider how we can invest in support of the generally agreed two-degree goal. When looking more closely at all our funds, we can conclude that East Capital’s investment strategy typically results in an active underweight in the energy sector, which translates into lower carbon intensity than the funds’ respective benchmarks. Presenting the East Capital Discovery of the Year Award 2018 to GEM, the largest used batteries and In terms of climate-related risks and rare metals recycling company globally, at their headquarters in Shenzhen, China. GEM is also the opportunities on a company level, we have world’s largest ultra-fine cobalt powder producer, with 20% market share, sourcing 35% of its cobalt included specific questions in our from its own recycling. proprietary ESG Scorecard to help us to understand and consider a company’s exposure and response to climate change within the context of its operations, its In order to increase the level of self-reporting company that demonstrates a clear aim business and its physical locations to make in our markets, we actively engage with to create value for all shareholders by an assessment of the potential financial companies in our portfolios, both through demonstrating strong standards in the area implications in terms of CapEx or OpEx, but letters and/or company meetings, to of corporate governance, and addresses also potentially make adjustments to our highlight the importance of this information the opportunities and risks related to assumptions of future revenues, assets and to investors. We have also been an investor environmental and social concerns. liabilities. Our main limitation to assessing signatory to CDP since 2014, and in addition carbon impact, currently, is the lack of to publicly endorsing their work as widely as In 2018, East Capital decided to present this reliable self-reported emissions data even if we can, we have participated in some of award to Alrosa, the world’s largest producer we start to see companies report according their more specifically targeted company of diamonds. The company is majority to the recommendations from the Task engagements and workshops for reporting. owned by the Russian State and by the Force on Climate-related Financial Republic of Sakha (Yakutia). Typically, state- Disclosures. owned companies are not leaders in terms Best Corporate of corporate governance developments, When looking at our portfolio companies, but we consider Alrosa one of the best 23% of the companies that we have invested Governance Award examples adhering to the highest standards in (measured as % of total AUM) report of corporate governance in emerging relevant emissions data, so our conclusions East Capital firmly believes in recognising markets. The improvement of corporate are still largely our own qualitative exceptional companies in our investment governance has been led by CEO Sergey assessment of the management’s and board’s region through the annual East Capital Ivanov and CFO Alexey Phillipovskiy. Most awareness, understanding and readiness to Awards, which were initially launched in notably, the dividend policy is expected effectively strategies around and manage 2004. The Awards are presented in the to be radically changed to 100% of the free both risks and opportunities related to following four categories: Best Growth, cash flow, and there have been a number of climate change. Our conclusions from our Best IPO, Best Corporate Governance, other achievements, including cost-cutting, ESG Scorecard may lead us to avoid and Discovery of the Year. The “Best disposal of non-core assets and working investing, adjust our level of conviction or Corporate Governance Award” was added capital improvements. reassess our modelling assumptions. to our awards in 2013 — to recognise a
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Active ownership: case basis, in the best interest of clients. tier markets on the African continent and in Follow-up and the results of voting are pre- the Middle East. Our voting activity in Russia Voting sented at team meetings and board meetings. remained the largest with almost half of the proxy voting taking place in Russian compa- Results 2018 nies. Next regions in importance of voting Background Starting in 2017, we decided to formalise our activity were the Balkans (15%), China (10%) The majority of companies in which East voting priorities and now aim to vote at all and Turkey and the Baltics with approxi- Capital invests on behalf of our clients are AGMs and EGMs in all of our most significant mately 8% each. limited liability companies, where the ulti- holdings, defined as our Key Active Positions mate decision-making body is the sharehold- (“KAPs”) and the 10 largest holdings in all Of the votes we cast, the highest number of ers’ meeting. Although a still highly manual, fund strategies. We will also vote in any addi- votes against the management’s proposals complex and costly process, we believe tional holdings where it makes sense and is was in East Capital China Environmental (14% investors can and should exercise their vot- important from a shareholder perspective. of all votes) and East Capital Global Emerging ing rights at annual and extraordinary share- Markets Sustainable (13%). holders’ meetings (AGMs/EGMs) where this During 2018, we voted at 184 AGMs and/or makes sense for their investment. Share- EGMs, in 150 different companies out of a During the year, together with the Russian holder participation in AGMs and EGMs serves total of approximately 335, corresponding to Association of Institutional Investors (API), as a monitoring effect on the company’s man- 50% of the market value of our assets under we continued our dialogue with certain inter- agement and board and instils respect for the management in public equity funds. Histori- national custodians and investors to address highest decision-making body — and ulti- cally, East Capital has focused on voting in the fact that shareholders’ votes are blocked mately the entire governance structure of the Russia, Turkey, the Balkans, the Baltics and from the AGMs/EGMs of Russian companies company. We see voting as one important way the CIS countries. In early 2016, we expanded under US sanctions or in companies where an for us to communicate our views to the com- our voting activities to include shareholder individual named under US sanctions panies and their management. meetings in Asia, as well as certain other fron- appeared among the candidates nominated to the board. Although we note the custodi- East Capital uses an external proxy voting an’s aim to remain compliant with sanctions, platform, which provides an efficient voting Percentage of total AUM voted, % we continue to believe that the very blunt interface towards our custodians who then practice of altogether blocking shareholders forward our voting instructions to the issuer, from voting at such meetings disenfranchises via their sub-custodian network. The platform these shareholders of their right and ability to O Voted 50 is also an important source of information on O Not voted 50 vote on other important matters, such as upcoming AGMs/EGMs and their respective approving dividends, blocking certain nega- agendas, as well as a tool for tracking and tive proposals and electing competent inde- reporting on voted meetings. Given that East pendent directors. Ironically, blocking these Capital’s funds are highly diversified, compris- investors from voting at these meetings actu- ing mainly minority stakes in a large number ally actively assists the sanctioned individuals of markets, we are unable to attend all AGMs/ in getting elected, as all the votes intended for EGMs in person. More often, we vote by proxy the non-sanctioned independent director are or issue a power of attorney and voting never cast at the meeting, allowing the sanc- instructions to someone who can represent Percentage of votes per region, % tioned individual to gain a greater relative East Capital at the meeting. share of the votes actually cast at the meeting. O Russia 47.4 Agendas for upcoming AGMs and EGMs are O Balkans 15.0 sent to each regional team on a weekly basis. O China 10.3 In determining if and how the voting rights O Turkey 8.7 related to a meeting shall be exercised, rele- O CEE 8.4 vant members of the investment team, com- O Baltics 6.0 Further reading: prising research analysts, portfolio managers O Asia 3.3 East Capital’s and portfolio advisors, will consider all availa- O South America 1.0 Voting Policy ble information related to the meeting as well as our own analysis of the specific company, including contacting the company to get fur- ther clarification on specific resolutions. East Fund % of AUM % of AUM % of votes with % of votes against Capital’s general views on typical resolutions voted 2017 voted 2018 mgmt 2018 mgmt 2018 and other ownership-related issues are Balkans 86% 77% 97% 3% described in East Capital’s Ownership Policy. The investment teams will use this policy as a China Environmental 57% 74% 86% 14% basis for deciding on how to vote in a meet- Eastern Europe * 76% 66% 96% 4% ing, while taking into account relevant market Global Frontier Markets 29% 34% 98% 2% specifics. Global Emerging Markets Sustainable - 25% 87% 13% Voting decisions are independently reached Multi-Strategy - 29% 100% 0% within the investment team and East Capital New Europe 72% 71% 97% 3% will not delegate decision making to any third party, although we may take third party rec- Russia * 68% 45% 95% 5% ommendations into consideration. Ultimately, *Voting was attempted in two Russian companies corresponding to an additional 6% of AUM, all voting decisions are made on a case-by- but was blocked due to US sanctions.
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A matter of course
Climate neutral The emissions that we are unable to eliminate Investing in the community are offset by carbon credits in various projects company since 2012 that create renewable energy or have other positive sustainability effects in our invest- Our social contributions to support our East Capital is a climate-neutral company in ment universe. During the years, the projects investment universe are primarily focused on accordance with the UN definition of climate that East Capital has selected have contrib- helping children and young people to ensure neutrality. The Stockholm office pioneered uted to several environmental and social ben- a better future. We prefer to build long term this effort by becoming a climate neutral efits, including: relationships and we actively ensure that any office already in 2010, and as of 2012, all initiative that we support is efficiently run offices are included in emission calculations • Supporting the shift to low carbon renewa- with lasting positive effects that are congru- and our efforts to reduce climate impact. ble energy in Turkey, while the country ent with the aim of our support. Our clear ambition is to actively decrease our meets growing electricity demand through negative climate impact. This means that we wind farms every year calculate our greenhouse gas • Reducing deforestation while improving SOS Children’s Villages emissions, according to the international local health and safety in Uganda through Since 2007, East Capital has been a proud standard Greenhouse Gas Protocol, imple- improved cooking stoves partner of the SOS Children’s Village in ment measures to reduce our emissions and • Increasing biodiversity and carbon seques- Keila, Estonia. SOS Children’s Villages is pro- offset any remaining emissions. Our emis- tration capacity while supporting local viding a loving home to children who do not sions are mainly related to our business employment in Georgia through reforesta- have the opportunity to grow up with their travel and offices. tion using hazelnut forests biological family. SOS Estonia is part of SOS Children’s Villages International, with high During the past couple of years we have The latest project, an investment through an standards in operations, quality control and taken several systematic steps to reduce our impact fin-tech company TRINE is bringing organisation. Throughout these years, we environmental impact and choose more sus- finance to local solar entrepreneurs in have been funding a family with five chil- tainable alternatives where possible. emerging countries. East Capital offset a dren who live with their SOS mother in the Good examples include: total of 2025 tons CO2, which is 3 times the SOS Children’s Village in Keila. Our relation- actual generated emissions in 2018, by invest- ship with the family offers our employees a • Use of video conference calls as the pre- ing in 3 different solar loans in Kenya, India, lot of joy, as we regularly visit the family in ferred venue for most internal meetings Uganda, Nigeria, Tanzania and Myanmar. Keila, and they also have come to Stockholm requiring participation of more than one to stay with us on several occasions. office, limiting unnecessary travel TRINE aims to eliminate energy poverty. The • Use of tablets and software for meeting company seeks to solve this problem by clos- RAOUL notes and materials, to facilitate knowledge ing the gap between private capital in devel- Since 2014, we have been engaging with the sharing and eliminate unnecessary printing oped countries and local solar partners in charity foundation RAOUL in St Petersburg, • Recycling of waste in our offices emerging markets. Using crowd investing, founded in honour of Raoul Wallenberg, • Choosing eco-friendly options when pro- TRINE helps people support solar energy a legendary Swedish businessman and curing office supplies, fruit, beverages and projects, while also delivering a return on diplomat. East Capital is focusing on a special other catering investment. TRINE provides the expertise, project, which aims to help young people • Imposing environmental criteria on our organisation and the platform for enabling with special needs and orphanage graduates suppliers regarding their policies on low- secure investments in carefully selected pro- to enter the workplace. The support involves emission company vehicles jects and bringing finance to local solar education, arranging employment, and pro- • Using only eco-labelled electricity, heating entrepreneurs in emerging nations to elec- vides training in social adaptation and self- and cooling on our business premises trify the world. organisation. Over 1000 young people have • When travelling by taxi, using eco-certified been coached, aiming to enable them to get taxi companies Read more about TRINE on www.trine.com. and retain a job with an official income.
Solar panels installed by Rensource at Sabon Gari Market in Kano, Nigeria’s second largest city. TRINE is bringing finance to local solar entrepreneurs in emerging countries, such as Rensource.
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Contact us
Investor contact
Direct private clients Institutions Phone: +46 8 505 97 777 [email protected] General: Nordics: North America: Sales team Nikodemus Dahlgren Erik Haukaa Phone: +46 8 505 88 555 Phone: +46 8 505 88 684 Phone: +47 22 39 66 91 [email protected] [email protected] [email protected]
Europe and Latin America: Middle East and Asia: Olle Olsson Marcus Åström Phone: +971 4 279 0745 Phone: +971 5 693 27050 [email protected] [email protected]
Our offi ces
Stockholm Hong Kong Moscow Tallinn Kungsgatan 33 9F Wyndham Place Romanov Dvor Business Centre 4 Tartu mnt. 2 Box 1364 40-44 Wyndham Street Romanov Lane, 125009 Moscow Tallinn 10145 111 93 Stockholm Central, Hong Kong Russia Estonia Sweden Phone: +852 2669 6200 Phone: +7 495 380 15 00 Phone: + 372 6406 650 [email protected] [email protected] [email protected] [email protected]
Dubai Luxembourg Oslo Dubai International Financial 11 rue Sainte-Zithe Kronprinsesse Märthas Plass Centre L-2763 Luxembourg PB 1811 Vika, Oslo Level 4, Gate Precinct Building 5 Luxembourg Norway P.O. Box 507035, Dubai Phone: +352 20 882 191 Phone: +47 22 39 66 92 United Arab Emirates [email protected] [email protected] Phone: +971 4 279 0743 [email protected]
www.eastcapital.com
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