SUSTAINABILITY INTEGRATION

Our Sustainability Objectives

Sustainability is tightly woven into Power Sustainable Investment Management’s Inc.’s investment philosophy and process. Through our investments in select quality and sustainable companies, we promote:

• Decarbonization – accelerating the transition to a low-carbon economy and the creation of affordable clean energy.
• Smart Society – accelerating the transition to a more innovative, equitable, better educated, and informed society.
• Quality Growth – upgrading the consumer’s experience and long-term benefit while also supporting communities and the environment.

The Investment Team seeks to promote the above sustainability objectives (“Objectives”) by overweighting the product’s portfolio with issuers that are believed to help promote the Objectives. The assessment of the level of alignment of every issuer in the active pool with each of the Objectives is assessed at least annually through the proprietary sustainability scorecard.

Sustainability in the Due Diligence Process

We perform an initial selection, screening out companies involved in tobacco, armaments, gambling, and thermal coal. We have a zero (0) percent direct exposure threshold (as percentage of total revenue) and we tolerate up to ten (10) percent of revenue generated from the sale of products and services to direct exposure companies (i.e. indirect exposure threshold). Where indirect exposure is found and an investment has been made in the company, the investment team will actively engage with the company’s management to reduce the exposure, and divestment may occur if engagement outcomes are not satisfactory. A sustained breach of the indirect exposure threshold (i.e. two consecutive reported quarters above the threshold) will trigger a complete divestment. Companies with severe controversies will also be excluded from the active pool and, if the company is already in the fund when the controversy is uncovered and engagement with the company yields unsatisfactory outcomes, the position will be liquidated.

We then analyze and retain the most attractive investment opportunities based on an initial set of financial factors. The resulting pool of companies undergo a deep financial and sustainability analysis, using our proprietary sustainability scorecard.

The scorecard is used to measure an issuer’s performance on a number of key sustainability issues that, in turn, provide insight on how the company aligns with the aforementioned Objectives. Sustainability issues range from greenhouse gas emissions to employee training and business ethics. The performance on any given sustainability issue is assessed using at least one sustainability metric or qualitative assessment. Every company in the active stock pool is compared against local peers, industry best practice, and against past self, to assess the quality of risk management for each sustainability issue. An overall assessment score from 0 to 10 (10 being the best) is determined and is updated any time there’s significant development around a sustainability issue covered by the scorecard.

ADVERSE IMPACT

Consideration of Principle Adverse Impacts of Investment
Decisions on Sustainability Factors

Principal adverse indicators – diligence phase

We consider principal adverse impacts of investment decisions on sustainability factors. We evaluate for each company the revenue streams that may adversely impact the environment and communities, within the definition of Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment and amending Regulation (EU) No 2019/2088 (the “Taxonomy Regulations”), and with respect to:

• Climate change mitigation
• Climate change adaptation
• Sustainable and protection of water and marine resources
• Transition to a circular economy
• Pollution prevention and control
• Protection and restoration of biodiversity and ecosystems.

We perform due diligence on the investments within our universe on an ongoing basis. This process evaluates a variety of factors, including an assessment of the proposed investment against the following non-exhaustive list of sustainability indicators:

• Greenhouse gas emissions;
• Carbon footprint;
• Exposure to companies active in the fossil fuel sector;
• Share of non-renewable energy consumption and production;
• Energy consumption intensity per high impact climate sector;
• Activities negatively affecting biodiversity-sensitive areas;
• Impacts on water sources;
• Hazardous waste production ratio;
• Violations of / lack of processes to monitor compliance with UN Global Compact principles and Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises;
• Unadjusted gender pay gap;
• Board gender diversity; and
• Exposure to controversial weapons (anti-personnel mines, cluster munitions, chemical weapons and biological weapons).

Non-availability of data: We use reasonable efforts to obtain the required data. If the data is not readily available, this shall be recorded instead of the quantitative data point.

Non-relevance of sustainability metrics: We may conclude, using reasonable judgment, that a particular metric is not relevant to the assessment of a proposed investment, given the asset class of that proposed investment or the proposed investment strategy. For example, for liquidity and cash management purposes, the portfolio may hold a very small position in cash or cash equivalents, which have no sustainability metrics. In instances where we reach the conclusion that sustainability metrics are not relevant, that conclusion shall be recorded instead of the quantitative data point.

Recording sustainability metrics: Raw sustainability data is stored in our internal databases received from vendors. Specific metrics are used for different analyses across the sustainability evaluations This data is saved both in its original form and in an adjusted form that has been produced from further analysis that is suitable for comparing sustainability metrics across the investment pool. Both forms are available to the portfolio managers and research analysts, but only the final form is used when making investment decisions.

This analysis then feeds into the investment phase, as outlined, below.

Principal adverse impacts – investment phase

After completing the adverse impact assessment, the investment process now concludes with an evaluation and extent of the merits of the proposed investment.

Significant impact – We seek to ensure that investments of the strategy have an appropriate aggregated sustainability score on our proprietary sustainability scorecard. Sustainability metrics that are susceptible to have a material impact on investment value are accounted for within our model, which has been tested and vetted by both the research and portfolio management teams. We seek to ensure that all investments have a sustainability score of at least 7 out of 10 on their sustainability scorecard. If the conclusion is that there is a significant adverse impact because a negatively scoring investment must be held for risk or investment purposes, the intention is to make off-setting investments to balance or hedge the adverse impact on the relevant sustainability indicator. However, we have complete discretion as to what mitigating actions to take. We will record what mitigating actions, if any, are appropriate given the circumstances. We closely monitor investee companies on core sustainability performance, based on the and individual investments’ sustainability score year-over-year. Potential significant harm is assessed throughout the investment process using expert judgement based on both qualitative and quantitative data and integrating EU taxonomy guidelines. If a material negative development in any of the core metrics is identified, we will re-assess an individual investment’s sustainability score in light of the new information and will act accordingly if the score changes substantially, including potential divestment.

No significant impact – If the conclusion is that there is no significant adverse impact, then that shall be recorded in our internal databases.