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Carnot Capital AG

PRI reporting framework 2020

You are in Direct - Listed Equity Incorporation » ESG incorporation in actively managed listed equities » Implementation processes

Implementation processes

LEI 01. Percentage of each incorporation strategy

01.1. Indicate which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities; and the breakdown of your actively managed listed equities by strategy or combination of strategies.

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
100 %
Total actively managed listed equities 100%

01.2. Describe your organisation’s approach to ESG incorporation and the reasons for choosing the particular strategy/strategies.

Carnot Impact Investing addresses the reduction of natural resource consumption. The focus is on products, technologies and services that conserve natural resources or make more efficient use of them as production factors. Concrete fields of application are the topics of energy and natural resources, which in turn are divided into the four elements fire, water, earth and air.

1) Carnot Impact Investing promotes the reduction of energy and natural resource consumption.

An in-depth financial analysis evaluates the return potential and ensures that financial return is a priority. Positive investment returns and positive societal impacts (ESG, sustainability) are compatible.

2) Carnot Impact Investing prioritizes the financial return with the maximum possible consideration of positive social impacts (ESG, sustainability).

In addition to a value approach with proven financial analysis, as a supervised "Independent Asset Manager of Collective Investment Schemes" and a specialist in equities Carnot Capital uses an active strategy. The value approach based on financial ratios is combined with a sustainability analysis (ESG filter) and extended to a "blended approach" of an active investor.

3) As an equity specialist, Carnot Impact Investing combines a value approach with a sustainability analysis (ESG filter) on the "blended approach" for active impact investors.

The sustainability analysis is not only created through a negative screening (exclusion lists) but also with a positive screening (ESG Rating) qualitatively deepened several times. Furthermore, external effects are included in the qualitative and quantitative reporting by means of an SDG map-ping.

4) Carnot Impact Investing uses an SDG mapping to document the sustainability of external effects of selected portfolio companies in a qualitative and quantitative reporting.

01.3. If assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]


LEI 02. Type of ESG information used in investment decision (Private)


LEI 03. Information from engagement and/or voting used in investment decision-making (Private)


(A) Implementation: Screening

LEI 04. Types of screening applied

04.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

Exclusion lists (top down) & ESG screening (bottom up):
• Sustainable ESG rating at the company level or your SRI MSCI report at the fund level
• Active selection for the area E = Environment
• S = Social and G = Governance partially active
The application of the ESG sustainability analysis is implemented in the investment process.

Screened by

Description

Exclusion lists (top down) & ESG screening (bottom up):
• Sustainable ESG rating at the company level or your SRI MSCI report at the fund level
• Active selection for the area E = Environment
• S = Social and G = Governance partially active
The application of the ESG sustainability analysis is implemented in the investment process.

04.2. Describe how you notify clients and/or beneficiaries when changes are made to your screening criteria.

Carnot reports with its annually Impact report to its clients/beneficiaries and to the public:

Carnot Impact Investing is a blended approach, which differentiates itself through the combination of financial as well as social and environmental performance. The positive effects (impact) are created in six steps:

1. Topic of energy efficiency

2. Controversial activities (ESG top-down analysis)

3. Financial analysis

4. Sustainability (ESG bottom-up analysis)

5. Impact validation

6. Engagement

In the appendix, the report is supplemented by examples, external reports on sustainability and the carbon footprint as well as information on Carnot Capital memberships and publications.


1. Topic of Energy Efficiency

The Carnot Efficient Energy Fund invests exclusively in companies with products, services and development projects that reduce energy consumption. The reduction of energy consumption must be part of a company’s strategy. Such companies can be found in the building technology, industry and transport sectors. Some portfolio companies also generate revenue from renewable energy products, which is shown separately in the following overview:

Fields of Activity of the Portfolio Companies (Measured by position sizes) as of 31/12/2019:
BUILDING TECHNOLOGY (36.7 %): ✓Heating ✓Cooling, ventilation ✓Windows, doors ✓Elevators ✓Smart buildings ✓Lighting✓ Planning INDUSTRIALS (28.6 %): ✓Energy supply ✓Automation ✓Internet of things ✓Energy storage ✓Fluid control ✓Engineering
TRANSPORT (26.9 %): ✓Lightweight construction ✓Down sizing ✓E-mobility ✓Batteries ✓Rail transport ✓Sea freight
RENEWABLE ENERGY (7.6 %): ✓Hydro power ✓Wind energy ✓Waste to energy ✓Energy from biomass

2. Controversial Activities

Potential portfolio companies are examined for controversial activities and excluded if necessary due to their negative impact (negative screening). For certain activities, a low turnover tolerance threshold is applied.

3. Financial Analysis

In our opinion, sustainability and the impact are only guaranteed if the company has a solid financial basis. We expect a) a strong balance sheet, b) an economic benefit of the products for the buyers, c) a good return on capital employed (ROCE). A high ROCE promotes growth and innovation, which in turn reinforces the positive impact.

4. Sustainability Analysis

In the sustainability analysis of portfolio candidates, we investigate the strategic significance of sustainability and assess a) environmental (products, production, supply chain), b) social (suppliers, employees, employer, customers) and c) corporate governance issues.

5. Impact Validation

a) Addressed Sustainable Development Goals (SDGs)

The portfolio companies make it possible to reduce energy consumption and thus make a decisive contribution to the United Nations Sustainable Development Goals (SDGs). The main goals addressed are “Affordable and Clean Energy” (# 7) as well as “Climate Action” (#13). Furthermore, the portfolio companies contribute to modern infrastructures and cleaner industries (# 9), make transport systems more sustainable (# 11) and support the decoupling of economic growth and environmental degradation (# 8). Some portfolio companies have additional effects in terms of further development goals. In our impact measurement, we consider the share of revenues of the relevant products as well as their effectiveness. We map the results according to companies and development goals in an impact heatmap.

b) Portfolio Share of Impact Companies

The strict focus on energy efficiency means that all positions have a positive environmental impact (excluding cash portion).

c) Share of Revenues of Companies with Impact Products

In our impact analysis, we determine which part of a company’s revenue has a positive impact. On average, the portfolio companies generate more than half of the turnover with products, services and projects with a positive impact. A fund investment of CHF 1 million accounts for approximately CHF 0.5 million of revenues with a positive environmental impact. Part of this revenue has a social impact at the same time, as outlined (SDGs 9.4 und 11.2).

d) Research & Development of Impact Products

A significant positive impact results from the research and development expenses of the portfolio companies. Measured by the turnover of the companies, the expenditure amounts to more than 5 %. On a fund investment of CHF 1 million, several tens of thousands of francs of development expenditure are spent to improve energy efficiency.

6. Engagement

If the Carnot Impact Analysis reveals questions (e.g. on corporate governance) or suggestions for improvement (e.g. on the impact reporting of the company), Carnot uses its contacts to the management level and address these commitment issues personally (Opened engagement initiatives 8, Closed cases 5, Pending cases 7).


LEI 05. Processes to ensure screening is based on robust analysis

05.1. Indicate which processes your organisation uses to ensure ESG screening is based on robust analysis.

05.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your ESG screening strategy.

05.3. Indicate how frequently third party ESG ratings are updated for screening purposes.

05.4. Indicate how frequently you review internal research that builds your ESG screens.

05.5. Additional information. [Optional]


LEI 06. Processes to ensure fund criteria are not breached (Private)


(B) Implementation: Thematic

LEI 07. Types of sustainability thematic funds/mandates

07.1. Indicate the type of sustainability thematic funds or mandates your organisation manages.

07.2. Describe your organisation’s processes relating to sustainability themed funds. [Optional]

Since 2007, the sustainability approach of the Carnot Energy Efficiency Fund has been based on reducing energy consumption. Since 2015, the same process has been used for positive screening (ESG bottom up) for the Carnot Efficient Resources Fund. The investment process focuses on resource efficiency through the active selection of companies that produce products or services that can reduce the consumption of natural resources.

To prove the impact of a company and make it comprehensible, a “Logic Model” is used to connect the company and its products, services and projects to its impact. This model is divided into 5 steps:
1. Input:
On the one hand, input refers to financial, human or other resources that are invested in products, services or projects. But part of the inputs are also concepts (e.g., mission, exclusion lists) that define the goals and direction of services or projects.
2. Activities / Process: Planning, developments and fabrication processes, which serve to achieve the goals and are implemented based on the input.
3. Output / Benefit: Output is understood as the direct result of the combination of input with the activities and processes of a company. These are quantifiable services such as products, services or projects. The performance is measured primarily by means of financial indicators.
4. Outcome / Effect: The outcome comprises the effects of products, services or projects that are implemented by the target groups and can be derived from the output.
5. Impact: On the other hand, are the effects of products, services or projects that go beyond the effects on the target groups. These can be effects in the surroundings of the target groups, on the social level or their environment.
Conclusion: Impact Measurement covers those effects (outcome) that a company triggers on the target groups through its output, but also longer-term effects (impact) that relate to the entire society or the state of the environment, which are not the direct addressees of the products, services or projects.

Impact-Analysis via Questionnaire

A systematic review of the impact portfolio companies via a set of questionnaires (impact analysis, sustainability analysis, engagement priorities) captures the positive as well as negative effects qualitatively.

The following four questions are answered using the questionnaires:

1. Are environmental (E) and social (S&G) risks reduced?

2. Is a financial return being generated?

3. Are environmental and social opportunities being pursued?

4. Does the company focus on measurable solutions with strong impact?

 

Reduction of environmental (E) and social (S&G) risks.

The first question concerns the strategic direction of the company, in which the fundamental willingness of the entire organization incl. Management is questioned: Are there mission-oriented business goals for environmental (E) and social (S & G) problems?

Answer: A company's strategy clearly shows how the business model targets specific positive social and / or environmental impacts.

Indicators:

• Strategy

  o Mission / Goals / Intentions

• Products & Services

  o Does the company have technology, or does it provide a service that reduces the consumption of natural resources or energy?

  o Does this technology or service bring economic benefits (payback)?
  o Does this technology or service account for at least 20% of the enterprise value of the company?
  o Regarding energy efficiency: is the company in one of the target sectors of building technology, industry or transport?
 
• Projects

 

Generating financial returns

The second question concerns the financial orientation of the company: Are there clear financial return targets and are these goals achievable?

Answer: The financial potential of the company meets the minimum criteria (ROCE & EV / EBIT) for quality and evaluation.

Indictors:

• Quality: o Indebtedness, debt ratio
  o Return on capital employed (ROCE)
 
• Ratings & Valuations: o Low EV / EBIT
  o Opportune P/E
  o Attractive dividend yield

 

Pursuit of environmental and social opportunities

The third question concerns the focus on sustainable corporate governance: Do ESG goals flow into everyday operations and are they reported?

Answer: The sustainability potential of the company meets at least half of the industry average (purchased ESG analysis from Vontobel Asset Management AG) as well as the exclusion criteria.

Indicators:

• Industry contribution o Environmental footprint: Resource consumption, emissions, waste
  o Social footprint: Working conditions, potential for social conflicts
 
• Business contribution o Environment: Supply chain, production, products
  o Social: Suppliers, employees, society, clients
  o Management
 
• Exclusion criteria o Arms
  o Nuclear energy
  o "Green" gene technology
  o Tobacco, Alcohol
  o Gambling
 
• Active selection for the area E = Environment
• S = Social and G = Governance; are not selected at first.

 

Focus on measurable solutions with strong impact

The fourth question concerns the direction of the company: Can the positive environmental or social contribution be disclosed and measured in relation to the company's objectives?

quantified on the selected SDGs (see chapter 6 Carnot Impact Mapping Tables)?

Answer: The impact on the selected SDGs is determined by the impact measurement, using primarily indirect and qualitative indicators. Quantitative goals derived from output are traditionally determined through traditional performance metrics.

Quantitative targets (performance measurement)

Indicators:

• Sales of dedicated products
• Number of people (i.e. clients, their families, neighbours) who are being reached / cared for
• Investment into research, development and innovation

• Other quantitative sources of information o Annual financial statement

  o Social and environmental report

  o Environmental balance sheet

 

Mixed Quantitative and Qualitative Objectives (Impact Measurement)

Indicators:

• Outcome o Efficiency; ROI
  o Follow-up investments
  o Reduction of ESG-risks
 
• Impact o Decreased usage of energy and resources (SDGs 2,3,6,8,12,14)
  o Climate change (SDG 13)
  o Better infrastructure (SDGs 9 & 11)

 


(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the proportion of actively managed listed equity portfolios where E, S and G factors are systematically researched as part of your investment analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]


LEI 09. Processes to ensure integration is based on robust analysis

09.1. Indicate which processes your organisation uses to ensure ESG integration is based on robust analysis.

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

09.5. Describe how ESG information is held and used by your portfolio managers.

09.6. Additional information. [Optional]


LEI 10. Aspects of analysis ESG information is integrated into (Private)


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