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Sycomore Asset Management

PRI reporting framework 2020

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

ESG incorporation in actively managed listed equities

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%
49 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
17 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
34 %
Total actively managed listed equities 117%

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

Integration alone (49% of listed equity AUM)

All the companies included within our long-only investment universe are analysed on the basis of our fundamental and integrated SPICE research model, described above and details of which are provided in chapter 2. Following this analysis process, each company is allocated a rating ranging from 1/5 for the weaker scores to 5/5 for the highest. As part of our company valuation models, this rating has an impact on our calculation of target prices: it adjusts by +/- 20% the risk coefficient (beta) used to calculate the weighted average cost of capital (WACC) and the discount rate for future financial cashflows, thereby impacting the company’s financial valuation. In addition to this integrated research capability, our analyst-fund managers can adapt their key estimates (sales, profitability, tax rate, capex) based on quantifiable metrics covering environmental, social or societal issues. As far as bond funds are concerned, the SPICE rating also provides a foundation for company research, as it reflects their degree of resilience and therefore their ability to pay off debt. To summarise, “sustainable development” factors are embedded within the research conducted on each individual stock and drives our investment decisions.

All long only, credit and flexible funds are managed using valuation data that includes companies’ SPICE ratings, yet their investment universe carries no restrictions in relation to SPICE criteria. This systematic integration offers more meaningful insights into the risk/return combination and has an impact on investment decisions.

Integration and screening (17% of listed equity AUM)

Beyond the integration of the SPICE rating to the assessment of companies' target prices, SRI-labelled funds (French SRI label and Belgium Towards Sustainability label) and SRI mandates apply screenings aimed at selecting companies on the basis of specific “sustainable development” criteria. Some funds have also received environmental labels (the French Greenfin and the Austrian Umweltzeichen labels).

Integration, screening and thematic (34% of listed equity AUM)

Sycomore Shared Growth, Sycomore Happy@Work and Sycomore Eco Solutions are thematic funds that combine ESG integration and screening strategies, which are common to all SRI funds at Sycomore, with thematic strategies based on societal impact, human capital and the ecological and energy transition respectively. Sycomore Selection Responsable and the mandates that follow the same investment strategy than Sycomore Selection Responsable are also included in this figure as they follow a multi-thematic strategy: more than 80% of the portfolios have a positive societal or environmental contribution. 

 

 

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

02.1. Indicate what ESG information you use in your ESG incorporation strategies and who provides this information.

Type of ESG information

Indicate who provides this information  

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

          We may use a network of experts (Third Bridge/GLG) to talk to company stakeholders. We may also interact with academia and/or NGOs.
        

Indicate who provides this information 

02.2. Indicate whether you incentivise brokers to provide ESG research.

02.3. Describe how you incentivise brokers.

Every year, the fund management team ranks brokers it works with on a number of issues. In the broker evaluation model, there is a specific score allocated to ESG research. Hence, brokerage fees also depend on the quality of ESG research they provide.

Our ESG analysts also participate to sectorial presentations provided by brokers: this is an opportunity we also use to ask them questions on ESG criteria, incentivising them to include these dimensions into their research.

We select brokers for the quality of their ESG research.

02.4. Additional information. [Optional]


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

03.1. Indicate whether your organisation has a process through which information derived from ESG engagement and/or (proxy) voting activities is made available for use in investment decision-making.

03.2. Additional information. [Optional]

Sycomore AM works with ISS to cast its votes. Portfolio managers have access to the platform and are regularly informed and consulted on votes at companies held in their portfolio. 

Sycomore AM developed an engagement database, integrated to the analysis and valuation tool shared by the portfolio management team, whereby all engagement-related information is tracked and stored and may impact the final ESG (SPICE) stock rating. 


(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

1. Exclusion of all controversial weapons for all investments

In line with the Oslo and Ottawa conventions, Sycomore AM excludes any investment in controversial weapons.

2. Exclusion policy for SRI funds

It also excludes any investments in companies involved in controversial weapons. For SRI funds, we do not invest in companies that derive more than 5% of their revenue from the following activities: production of weapons or weapon systems as well as weapon support and services, GMOs, tobacco products, coal extraction, coal heat and power generation, unconventional oil and gas extraction, conventional oil extraction, nuclear industry, oil extraction from tar sands, oil extraction through hydraulic fracking, shale gas extraction. Utilities companies that have a carbon intensity of the energy generation above 408 gCO2/kWh and companies whose activities clearly infringe the UNGC are also excluded.

3. Negative screening for SRI funds

Please see our Transparency Code for SRI listed equity funds that describe negative screening criteria in details : 

https://en.sycomore-am.com/5e4a5cb9-5._SYCOMORE_-_SRI_equity_funds_-_AFG-Eurosif-FIR_Transparency_Code_2019_ENG.pdf

 

 

Screened by

Description

All our SRI funds apply positive/best-in-universe screening. Exclusion criteria as well as selection criteria from our SPICE fundamental analysis model are defined for each fund according to each fund's objective. 

The details of these criteria are given chapter 4 of our Transparency Codes: 

  • SRI equity funds: https://en.sycomore-am.com/5e4a5cb9-5._SYCOMORE_-_SRI_equity_funds_-_AFG-Eurosif-FIR_Transparency_Code_2019_ENG.pdf
  • SRI bond and multi-asset funds: https://en.sycomore-am.com/5dcc39e9-5dc5393c-5._SYCOMORE_-_SSC_fund_-_AFG-Eurosif-FIR_Transparency_Code_2018_ENG-OCT_2019.pdf

 

Screened by

Description

Sycomore AM's SRI funds will not invest in companies that contravene international norms: any company involved in a major controversy is excluded from our SRI funds investment universe. 

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

For all our SRI funds, negative and positive selection criteria have been established and clearly communicated to clients and/or beneficiaries through the prospectus, the transparency codes and the commercial documentation. Some changes have been made since the creation of each SRI fund in order to better reflect the SRI positionning of each fund: for example, in 2019, we revised the SPICE exclusion score from 2.5/5 to 3/5 for the fund Sycomore Eco Solutions. In the case of such minor changes, clients and/or beneficiaries are informed by our commercial team and through the update of our commercial documentation as well as the transparency codes. In case some changes are made in the prospectus, a dedicated letter would be sent to the clients and/or beneficiaries. 

 


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.

          The robustness of our ESG analysis is also ensured through meetings with companies: OtO meetings or specific interviews enable to complete our 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.

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

05.5. Additional information. [Optional]

ESG analysis of Sycomore AM's investment universe is led by the 7-people ESG team with the input of the other 15 analysts/fund managers. All investment professionals share the same investment tool named SYCOVALO. In that regard, every investment professional is responsible for the ESG analysis of companies he or she covers. This ensures an on-going quality review by professionals whose analysis is directly impacted by ESG criteria and analysis.

We update our ESG analysis on a regular basis according to the newsflow we collect and the meetings we have with companies. We perform complete updates of ESG screenings every two years for companies within our investment universe. 

Since 2016, we set up an independent expert committee, the Environment committee, focusing on the Environment pillar of our ESG analysis methodology. The committee is composed of around ten members with various backgrounds, selected for their expertise (academics, consultants, executives of private companies, writers, investors, board members, etc.). They meet twice a year. They aim at enriching our approaches with external reviews and help us improve our tools and methodologies. We also take the opportunity of these committees to share our views on news topics (environmental controversies, regulation changes, etc.). The investment process and the porfolio of our thematic fund Eco Solutions is also challenged by this committee. 


LEI 06. Processes to ensure fund criteria are not breached

06.1. Indicate which processes your organisation uses to ensure fund criteria are not breached.

06.2. If breaches of fund screening criteria are identified, describe the process followed to correct those breaches.

The risk management team performs a monthly check on SRI funds to ensure that all stocks held meet the funds' screening criteria. A monthly alert is sent by email to the fund's management team:  in case of a breach, the investment team has 5 days to make observations or correct the situation, should the breach be due to outdated or incorrect information. 
If the breach is confirmed, due to an update of the ESG analysis or a severe controversy (level 3 out of 3, triggering exclusion from SRI funds), the stock must be divested within 3 months. 

The internal control team is in charge of verifying that, in case of a breach highlighted in the monthly alert, corrective actions are taken.

Automated IT systems block any investment in excluded stocks as defined by our SRI exclusion policy. 

External audits are performed on all our SRI funds and covering all our SRI procedures and processes once a year by EY as well as Ethibel in the context of the French and Belgium SRI labels. 

 

 

 

 

06.3. Additional information. [Optional]

We have a specific portfolio construction tool for each SRI fund to screen companies of the database that pass our exclusion and selection filters and thus are eligible to our SRI funds.


(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]

Sycomore Shared Growth

The fund aims to invest in companies that have a positive impact on society. The stock selection process takes into account two dimensions of societal impact: the societal contribution of goods and services, which reflects how a company’s business is aligned with major societal issues, and corporate citizenship, which reflects how a company conducts its business and the more or less positive externalities that these choices entail for society. 

When assigning a rating for the societal contribution of goods and services, we review the company’s sales revenue in order to assess the contribution of each business line to the four pillars that we have defined : Access & Inclusion, Health & Safety, Human and Economic Progress and Employment. These pillars cover the priorities defined in the UN Sustainable Development Goals as well as broader human development themes.

The corporate citizenship grade is based on 7 qualitative criteria, such as business ethics, tax responsibility, relationships with local communities..., identifying both risks and opportunities arising from corporate behaviour. 

 

Sycomore Eco Solutions

We concentrate on businesses and sectors that interact strongly with the environment and analyse the environmental impact of each company's products and services. Therefore, Sycomore Eco Solutions focuses on five key areas: mobility and transport, the circular economy, renovation and construction, energy production and management, and ecosystem-related businesses. Our proprietary methodology relies on an environmental quantification process that measures, for each business, the extent to which companies align with the energy and environmental transition. The fund may invest only in companies that have a positive Net Environmental Contribution.

Also, the fund systematically steers clear of businesses that destroy natural capital. The investment approach is based on strong exclusion criteria (coal, intensive farming, minimum ESG rating...) and on a strategic stock selection process.

In addition to SRI labels, the fund has the French environmental label Greenfin. 

Sycomore AM also set up a strategic environment committee of experts with academic, institutional, corporate and NGO backgrounds. This committee is a venue for members to exchange critical and constructive views on complex environmental issues.

 

Sycomore Happy@Work

Sycomore Happy@Work was launched in 2015. It aims to invest in companies that recognise employee engagement and well-being as a key performance driver (several studies indicate that well-being at work reduces absenteeism, work accidents, turnover and drives creativity, engagement, sales and productivity).

We have identified five key pillars that enable employee happiness and engagement, at an individual level: equity, autonomy, sense of purpose and meaning, evolution and development and a good working environment.

A full assessment includes:

  • an analysis of how companies perform on the five pillars and how it is organised to manage human capital,
  • an assessment of other ESG metrics, since a minimum ESG score is required for a company to be eligible to the fund.

It is based on:

  • public documents and meetings with operational management (Human Resources teams for example) where we seek both quantitative and qualitative information,
  • on-site visits and employees’ interviews when possible for small companies when representative and relevant,
  • interviews of experts and ex-employees,
  • anonymous testimonies on specialized websites,
  • controversies assessments related to human capital management.

Sycomore Selection Responsable and mandates following the same investment strategy: 

Sycomore Sélection Responsable is a conviction-driven SRI multi-thematic fund. This concentrated portfolio invests in companies for their sustainability credentials, with a particular focus on those whose products and services contribute positively to solving environmental and social challenges in keeping with the Sustainable Development Goals (SDGs). Three criteria are used for stock selection: Net Environmental Contribution (NEC), Societal Contribution (SC) and SPICE Leadership. As a result, around 80% of the portfolio is exposed to companies that have a positive environmental or social contribution.


(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]

Sycomore AM has developed a proprietary methodology to store information, analyse, screen, score and monitor companies from an ESG standpoint. The SPICE (Suppliers & Society, People, Investors, Clients and Environment) analysis and scoring tool is composed of 80 criteria fully integrating ESG. The ESG team is mainly responsible for inputing ESG data in the database but the other mainstream fund managers also input ESG information in the database and use relevant ESG information.


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.

          The robustness of our ESG analysis is also ensured through meetings with companies: OtO meetings or specific interviews enable to complete our 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.

09.4. 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.

          The final ESG rating of an issuer impacts its beta in our financial valuation tool SYCOVALO.
        

09.6. Additional information. [Optional]

Please see previous information provided on Sycomore AM's internal database SYCOVALO where all financial and extra-financial information are disclosed.

Our ESG integration strategy is reviewed on a regular basis in order to reflect the best practices and to ensure the last evolution of ESG issues are captured in our analysis. As an example, in 2019, we reviewed our Environment pillar to split our analysis into three dimensions: transition risks, physical risks and environment integration and strategy.


LEI 10. Aspects of analysis ESG information is integrated into

New selection options have been added to this indicator. Please review your prefilled responses carefully.

10.1. Indicate which aspects of investment analysis you integrate material ESG information into.

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

10.2. Indicate which methods are part of your process to integrate ESG information into fair value/fundamental analysis.

10.3. Describe how you integrate ESG information into portfolio weighting.

Sycomore AM integrates ESG criteria across all its investments, according to the following 3-step approach:

1. Each company’s beta is automatically adjusted in our valuation model according to the stock’s ESG and fundamental analysis. It can be adjusted from -40% to +40% depending on the risks and opportunities we identify in our analysis.

2. If a company has a poor ESG and fundamental analysis score, we will require a higher margin of safety.  

3. ESG and fundamental analysis has a direct impact on portfolio construction as it adjusts the target weight of each stock in the portfolio.

For our SRI funds, a specific portfolio construction tool allows us to screen companies in our initial investment universe that respect all our exclusion and selection criteria.

10.4. Describe the methods you have used to adjust the income forecast/valuation tool.

Each company’s beta is automatically adjusted in our valuation model according to the stock’s ESG and fundamental analysis. It can be adjusted from -/+40% depending on the risks and opportunities we identify in our analysis.

10.5. Describe how you apply sensitivity and /or scenario analysis to security valuations.

Our Net Environmental Contribution (NEC) methodology partly relies on scenario analysis.

10.6. Additional information. [OPTIONAL]


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