The content on this page is marketing communication
Sustainability Related Disclosures
SKAGEN AS manages the SKAGEN Funds on behalf of Storebrand Management AS. This text provides detailed sustainability-related disclosures regarding SKAGEN's equity products that are categorised as Article 8 as provided in Article 32 of the Sustainable Finance Disclosure Regulation Level II proposal text from the European Supervisory Authorities. These products are namely SKAGEN Global, SKAGEN Kon-Tiki, SKAGEN Vekst, SKAGEN m2, SKAGEN Focus and their respective share classes (hereafter referred to as the products/ SKAGEN's equity funds). As these products all adhere to the same ESG Integration Strategy for their individual investment mandates, the following disclosure applies to each of these products. Responsibility for execution of the following disclosure in SKAGEN's equity funds falls to the respective portfolio manager of the product together with SKAGEN's ESG team.
SKAGEN's equity funds adhere to an ESG Integration Strategy throughout the investment lifecycle. The ESG Integration Strategy is intended to enhance the overall investment objective of each product mandate; namely to provide the best possible risk-adjusted returns to unit holders. While the equity funds each have their own particular mandate and investment strategy, the same four ESG pillars apply to each of the investment cases they identify. These four pillars consist of:
- Exclusion of investments in a range of non-sustainable products, businesses and activities
- Enhanced due diligence for companies in high-emitting industries
- ESG integration through dedicated factsheets
- Active ownership
The Sustainable Investment Policy, embedded at Board level, binds all SKAGEN products to its principles, which in turn builds on broader Storebrand Group level policies. The ESG Integration Framework puts these binding guidelines into practice, meaning that SKAGEN's equity funds promote environmental and social characteristics, but do not have sustainable investment as their objective. SKAGEN is a signatory to the UN PRI and commits to invest according to its principles. The UN PRI is also an important point of reference for implementing good governance assessments in our investment activity. SKAGEN's Sustainable Investment Policy also makes specific reference to the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. Systematic breaches of the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights that are not addressed by a potential investment will constitute a breach of good governance practice. SKAGEN screens for potential violations of the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human rights in several stages of the ESG Integration Strategy.
SKAGEN's equity funds manage environmental and social factors by applying binding elements throughout the investment process. Exclusion and negative screening of a range of non-sustainable products, businesses and activities are the first steps deployed to assess the environmental and social characteristics of an investment. Second, when constructing an investment thesis, environmental, social and governance characteristics are collected, measured, and assessed, at the same time as an enhanced due diligence is carried out on the climate risk of companies in high-emitting sectors. Third, ESG factsheets are compiled for each fund to provide deeper insights into material ESG factors at investment level, supported by a traffic light model to indicate the estimated degree of ESG risks or opportunities. The product assesses the double materiality of environmental and social characteristics that are of relevance at investment level. Lastly, active ownership through dialogue, engagement and voting is a lever that is deployed by the products to monitor and engage with investees. Double materiality considerations are continuously assessed. If salient sustainability risks (harm to investment) or principle adverse impacts (potential harm by investing) do not show signs of improvement, the holding in an investee company will ultimately have to be divested should the investee company fail to mitigate these. Quarterly checks and controls of the products are conducted by SKAGEN's ESG team to monitor developments of events and general exposure, to ensure alignment with the Sustainable Investment Policy of the entity and broader Storebrand Group.
2. No sustainable investment objective
The financial products promote environmental or social characteristics, but do not have sustainable investment as their objective.
3. Environmental or social characteristics of the financial product
SKAGEN's equity funds (the products) promote environmental and social characteristics because they deploy an ESG Integration Strategy throughout the investment process. The ESG Integration Strategy consists of four pillars to execute the investment selection process and exercise ownership rights. The first pillar of the strategy is negative screening and control of potential investments, the second is an enhanced due diligence of companies in high emitting sectors*, the third is ESG integration through dedicated factsheets, whilst the fourth and final pillar is active ownership.
* Energy equipment & services, oil, gas & consumable fuels, chemicals, construction materials, containers & packaging, metals & mining, paper & forest products, industrial conglomerates, machinery, environmental & facilities services, transportation, automobiles, food products, utilities, real estate segments focusing on data centres and industrial real-estate.
4. Investment Strategy
The Investment Manager’s ESG investment strategy is as follows:
The Investment Manager is required to communicate all potential investments to the Investment Manager's ESG team for approval. The Investment Manager's ESG team will conduct a screening process (negative screening) to check whether potential investments fall under the exclusion criteria of the Investment Manager’s sustainable investment policy (entity level) which aligns with the broader Storebrand Asset Management Sustainable Investment Policy at group level. If the exclusion criteria (at entity level and at group level) apply to an investment ,the Sub-Fund may not invest in the company and the potential investment will be rejected during the screening phase. Moreover, the Sub-Fund’s investments are subject to quarterly screening controls to ensure their continued alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights and that they do not fall under the Investment Manager’s exclusion criteria.
Second, the Investment Manager’s ESG team with support from the portfolio manager is required to draw up a dedicated ESG factsheet for the potential investment, identifying material ESG and PAI information and presenting potential efforts on how to manage ESG and PAI associated risks – or undervalued opportunities – through active ownership or other investment-related actions. Here, contextual and relevant ESG factors are tied to the investment thesis. The degree of ESG risk of each investment is assessed using a traffic light model, where short-term results and the extent of engagement increases in step change with the level of risk. To avoid conflicts of interest, it is the task of the ESG team to determine the traffic light assessment of a potential investment. In response to this, the portfolio manager, in collaboration with the ESG team, must articulate a clear plan for environmental and social risk mitigation. The portfolio manager must also specify the financial considerations that have been made on the back of the ESG profile of the investment in question. Investments with ESG risks that fail to be mitigated following escalation strategies, will be excluded as this will be deemed a thesis violation.
The Investment Manager is a signatory to the UN PRI and commits to invest according to its principles. SKAGEN's Sustainable Investment Policy also makes specific reference to the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. Systematic breaches of the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights that are not addressed by a potential investment will constitute a breach of good governance practice. Amongst other things, we assess sound management structures, employee relations, remuneration of staff and tax compliance, allocating breach flags as needed in the products' quarterly portfolio screenings which are carried out according to the UN Guiding Principles on Business and Human Rights. Potential breach flags will lead to further investigation by the ESG team and the respective portfolio manager. Compliance with global norms is embedded in SKAGEN's exclusion criteria, and breaches will be evaluated to determine potential exclusion of the company in question.
5. Proportion of Investments
As SKAGEN's equity funds are actively managed, there is no planned asset allocation for investments. In theory, all of the products' assets under management should be aligned with E/S characteristics as all companies that are selected and invested in by the product are subject to the ESG integration strategy. Residual capital in the product may however de-facto be categorised as 'other' due to the cash position. However, at a minimum, it should be expected that more than 95% of the capital allocation in the product will be aligned with E/S characteristics. The minimum indication might fluctuate depending on the market conditions and there is no absolute certainty regarding the percentage indicated. The products do not have a sustainable investment objective and a minimum proportion of ESG investments is therefore not applicable.
6. Monitoring of environmental or social characteristics
SKAGEN manages environmental and social factors by applying binding elements throughout the investment process. Exclusions and negative screening are the first steps deployed to assess the environmental and social characteristics of an investment. Second, when constructing an investment thesis, environmental, social and governance characteristics are collected, measured, and assessed at the same time as an enhanced due diligence is carried out on the climate risk of companies in high-emitting sectors. Third, assessment of these factors is tied to the investment thesis of each investment – driven by a traffic light model to indicate estimated degree of ESG risks and opportunities. The product assesses the double materiality of environmental and social characteristics that are of relevance at investment level. Lastly, active ownership with holdings is a lever that is deployed by the product to work for factor improvement over time. Double materiality considerations are continuously assessed. If salient sustainability risks (harm to investment) or principal adverse impacts (potential harm by investing) show no signs of improvement, the holding in an investee company will ultimately have to be divested should the investee company fail to mitigate these. Quarterly checks and controls are conducted of the holdings in the product to monitor developments of events and general exposure, to ensure alignment with the sustainable investment policy of the entity and broader Storebrand Group.
Prior to investing, the portfolio manager is required to forward potential investment cases to the ESG team who conduct a process to screen and approve the potential investment in question. This screening process assesses whether the investment case aligns with the entity-level investment policy or is in violation of it. If it is in violation of the norms-based and product-based exclusion criteria, the company will be rejected during the screening phase. Moreover, the product is subject to quarterly screening controls to ensure continued compliance with global norms and SKAGEN's exclusion criteria.
Second, the portfolio manager is required to draw up a dedicated ESG factsheet for the investment case, identifying material ESG information and defining an engagement plan for managing ESG-associated risks – or undervalued opportunities – through active ownership. Here, contextual and relevant ESG factors are tied to the investment thesis. The degree of ESG risk of each investment is assessed using a traffic light model, where short-term results and degree of engagement increase in step change with the level of risk. To avoid conflicts of interest, it is the task of the ESG team to determine the traffic light assessment of an investment case. In response to this, the portfolio manager, in collaboration with the ESG team, must articulate a clear plan to mitigate environmental and social risk. The portfolio manager must also state financial considerations that have been made on the back of the ESG profile of the investment in question. ESG risks that fail to be mitigated following escalation strategies will be excluded as this will be deemed a thesis violation.
Monitoring at fund and entity level:
There are formalised processes in place for monitoring environmental and social characteristics at fund and entity level, in addition to investment process-related monitoring of environmental and social characteristics.
Each quarter, all funds are subject to a quarterly control in order to ensure continued alignment with SKAGEN's Sustainable Investment Policy. This control is carried out by the ESG Team and is communicated transparently to key stakeholders internally. The quarterly controls also serve as a helpful format for identifying new developments and determining potential support for the fund in question.
The following methodologies are deployed under the respective pillars that inform the environmental and social characteristics of the equity products:
As defined by the exclusion criteria, SKAGEN will not invest in a company if it falls under one of two themes. The first is product specific – exclusion of companies that are exposed, via a certain share of revenue, to certain products. The other exclusion criteria encompass companies that violate global norms such as the UN Global Compact and the OECD Guidelines for Multinational Enterprises. Whenever a new investment case is identified, the portfolio manager in question must forward a screening request to the ESG Team which will assess whether the investment is in breach of SKAGEN's exclusion criteria. To assess this, a third-party ESG data provider is relied on.
If the third-party provider indicates that the investment has controversial business involvement, this will be further assessed by the ESG team to determine if it includes one of the products which SKAGEN excludes. If it does, and it exceeds the allotted income threshold, the investment request is rejected. If the revenue exposure does not exceed the allotted income threshold, the portfolio manager receives a caution about the exposure and is informed that the share of revenue might exceed the threshold during the investment period, which would result in divestment of the holding. The guiding principle behind this exclusion theme is to avoid investing in activities that are instrumental for that activity.
For the second exclusion criteria, the ESG team will assess a potential flagging that the third-party provider has identified that could indicate potential breach of SKAGEN's norms-based exclusion criteria. Such controversies are prioritised according to the degree of severity, how recent the controversy is and its estimated impact in violating the UN Global Compact and OECD Guidelines for Multinational Corporations. Whilst a controversy might not be serious enough to warrant an exclusion, a recommendation may be made to engage with the company in question in order to assess the controversy and seek to remedy it, if the company is invested in.
Ultimately, the information provided by the third-party data provider is not considered an objective truth, however, it is used as the basis for making SKAGEN's own informed decision.
b. Enhanced due diligence of companies in high emitting sectors
The following parameters are assessed during the due diligence process:
The purpose of conducting an enhanced due diligence assessment is to uncover and document climate-related risks and assess relative impact on double materiality. The following aspects must be assessed:
- Principal Adverse Impact emission indicators and their delta
- Transition Pathway
- Assessment of reputational risk and financial risk; with a corresponding engagement plan when necessary.
c. ESG Factsheet
ESG Factsheets are being implemented for equity investment cases on an ongoing basis. These ESG factsheets serve to document and navigate company-specific ESG factors including risks, opportunities, and a potential engagement plan. Traffic light indicators serve as a key feature informing the nature of each ESG factsheet. The colour of the traffic light is determined by the ESG team on the basis of material ESG data that is used as the basis for each factsheet. These data include company-specific and material ESG factors, controversies, UN Global Compact status amongst other things. These data form a sum-of-the-parts consideration determining the traffic light assigned to the company. Portfolio managers, in turn, assess the traffic light and underlying ESG data and further populate the factsheet with qualitative information on how the ESG profile has impacted investment decisions as well as formulating potential engagement plans and KPIs.
d. Active Ownership
The ESG Factsheets serve as a helpful reference when assessing an investment case and can inform proactive and reactive active ownership dialogue with investee companies.
There is no methodology per se for exercising voting rights. SKAGEN makes use of a third-party proxy provider to facilitate the voting activity. An overview of all voting activities is publicly available on SKAGEN's website.
SKAGEN has developed a proprietary tool to register, log and monitor engagement dialogue with companies. This tool also provides an interface that generates descriptive figures for reporting purposes on various engagement metrics. SKAGEN defines engagements as interactions that make up a dialogue – a single request or communication post does not constitute an engagement. Engagement activity according to several different parameters is reported in SKAGEN's annual ESG report, as are case studies.
For further information on Engagement, please see Section 11. Engagement Policies.
8. Data sources and processing
SKAGEN sources ESG data from a handful of third-party data vendors. As a bottom-up and active investor, SKAGEN is reluctant to accept any data at face value, and access to structured, raw company-disclosed ESG data is preferred. In cases where disclosed data is not available, estimates provided by the third-party vendors are considered as a substitute. Use of numerical ESG scores in the investment process is limited to ascertaining endogenous relative rankings vis-à-vis peers. Some data vendors are used consistently, such as in the screening process, as they have extensive data and information on aspects that can potentially violate SKAGEN's exclusion criteria (controversy data, product involvement data and potential breaches with the Global Compact and OECD Guidelines for Multinational Enterprises). Other data vendors are used for more specialist cases, or as a basis for computing quantitative ESG data in enhanced due diligence processes and ESG factsheets. All data is collected and processed manually and maintained in dedicated databases for analysis and reporting purposes.
9. Limitations to methodologies and data
There are clear limitations to the methodologies referred to in section 7 as well as to the data sources and data processing referred to in the section 8. The first limitation is lack of data availability. There are also significant biases in ESG data, where quantity is conflated with quality data as well as data consistency issues. Time inconsistency of data and increasing expansion of data coverage can result in a data-lag, with new information manifesting in quarterly controls that was not known when the company was screened, which can also influence investment decisions. These data consistency issues pertain to ESG data values for one variable for one specific time period varying from source to source, which reduces the validity of such data as well as best guess estimates that might be used as proxies for missing data.
However, such limitations do not affect the attainment of environmental or social characteristics promoted by the equity products as such. As the attainment of said characteristics is defined by process and how this process is systematically and routinely integrated into the investment process rather than promulgating a data-driven outcome claim on behalf of the investment strategy. Yet, these limitations do dilute the efficacy of company-specific ESG analysis and ESG integration for the products. SKAGEN seeks to address such limitations by prioritising data coverage on the most salient and material ESG factors, which will vary from sector to sector. Specific actions to address these limitations therefore focus on cross-referencing data across different sources to ensure a certain level of data consensus, reconciling third-party data against company disclosures, engaging and requesting data directly from investment companies or using appropriate estimates where relevant.
10. Due diligence
The ESG Integration Strategy, informed by the Sustainable Investment Policy, is the key process to conduct initial due diligence of investments in the equity funds. Prior to investment, the potential investee is screened for compliance with the Sustainable Investment Policy. Post investment, the due diligence process for investments also includes assessments of material ESG factors, tracking trends to identify YoY positive or negative development, review controversies, comparison against peers/benchmark/industry, assessing the investees transition pathway and compliance with global norms.
Moreover, there are broader and formalised structures in force to ensure continued due diligence and monitoring. The equity funds are subject to quarterly screening and control, conducted by the ESG Team. Ensuing screening reports are provided to portfolio managers, select leaders and compliance. Moreover, the Sustainable Investment Policy is anchored with the Board of Directors, which is also responsible for giving the portfolio team Power of Attorney to execute ownership rights on behalf of unit holders. The Board of Directors receives frequent updates on the execution of ownership and offers guidance on the Sustainable Investment Policy. In sum, the ESG Integration Strategy, the Sustainable Investment Policy and broader controls and due diligence processes help ensure that due diligence of investment activities is an ongoing process.
The combined result of our due diligence process and formalised structures, ensures that all products are in line with SKAGEN's set expectations for environmental and social characteristics.
11. Engagement policies
As stated in SKAGEN's Sustainable Investment Policy, which aligns with responsible business codes and internationally recognised standards, SKAGEN believes in exercising our rights as shareholders. These are executed either through voting at shareholder meetings or engaging – through direct dialogue – with the management and board members of the various holdings.
Both tools can be very effective in addressing concerns regarding environmental, social and corporate governance matters. Combined they can strengthen one another and be an effective signal to companies on where SKAGEN stands on various important issues. SKAGEN will therefore use both methods to influence companies’ behaviour over time.
Active ownership is a key pillar for SKAGEN's equity funds. The decision to engage with select companies is made based on the respective portfolio manager and ESG team's assessment of the significance of a particular matter, the size of the holding, the scope to effect change and the opportunity to collaborate with other investors. Dialogue with companies can be exercised by expressing views, in writing or orally, to the company's management on all levels, advisers, and Board of Directors.
Cases for engagement
The products will consider engaging with companies in the following cases:
- Serious or systematic breaches of human rights
- Corruption and bribery
- Serious environmental and climate damage
- Companies with a low sustainability rating in high-risk industries
- If the company's strategy or results differ substantially from those previously communicated
- Governance issues such as:
- Replacement of directors
- Equity issues and dividend policies
- Remuneration of key personnel
- Transactions between related parties
- Diversity issues
In addition, the products will seek to engage with companies on climate change. For some of SKAGEN's equity funds – and given the nature of the investment style - the carbon footprint may vary substantially over time. Still, the products are committed to working with the holdings to reduce their carbon footprint and operate more efficiently in future. Climate change is one aspect considered when monitoring companies and those companies lagging in their efforts to reduce their carbon footprint may be subject to engagement. The respective portfolio manager together with the ESG team will engage with and encourage those companies that are in a position to reduce their carbon footprint.
If the outcome of the company engagement does not meet expectations, other actions may be considered. If a company is on the observation list, SKAGEN's ESG team will make an exclusion assessment. For other companies, actions may include:
- Expressing views publicly
- Proposing resolutions at the annual general meeting
- Suggesting an extraordinary general meeting
Engagement with companies may be in collaboration with other investors where the portfolio manager of the respective product believes this to be in the interests of the unit holders.
When working with other investors to influence companies, the portfolio manager will be aware of potential conflicts of interest and of being put in an insider position.
Use of voting rights
The framework for the use of voting rights for funds managed by SKAGEN is set out in the Norwegian Regulations on Securities Funds Section 2-24 and in the industry recommendations from the Norwegian Fund and Asset Management Association.
The ultimate responsibility for execution of corporate governance in SKAGEN lies with the Board of Directors. The daily execution is delegated to the portfolio managers of each fund and activities are reported back to the Board. The Board annually evaluates the execution of corporate governance.
Guidelines for Voting
Voting rights must be exercised to the benefit of the fund in question, with the objective of securing the best possible risk-adjusted returns for unit holders. Generally speaking, the portfolio manager assesses how the voting rights are to be used. In all cases where the products vote, the respective portfolio manager familiarises him or herself with the matters to be discussed at the general meeting and decides how to vote. Voting rights are exercised directly by the fund management company or by using a proxy voting platform. For details see the Voting Policy.
SKAGEN typically votes against management in the following situations:
- Inadequate information ahead of meeting
- Quality of board and its members
- Anti-takeover mechanisms
- Needless or unfair changes in capital structure
- Excessive executive compensation
- Disclosure proposals related to climate change
Specific situations may call for a unique response and the portfolio manager and ESG team will always take market and company conditions into consideration. To the extent that voting rights have been exercised in controversial cases or where the product have voted against the board’s or management’s recommended course of action, the voting rationale will be disclosed.
Institutional Shareholder Services (“ISS”), an independent service provider, is the platform selected for SKAGEN's equity funds' proxy voting activities. ISS provides notices of general meetings and comprehensive information about the companies, the voting items on the agenda and recommendations. Funds managed by SKAGEN will vote according to SKAGEN's voting policy, and always in what the portfolio manager of the respective product deem to be the best interests of unit holders. When SKAGEN does not have a policy in place for a specific ballot item, the ISS recommendation will typically be followed. SKAGEN will review the relationship with ISS on an annual basis, including the quality and effectiveness of the services provided. Each fund has a custodian approved by the Financial Supervisory Authority of Norway. The custodian bank also provides information related to general meetings. SKAGEN's voting record is publicly available on www.skagenfunds.coms and is disclosed in annual sustainability reports.
12. Designated reference benchmark
The products are actively managed and use a benchmark for performance comparison purposes. However, the products do not specifically use a benchmark index to attain their environmental or social characteristics.