The Sustainable Asia Bond Fund (the Sub-Fund) promotes environmental and/or social characteristics and is therefore considered to be in compliance with Article 8 of the Sustainable Finance Disclosure Regulation (SFDR)1. It does not have as its objective sustainable investment.
This disclosure is made in compliance with Article 10 of SFDR, and sets out key information with regards to the environmental and/or social characteristics promoted by the Sub-Fund. This information is summarized as follows:
The environmental and social characteristics promoted by the Sub-Fund include:
The Sub-Fund does commit to investing a minimum proportion of its assets in sustainable investments. It ensures that that the sustainable investments made by the Sub-Fund Do No Significant Harm (“DNSH”) to sustainable investment objectives by (a) adhering to a detailed exclusion framework, (b) screening out securities with the lowest ESG rankings while selecting securities that have higher ESG rankings and (c) identifying and considering the principal adverse impacts (“PAI”) on sustainability factors.
The Sub-Fund seeks to invest at least 85% of its net assets in companies domiciled in, traded in and/or with substantial business interests in Asia and/or governments and government-related issuers located in Asia, who demonstrate strong or improving sustainability attributes. Asia shall include Australia and New Zealand. Issuers with improving sustainability attributes are those that demonstrate awareness and commitment to ESG issues, while issuers with strong sustainability attributes are those that demonstrate stronger performance on and management of ESG issues compared to their peers.
In order to select securities of issuers with strong or improving sustainability attributes, the Sub-Investment Manager will start with the broader Asia fixed income universe and narrow it down by: (i) adhering to an exclusion framework as explained in the DNSH section above; (ii) applying a quantitative and qualitative positive screening, (iii) removing securities with the lowest ESG rankings from proprietary assessment; and (iv) selecting securities that have higher ESG rankings from the proprietary assessment (see below).
Due diligence is a key element of the methodology for integrating sustainability factors into the investment decision making process, on both a pre-investment and ongoing basis. As part of the due diligence process, the investment team seeks to assess sustainability risks and factors material to an investment, and incorporate these issues into fundamental analysis, which then may influence their valuations, portfolio construction decisions, and transaction underwriting, where relevant.
Engagement with investee companies provides an opportunity to gather further information, which feeds into the Sub-Investment Manager’s due diligence process. The Sub-Investment Manager will also engage to enact positive change in disclosure, management, and performance related to sustainability risks or factors.
The Sub-Fund’s investment team will meet with company management as part of their fundamental research process. These meetings provide analysts and portfolio managers with insights into management quality, business drivers, and the strategies of the companies in which they invest.
The Sub-Investment Manager also participates in collaborative engagements with other firms in the industry. Engaging collaboratively with other investors amplifies the Sub-Investment Manager’s impact on the companies, industries, and markets in their collective orbit of influence.
The environmental and/or social characteristics and the sustainability indicators of the Sub-fund are monitored during initial security selection and ongoing portfolio management using a combination of internal and external data.
The Sub-Investment Manager’s overall investment process includes both quantitative and qualitative metrics to measure how the social or environmental characteristics promoted by the Sub-Fund are met, including an exclusionary framework, positive screening and a proprietary ranking of ESG ratings.
The Sub-Investment Manager uses a range of data sources in order to monitor the environmental and/or social characteristics promoted by the Sub-Fund, including both in-house research and third party data providers. These are used to systematically screen client portfolios for sustainability risks, identify priority companies for engagement and to inform company analysis as described in the Sub-Fund’s investment policy. The third-party data providers are subject to ongoing review and change and may differ between asset classes or sub-funds depending on the nature of the characteristic to be measured.
The main limitation to the methodologies and data sources is the lack of global reporting standards and availability of consistent data. Where data is available, this also has limitations and is subject to estimation and reporting gaps and continues to evolve. The Sub-Investment Manager keeps under review the sources of data it uses for the implementation of its sustainability policy and will make changes where it considers this is necessary.
This financial product promotes environmental or social characteristics but does not have as its objective sustainable investment.
However, the Sub-fund does commit to investing a minimum proportion of 35% of its portfolio in sustainable investments. The sustainable investments of the Sub-Fund may contribute to a sustainable objective through their performance in areas such as energy transition, health and wellbeing, diversity and inclusion and improved labour standards.
Although the Sub-Fund does not commit to a minimum level of taxonomy alignment, the Sub-Investment Manager expects that the Sub-Fund’s sustainable investments may contribute to the environmental objectives of climate change mitigation and natural resource use. The Sub-Fund also has socially focused investments which are not yet designated under the EU Taxonomy.
The Sub-Investment Manager has fully integrated ESG considerations into the investment decision making process. As part of this overall approach, the Sub-Investment Manager ensures that the sustainable investments made by the Sub-Fund Do No Significant Harm (“DNSH”) to sustainable investment objectives by (a) adhering to a detailed exclusion framework, (b) screening out securities with the lowest ESG rankings while selecting securities that have higher ESG rankings and (c) identifying and considering the principal adverse impacts (“PAI”) on sustainability factors.
Each of these elements is further explained below:
a) Exclusion Framework
The Sub-Fund adheres to an exclusion framework where certain issuers are removed from the permissible investment universe. This includes screening out issuers, subject to data availability, who are considered by third party data providers, to be in violation of the Ten Principles of the United Nations Global Compact. This also includes issuers with products or within industries that are considered by the Sub-Investment Manager to be unsustainable or associated with significant environmental or social risks.
These may be updated from time to time depending on the assessment of each product or industry against the abovementioned principles, but currently issuers deriving more than 5% of revenue from alcohol, tobacco, gambling operations, adult entertainment, thermal coal production, conventional weapons and any revenue from controversial weapons are automatically eliminated from investment consideration (exclusion framework). This forms a material part of the Sub-Fund’s DNSH test.
Over time issuers’ eligibility status may change and some issuers who were eligible when purchased by the Sub-Fund may become ineligible. When this occurs, the Sub-Investment Manager may engage with issuers to have a constructive dialogue in order to improve factors that lead to ineligibility within the next 90 days. If a resolution is achieved during this period, the issuer may become re-eligible. The position in respect of such issuers may be divested at any time or for any reason during this 90-day period.
The exclusionary framework explained is aligned with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights, including the principles and rights set out in the eight fundamental conventions identified in the Declaration of the International Labour Organization on Fundamental Principles and Rights at Work and the International Bill of Human Rights.
b) ESG rankings
Each potential issuer will be assigned with one of four rankings in respect of each category of environmental, social and governance, based on the Sub-Investment Manager’s assessment of that issuer’s performance on and management of ESG issues, in consideration of and/or in reference to a number of industry principles and standards including the principles of financial materiality as outlined by the Sustainability Accounting Standards Board (SASB). The ESG rankings will be determined and assigned by the Sub-Investment Manager using a proprietary method which aims to incorporate all relevant ESG factors, considering and processing third party ratings and scores together with the Sub-Investment Manager’s own analysis of raw industry data (such as publicly available ESG reports, assessment reports or case studies). Securities with the lowest ESG rankings from the proprietary assessment will be removed from inclusion.
c) PAI on sustainability factors
The Sub-Investment Manager has assessed the PAI indicators relevant to the Sub-Fund and which the Sub-Investment Manager considers should be taken into account for the purposes of assessing whether sustainable investments otherwise cause significant harm.
Based on data availability, the following PAI indicators are taken into consideration for investments in equities and/or fixed income products issued by corporate issuers for the proportion of holdings where data is available:
1. Scope 1 Green House Gas emissions
2. Scope 2 GHG emissions
3. Scope 3 GHG emissions
4. Total GHG emissions
5. Carbon footprint
6. GHG intensity of investee companies
7. Share of investments in companies active in the fossil fuel sector
8. Share of non-renewable energy consumption and non-renewable energy production of investee companies from non-renewable energy sources
9. Energy consumption in GWh per million EUR of revenue of investee companies, per high impact climate sector
10. Share of investments in investee companies with sites/operations located in or near to biodiversity-sensitive areas
11. Tonnes of emissions to water generated by investee companies per million EUR invested, expressed as a weighted average
12. Tonnes of hazardous waste generated by investee companies per million EUR invested, expressed as a weighted average
13. Share of investments in investee companies that have been involved in violations of the UNGC principles or OECD Guidelines for Multinational Enterprises
14. Share of investments in investee companies without policies to monitor compliance with the UNGC principles or OECD Guidelines for Multinational Enterprises or grievance /complaints handling mechanisms to address violations of the UNGC principles or OECD Guidelines for Multinational Enterprises
15. Average unadjusted gender pay gap of investee companies
16. Average ratio of female to male board members in investee companies
17. Share of investments in investee companies involved in the manufacture or selling of controversial weapons
For investments in sovereign bonds and bonds issued by supranational entities, the following PAI indicators will be considered:
1. GHG intensity of investee countries
2. Absolute number of investee countries subject to social violations
3. Relative number of investee countries subject to social violations
4. Non-cooperative tax jurisdictions
The Sub-Investment Manager aims to identify the adverse sustainability impact from the Sub-Fund’s investments in several ways, including via general screening criteria, ongoing review of PAIs and where appropriate supplemented by fundamental research during the Sub-Investment Manager’s investment processes. Subject to data availability, the Sub-Investment Manager, with subject matter support from the Manulife IM’s Sustainable Investment team, is responsible for assessing and monitoring the above PAI indicators for all in-scope assets on an ongoing basis using an internally developed monitoring system, third-party data, company issued data and public information. This assessment may include both fundamental as well as quantitative analysis. Issuers identified as outliers on specific indicators, or which exhibit high adverse impact across several indicators will be subject to further analysis by the Sub-Investment Manager and may be reviewed by the Sustainable Investment team.
All specific PAI indicators that are taken into consideration for the Sub-Fund, both at an overall portfolio level and in relation to the DNSH assessment for sustainable investment, are subject to data availability. The Sub-Investment Manager monitors data availability on an ongoing basis with the aim to improve both data quality and availability.
PAI value outcomes for the Sub-Fund will be reported on an ongoing basis in the periodic reporting that will be published after 1 January 2023.
The Sub-Fund promotes environmental and social characteristics by investing in issuers who demonstrate strong or improving sustainability attributes. Whilst the Sub-Fund does not have a sustainable investment objective, it does invest a proportion of its portfolio in sustainable investments.
The environmental and social characteristics promoted by the Sub-Fund include:
Issuers with improving sustainability attributes are those that demonstrate awareness and commitment to ESG issues, while issuers with strong sustainability attributes are those that demonstrate stronger performance on and management of ESG issues compared to their peers. Due to the widespread lack of available data, and given the Sub-Fund invests primarily in issuers in Asia which are not subject to the EU Taxonomy, the Sub-Fund is not yet able to confirm the degree of taxonomy alignment of its sustainable investments with an environmental objective and does not commit to making any such investments.
The Sub-Fund has not designated a benchmark for the purpose of determining the attainment of the environmental or social characteristics promoted, as the Sub-Investment Manager considers that the sustainability indicators and other measures monitoring the attainment of the environmental or social characteristics promoted by the Sub-Fund are a more appropriate reference.
The sustainability indicators used by the Sub-Investment Manager to measure the attainment of the environmental or social characteristics of the Sub-Fund include:
The Sub-Fund seeks to invest at least 85% of its net assets in companies domiciled in, traded in and/or with substantial business interests in Asia and/or governments and government-related issuers located in Asia, who demonstrate strong or improving sustainability attributes. Asia shall include Australia and New Zealand.
In order to select securities of issuers with strong or improving sustainability attributes, the Sub-Investment Manager will start with the broader Asia fixed income universe and narrow it down by: (i) adhering to an exclusion framework as explained in the DNSH section above; (ii) applying a quantitative and qualitative positive screening, (iii) removing securities with the lowest ESG rankings from proprietary assessment; and (iv) selecting securities that have higher ESG rankings from the proprietary assessment (see below).
The Sub-Fund applies a positive screen which captures issuers that demonstrate strong sustainable practices or have positive impact on the sustainability themes of the Sub-Fund. The positive screening is quantitative and qualitative driven. Third party data providers’ relevant datapoints at company level will be used as primary inputs for the quantitative assessment. Datapoints used can be both financial related (e.g., revenue contribution from products or services with positive impact), or extra-financial related (e.g., adoption of carbon emission reduction targets or product safety management program). With regards to the limited data availability, missing data or lack of coverage from raw datapoint sets will be supplemented with company reported data and/or findings from proprietary credit analysis, and/or ESG research for qualitative assessment.
Furthermore, the Sub-Fund's investment process combines bottom-up fundamental credit analysis with a proprietary ESG-based methodology (outlined below) which assigns ESG rankings on each potential issuer with the aim of identifying potential issuers demonstrating such strong or improving sustainability attributes. Each potential issuer will be assigned with one of four rankings in respect of each category of environmental, social and governance, based on the Sub-Investment Manager’s assessment of that issuer’s performance on and management of ESG issues, in consideration of and/or in reference to a number of industry principles and standards including the principles of financial materiality as outlined by the SASB. The ESG rankings will be determined and assigned by the Sub-Investment Manager using a proprietary method which aims to incorporate all relevant ESG factors, considering and processing third party ratings and scores (such as MSCI, Sustainalytics, Bloomberg, S&P Trucost, MSCI Carbon Delta, CDP, and SPOTT) together with the Sub-Investment Manager’s own analysis of raw industry data (such as publicly available ESG reports, assessment reports or case studies).
Using the ESG rankings, the Sub-Investment Manager will (i) remove the lowest ranked issuers (which typically comprise approximately 10% of all potential issuers); and (ii) select issuers which are ranked above a minimum threshold determined by the Sub-Investment Manager to indicate strong or improving sustainable attributes. Selected issuers shall be included in the Sub-Fund’s investment universe.
Within the primary investment strategy, the Sub-Fund will also invest a minimum of 15% of net assets in ESG themed bonds issued by companies domiciled in, traded in and/or with substantial business interests in Asia and/or governments and government-related issuers located in Asia. "ESG themed bonds" are bonds which align with a combination of one or more of ICMA Green Bond Principles, ICMA Social Bond Principles and/or the ICMA Sustainability Bond Guidelines, amongst others.
The following elements of the investment strategy are binding within the selection process:
Good governance practices of investee companies of the Sub-Fund are evaluated across various steps of the security selection process. Governance safeguards are inherent in the Sub-Investment Manager’s level norms-based screening as well as the Sub-Investment Manager’s PAI processes for the Sub-Fund.
Furthermore, at the Sub-Fund level, investee companies are screened for good governance principles at the point of investment and on an ongoing basis. This screening process includes sound management structures, employee relations, remuneration of staff and tax compliance, and is based on third party data, and/or a proprietary assessment. A proprietary assessment will be used and may take precedence over the third-party data, when the Sub-Investment Manager determines to engage with the investee companies or the Sub-Investment Manager otherwise evidences the good governance practices of investee companies, or when third party data is lacking, the Sub-Investment Manager applies these principles by assessing issues including, but not limited to: companies’ board composition and oversight, executive compensation, labor management and human capital and tax controversies.
The selection of these specific indicators is subject to change from time to time although the overall principles will remain. Where the Sub-Investment Manager identifies any areas for improvement, and subject to an overall assessment of good governance, it may engage with the relevant investee company to seek improvements before choosing to divest, which will typically occur within 90 days. The assessment is not applicable to any cash, cash equivalent or derivatives investment or investments in securities issued by sovereigns or government-related entities.
The Sub-Fund seeks to invest at least 85% of its net assets in companies domiciled in, traded in and/or with substantial business interests in Asia and/or governments and government-related issuers located in Asia, who demonstrate strong or improving sustainability attributes. Asia shall include Australia and New Zealand. The exposures to these investments will be direct. Derivatives are not used for the purposes of attaining the environmental or social characteristics promoted by the Sub-Fund.
The Sub-Fund will have a minimum proportion of 85% of its net asset value that is aligned with its environmental and / or social characteristics and a minimum proportion of 35% of its net asset value in sustainable investments.
The Sub-Fund may invest up to 15% of its net assets in the fixed income securities of issuers outside of Asia, who demonstrate strong or improving sustainability attributes, and/or cash and cash equivalents.
The environmental and/or social characteristics promoted by the Sub-Fund are measured and monitored throughout the lifecycle of an investment using the sustainability indicators. These are:
The environmental and/or social characteristics and the sustainability indicators of the Sub-fund are monitored during initial security selection and ongoing portfolio management using a combination of internal and external data.
Once an investment is made, and to ensure that investments continue to meet the Sub-Fund’s sustainability criteria, the Sub-Investment Manager continues to monitor material factors that could impact an investment, including sustainability risks and factors. Relevant risks or concerns are addressed as part of the Sub-Investment Manager’s ongoing investment process which may result in changes in a fund position size or divestment. The Sustainable Investment team may also conduct reviews on a periodic basis, and engage with the investment team about potential sustainability risks. The Sub-Investment Manager uses a combination of externally sourced data and proprietary research to ensure that the information used when monitoring of the environmental and/or social characteristics is suitably robust, given the current levels of disclosure by companies, and performs periodic reviews allowing the Sub-Investment Manager to seek to identify gaps and/or data that may require further review. The current level of disclosure of environmental and social characteristics remains comparatively limited in comparison with other financial data, and that which is available is typically subject to more limited review (such as audits).
The Sub-Investment Manager’s overall investment process includes both quantitative and qualitative metrics to measure how the social or environmental characteristics promoted by the Sub-Fund are met, including an exclusionary framework, positive screening and a proprietary ranking of ESG ratings. In addition, the Sub-Investment Manager seeks to understand the sustainability risks and opportunities by using a range of external research providers as well as internal research.
Each sustainability indicator for the Sub-Fund is subject to measurement using clearly defined metrics on an ongoing basis, using a combination of internal and external data and research as is appropriate for the particular indicator.
The Sub-Investment Manager uses a range of data sources in order to monitor the environmental and/or social characteristics promoted by the Sub-Fund, including both in-house research and third party data providers. These are used to systematically screen client portfolios for sustainability risks, identify priority companies for engagement and to inform company analysis as described in the Sub-Fund’s investment policy. The third-party data providers are subject to ongoing review and change and may differ between asset classes or sub-funds depending on the nature of the characteristic to be measured.
The Sub-Investment Manager acknowledges that, given the lack of a consistent standard of global regulatory requirements on sustainability disclosures generally, third-party data providers upon whom the Sub-Investment Manager places reliance do have to estimate datapoints and the proportion of estimations used will vary depending on the subject matter and asset in question. The Sub-Investment Manager does not seek to systematically audit those estimates but does challenge numbers with third-parties if it identifies data it believes is inaccurate, and where possible places greater reliance on actual disclosed data. The Sub-Investment Manager seeks to encourage adoption of sustainability disclosure standards by issuers and thus decrease reliance in the industry on estimated or incomparable information.
The main limitation to the methodologies and data sources is the lack of global reporting standards and availability of consistent data. Where data is available, this also has limitations and is subject to estimation and reporting gaps and continues to evolve. The Sub-Investment Manager keeps under review the sources of data it uses for the implementation of its sustainability policy and will make changes where it considers this is necessary.
In case data gaps pose challenges to making an informed decision on an aspect of the investment process the Sub-Investment Manager’s Sustainable Investment team, together with the investment analysts and fund managers may seek further information. Such options may include a direct dialogue with the company, a dedicated engagement plan or a decision against holding the company.
Due diligence is a key element of the methodology for integrating sustainability factors into the investment decision making process, on both a pre-investment and ongoing basis. As part of the due diligence process, the investment team seeks to assess sustainability risks and factors material to an investment, and incorporate these issues into fundamental analysis, which then may influence their valuations, portfolio construction decisions, and transaction underwriting, where relevant.
To inform their assessment framework, teams may utilise ESG research and data as described above as well as support from the dedicated in-house Sustainable Investment team assigned to the investment team. The investment team may also consider the responses of investee company management teams to inquiries focused on their ability and willingness to manage ESG issues. Conclusions about the sustainability risks and factors are documented in investment research. The Sub-Investment Manager may engage with company management to understand their ESG strategy, influence best practices towards disclosure, seek improvement in key sustainability metrics over time, and to address issues pertinent to the specific investment thesis.
Once an investment is made, the investment teams continue to seek to monitor material issues that could impact an asset or company, including sustainability risks, factors and opportunities. Relevant risks or concerns are addressed as part of the investment teams’ ongoing investment process, via ongoing company surveillance and engagement, where relevant, portfolio positioning and risk monitoring.
The Sustainable Investment team may also conduct, on a periodic basis, reviews of individual portfolios, and engage with investment teams about potential sustainability risks as a further support to the investment process. The nature of any material risks identified will inform decisions as to next steps within the context of the investment teams’ overarching investment process, including further company research and company engagement among other considerations.
Responsible stewardship is an integral component of the Sub-Investment Manager’s business and culture.
Engagement with investee companies provides an opportunity to gather further information, which feeds into the Sub-Investment Manager’s due diligence process. The Sub-Investment Manager will also engage to enact positive change in disclosure, management, and performance related to sustainability risks or factors.
The Sub-Fund’s investment team will meet with company management as part of their fundamental research process. These meetings provide analysts and portfolio managers with insights into management quality, business drivers, and the strategies of the companies in which they invest. In addition, these meetings allow the investment team to assess companies’ risk, including exposure to sustainability factors and the companies’ management of that exposure to protect shareholder value. Where appropriate, members of the Sustainable Investment team may also participate in company meetings alongside investment analysts and portfolio managers.
The Sub-Investment Manager also participates in collaborative engagements with other firms in the industry. Engaging collaboratively with other investors amplifies the Sub-Investment Manager’s impact on the companies, industries, and markets in their collective orbit of influence. For the companies the Sub-Investment Manager engages with, collaborative efforts reduce the noise of numerous points of view, helping focus on goal setting and real outcomes. Collaboration is always in alignment with the Sub-Investment Manager’s fiduciary duty to their clients as an asset manager.
If in the Sub-Investment Manager’s opinion issues of concern remain unaddressed by a company’s leadership after a process of engagement conducted over a reasonable period of time, then the Sub-Investment Manager may consider an escalation. Depending on the asset in question, this could include voting their equity proxies in accordance with their views, filing or co-filing a shareholder resolution, or divesting, where applicable.
The Sub-Investment Manager may also occasionally engage with regulators where the Sub-Investment Manager believes it is appropriate and in the best interests of their clients.
For additional detail, please see the Investment Managers' ESG Engagement Policy.
1 Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector
The Sub-Fund uses the JPMorgan ESG Asia Credit Index TR USD Index as a benchmark for performance comparison purposes only and not as a reference benchmark for SFDR purposes.
The Sub-Fund invests at least partially in sustainable investments as defined by Article 2(17) of SFDR. Of these sustainable investments, it is expected that a proportion will be aligned with the EU Taxonomy (as defined below). This means that those investments take into account the EU criteria for environmentally sustainable economic activities and contribute to either the climate adaptation and/or climate mitigation objectives set out in Article 9 of Regulation (EU) 2020/852 of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (the “EU Taxonomy”).
The “do no significant harm” principle set out in SFDR will apply only to those investments underlying the Sub-Fund that are aligned with the EU Taxonomy. The investments underlying the remainder of the Sub-Fund do not take into account the EU criteria for environmentally sustainable economic activities.
As at the date of this disclosure, the SFDR Level 2 disclosure rules prescribing the EU Taxonomy aligned information to be provided to investors, including the methodology for calculating the proportion of investments which are EU Taxonomy aligned, have not yet been adopted by the European Commission.
When all relevant regulations are in force, the Investment Managers expect to be able to disclose that the Sub-Fund does have some EU Taxonomy alignment. However, as at the date of this disclosure, the Investment Managers cannot provide sufficiently accurate data to state that the investments are EU Taxonomy aligned.
In addition, accurate data to allow for EU Taxonomy alignment information to be provided to investors is dependent on the disclosure of such data by the companies in which we are invested, also in accordance with the EU Taxonomy. It is likely that such data will only be available from 1 January 2023.
Further details of the Sub-Fund’s investment in environmentally sustainable economic activities will be disclosed in line with the timing requirements of the SFDR Level 2 disclosure rules which are expected to come into force on 1 January 2023.
While the disclosure requirements under SFDR and the EU Taxonomy remain uncertain, these do not impact the way in which the Sub-Fund is managed. The Sub-Fund continues to comply with the sustainability criteria set out in the investment policy and the “Environmental and/or Social Characteristics” section of the Sub-Fund as stated in the Prospectus of Manulife Global Fund.
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