Promotion of environmental and social characteristics by the Equity Selection sub-fund of Value Square Fund
Value Square NV is promoting Value Square Fund as a financial product with ecological and social characteristics (Art. 8 SFDR) through the Value Square Fund Equity Selection sub-fund. Here you can read which ecological and social characteristics are involved and what the 'promotion' of Value Square Fund Equity Selection actually entails.
Environmental and social characteristics can only be promoted if investments are made in companies that follow good governance practices.
No sustainable investment goal
Promoting ecological and social characteristics vs. sustainable investments as a goal
This financial product promotes ecological and social characteristics, but does not aim at sustainable investments as described in Art. 9 SFDR.
Ecological and social characteristics of the financial product
What environmental and/or social characteristics are promoted by Value Square Fund Equity Selection?
Value Square Fund Equity Selection seeks to score companies on awareness and active integration of multiple environmental and social attributes. From an ecological perspective, the following 5 elements are looked at to demonstrate that a company has ecological issues on the agenda:
1. Total intensity of greenhouse gas emissions in relation to sales, scoring a company when emission levels are below the industry average;
2. Energy intensity per sale, where a company is scored if energy intensity is below the industry average;
3. Presence of a Biodiversity Policy;
4. Presence of a Water policy;
5. Presence of a Climate Change Policy.
From a social point of view, the following 10 elements are looked at which show that the company wants to deal fairly and correctly with employees and stakeholders. Companies are scored if they have an active program and/or policy regarding the following topics:
1. Equal opportunities policy
2. Anti-bribery and anti-corruption policy
3. Protection of employees and/or whistleblowing policy.
4. Training policy
5. Corporate social responsibility training for employees
6. Ethics policy
7. Health and safety policy
8. Human rights policy
9. Policy against child labor
10. Fair remuneration policy
What investment strategy does Value Square Fund Equity Selection follow?
Value Square NV uses three basic strategies for the Value Square Fund Equity Selection sub-fund that incorporate ESG criteria (Environmental, Social and Governance criteria):
1. Negative exclusion.
2. ESG integration
3. Active shareholding (engagement).
These three basic strategies involve Value Square Fund Equity Selection excluding certain securities based on legislation, product category, market participation and on behavior. Three specific examples of exclusion are:
(i) Companies banned under the law of June 8, 2006, called the Arms Law (companies whose activities consist of the manufacture, use, repair, offering for sale, sale, distribution, import or export, storage or transport of anti-personnel mines, sub-munitions and/or inert ammunition and armor containing depleted uranium or any other industrial uranium within the meaning of the law and with a view to its proliferation);
ii) Companies that violate the principles of the United Nations Global Compact (human rights, labor conditions, environment, anti-corruption);
iii) Producers and wholesale distributors of tobacco products.
In addition, non-excluded effects are analyzed based on 60 parameters. Out of these 60 parameters, 44 parameters can be considered as sustainability indicators or in other words, ESG selection criteria: 5 E-criteria, 10 S-criteria and 29 G-criteria (the 5 E-criteria and the 10 S-criteria are explained above). Each company is scored based on the 60 parameters and these scores are then ranked percentile within their respective geographic universe (North America, Europe, Emerging Asia or Developed Asia). Ultimately, Value Square Fund Equity Selection makes a positive selection of securities that are at least in the 70th percentile within their respective universe ("best-in-class calculations").
The assessment of a company's good governance practices is based on 29 elements that demonstrate that a company is well managed. These elements can be summarized as follows:
1. Does the board of directors have an independent chairman?
2. Does each committee consist of at least one-third independent directors?
3. Are the CEO and the Chairman of the Board the same person?
3. Does each committee have an independent chairman?
4. Does the Board consist of at least one-third independent directors and one-half non-executive directors?
5. Are there equal voting rights for all shareholders?
6. Is director compensation linked to the long-term benefit of the company?
7. Does the board of directors (management) consist of at least one-third female directors?
8. Does the company have a reputable and recognized auditor?
A company's governance practices are closely monitored because Value Square NV believes in the concept of leading by example. In this context, the company structure is evaluated, starting with the Board of Directors and the various committees (in particular, the committees responsible for auditing, remuneration and appointments). The evaluation covers, among other things, the percentage of independent directors, the size of the Board of Directors, overboarding and diversity. The remuneration policy is analyzed to check whether there is a balance between long-term incentives and other rewards. Shareholder rights fall under this umbrella (poison pills, unequal voting rights, etc.).
Engagement includes voting and asking questions at General Meetings of Shareholders, engagement via phone calls, email, letters, etc.
Planned asset allocation
What is the minimum share of Value Square Fund that promotes ecological and social characteristics?
Value Square NV promotes Value Square Fund Equity Selection as an investment product with a combination of environmental and social characteristics as discussed above. This compartment represents 50% of Value Square Fund. For this reason, the minimum share of Value Square Fund that promotes ecological and social characteristics is 50%. As discussed above, Value Square Fund Equity Selection excludes securities based on legislation, product category, market participation and on behavior. The other sub-funds of Value Square Fund apply a less strict version of the exclusion strategy as a minimum environmental and social protection threshold.
Monitoring ecological and social characteristics
On updates to business models
Updates on environmental and social characteristics are monitored when business models are updated. The frequency depends on the availability of company publications and updates in Value Square NV's data sources.
Depending on the measurement method
The methodologies used to measure the achievement of environmental and social attributes depend on the measurement method.
For example, for emission intensity, the data published by the company is compared to a calculated industry average while for the availability of a water or biodiversity policy, no calculation is made.
Data sources and processing
Bloomberg, Eikon and internal research
Value Square NV uses Bloomberg and Eikon as data providers. Because not all data is available for all companies, Value Square NV uses internal research based on company reports and company contacts.
Limitations of methodologies and data
Analysis of available data only
Currently, Value Square NV relies on the data available through our data sources. Value Square NV does not use estimates for missing data that may be a limitation when assessing a company. The more sustainability data that is made available by companies in the future (due to legal obligations), the better Value Square NV will be able to analyze these companies when it comes to corporate sustainability.
Three Lines Model
Due diligence takes the form of a monitoring and control procedure in line with the Three Lines Model and is both quantitative and qualitative in nature:
1. At the first level (first-line monitoring), the exclusion filters are regularly updated and integrated into the investment process of Value Square Fund Equity Selection (and, to a lesser extent, the other sub-funds of Value Square Fund as described above) by the Asset Management Team of Value Square NV ("AM"). Exclusion filters are communicated internally for risk and compliance monitoring purposes.
AM also exercises controls to ensure that there is no violation of any of the investment strategies described so that the promotion of ecological and social characteristics remains respected. Data is retained in case of temporary breaches.
2. The Compliance Officer of Value Square NV is responsible as second line for the internal control of the way ecological and social characteristics are promoted by Value Square Fund Equity Selection.
3. Value Square NV is currently looking for an external auditor to provide the third-line audit.
Principles for Responsible Investment of the United Nations
The engagement strategy (also known as the 'engagement strategy' or the 'active shareholding strategy') for Value Square Fund Equity Selection is derived from the principles of engagement set out in the United Nations ('UN') Principles for Responsible Investment. Value Square Fund Equity Selection takes the following position on its engagement strategy:
a. Exercise of voting rights:
Value Square Fund Equity Selection will strive to maximize its participation in general meetings and exercise its voting rights to its advantage. Voting decisions are guided with the objective of maximizing risk-adjusted returns to investors. These principles are further described in the Voting Policy.
b. Management Involvement:
Value Square Fund Equity Selection is committed to actively engaging with management and the Board of Directors when it believes that improvements in sustainable business practices, on ESG issues, are possible. This opinion is formed, among other things, during the best-in-class calculations: Companies that score weakly in the respective E, S or G percentile rankings are considered very good candidates for engagement action.
Actively engaging with management and the Board of Directors includes engaging in an active dialogue about sustainability efforts and making suggestions for improvement. Some instances where Value Square Fund Equity Selection will engage with management include:
a. Significant change in strategy from that previously communicated.
b. Issues related to governance or compliance.
c. Significant changes in the composition of the Board of Directors
d. Clarification on negative media coverage involving the Company or an affiliate.
e. Any other matter that, in its opinion, jeopardizes the long-term value of investments.
Value Square Fund Equity Selection may also collaborate with other long-term investors on these issues as it deems appropriate. However, the risk of conflict of interest and the risk of acquiring inside information will be carefully examined before taking such actions. In addition to the above, Value Square Fund Equity Selection may invoke the following options if the outcome of the above assignment does not produce the expected results:
a. Selling our position
b. Reduce our position to a smaller weight
c. Expressing positions publicly
d. Contacting other shareholders to communicate our dissatisfactions and to know their views and, if necessary, acting together in order to have greater weight (in % of total shareholding).
e. Engage an institution that specialises in defending the interests of minority shareholders (e.g. Déminor, ADAM, etc...) and, through them, voice our grievances and, if necessary, safeguard and defend our rights through legal action.
No sustainability index
Is there a specific index designated as a reference benchmark to determine whether Value Square Fund Equity Selection is aligned with the environmental and social characteristics it promotes?
Value Square NV does not use a benchmark to measure the promotion of ecological and social characteristics by Value Square Fund Equity Selection like a sustainability index. The reason for this is that Value Square NV does not pursue sustainability goals with Value Square Fund Equity Selection but promotes Value Square Fund Equity Selection as an investment product with ecological and social characteristics.