While avoiding unsuitable companies and finding good investment opportunities in the leaders is our priority, our company engagement and investment process (via the EPORA) also helps identify which companies have the capability to become future ESG leaders.
Our proprietary Ethical Partners Opportunity and Risk Assessment (EPORA) considers such issues as where a company does business, what products or services they sell, their human rights policies and their environmental impact. These are key considerations for us in addition to our strict assessment of a company’s balance sheet, cash flow and our assessment of company management. This analysis is conducted in-house via the use of over 600 different and diverse data sources.
The Ethical Partners Australian Share Fund ("the Fund") has also adopted a Net Zero Emissions by 2050 target. We will transition the Fund via the Ethical Partners Carbon Alignment Process (EPCAP). This is our proprietary process whereby we track carbon emissions by company, have a record of a company's emissions reduction targets and gain an understanding from a portfolio perspective of what changes may be needed over time to reduce carbon emissions.
The EPORA is our assessment process that results in the exclusion of companies unsuitable for investment in the Ethical Partners Australian Share Fund if they are deemed high risk, the identification of companies that are leaders in ESG and indicates what changes can be advocated for at the vast majority of other companies in order to improve ESG practices.
Once this analysis is complete, the important process of engagement with board, management and sustainability teams of companies begins, in which Ethical Partners actively advocates for change. We aim to proactively engage with companies on relevant ESG issues identified through the EPORA. We also collaborate and advocate for change in the wider legislative, NGO and shareholder community, as well as through shareholder voting.
Our approach to ESG can be summarised as:
- Avoiding the worst ESG performers (excluded from the Ethical Partners Australian Share Fund investment universe). These companies are deemed high risk from a human rights perspective, in areas of governance and environmental performance. This is a qualitative process determined in-house.
- Owning shares in the ESG leaders (where valuation and the financial case is appropriate). ESG leaders are identified as "low risk" in many of the ESG assessment categories in the EPORA. This is a qualitative process determined in-house.
- Advocating for change in many of the balance of companies that are not excluded or are not ESG leaders. Details of our engagement efforts are outlined in our Engagement Report available on this website.
For each company under coverage Ethical Partners, via its proprietary approach, assesses each category under the EPORA and assigns a low, medium or high-risk rating. A company that is assigned a high-risk rating in any EPORA category cannot be owned by the Fund (ie is excluded). These risk ratings are frequently reassessed as information becomes available to Ethical Partners changes.
As an initial negative screen, the Ethical Partners Australian Share Fund will exclude:
- Companies that have first derivative exposure to alcohol, gambling, tobacco, uranium, weapons, predatory lending and fossil fuels.
Ethical Partners defines a first derivative exposure as:
- Direct and/or owned operations in the gambling industry
- Direct or owned primary production or sale of alcohol.
- Direct or owned primary production or sale of uranium.
- Direct or owned primary production or sale of weapons.
- Direct or provided predatory lending.
- Direct or owned primary extraction and sale of fossil fuel.
We define the threshold on these exclusions as a company having >1% of their net profit after tax (or an equivalent disclosed measure) generated in these areas. Typically it will be zero.
We note that the Fund may own companies with what we define as having second derivative exposures to these exclusions listed above.
For example, the Fund may own a company that produces agricultural commodities or containers used by the alcohol supply chain, or a REIT that has an alcohol retailer within their shopping centre or a carton and box manufacturer that a tobacco manufacturer may utilise. We also note that the Fund is likely to hold a second derivative exposure to companies who still utilise some fossil fuels in the course of their normal business activities. We may also hold a bank that is on the pathway to decarbonisation, but at this point retains some fossil fuel loan exposures. We also note that these second derivative company exposures will further form an important factor in the EPORA risk and opportunity analysis and investment screening, and engagements with these companies wherever possible.
The Fund is transparent that this is a realistic requirement in order to build a diverse portfolio of companies across the Australian share market while still being true to label regarding exclusions.
Geographic risk
The EPORA screen will also exclude all companies that have substantive operations in higher risk geographies (defined as those that rank in the bottom 30% of Transparency International’s Corruption Perceptions Index). This is defined as a company having >15% of their net profit after tax (or an equivalent disclosed measure) generated in these areas. Typically, it will be zero.
Ethical Partners utilises our proprietary EPCAP (Ethical Partners Carbon Alignment Process) to assist in our alignment with progress against these targets. The graphs below demonstrate the key metrics that are being tracked.
Our markedly lower emissions footprint clearly demonstrates how our active management, our EPORA research analysis, portfolio construction and investment process allows our clients to hold a portfolio that aligns with their values, creates a much lower carbon impact on people and planet, and additionally, carries markedly less investment risk in a rapidly transitioning global economy.
As of May 2024, The Ethical Partners Australian Share Funds Weighted Total Emissions footprint (Scope 1 and 2) was 85.17% lower than the footprint of the ASX300 as a whole.
Weighted total emissions Ethical Partners Australian Share Fund vs ASX 300
Source: EPCAP, May 2024
This also represents a decrease of 60% since we established our Net Zero Scope 1 and 2 targets and our emissions baseline in June 2021, and places our fund well ahead of our target of a 50% reduction in CO2 emissions (Scope 1 and 2) by 2030, and Net Zero by 2050.
Weighted Total Emissions June 21 - May 24
Source: EPCAP, May 2024
As of May 2024, the ETHASF’s Weighted Average Carbon Intensity (WACI) is only 57% of the Weighted Average Carbon Emissions of the ASX300 as a whole.
WACI Ethical Partners Australian Share Fund vs ASX 300
Source: EPCAP, May 2024
This metric has also decreased significantly, by 39%, since we established our carbon emissions targets and our emissions baseline in June 2021, and is well ahead of our targeted decrease.
WACI June 21 - May 24
Source: EPCAP, May 2024
The Australian Modern Slavery Act 2018 requires entities based, or operating, in Australia which have an annual consolidated revenue of more than $100 million, to report annually on the risks of modern slavery in their operations and supply chains, and actions to address those risks. Other entities, based or operating in Australia may report voluntarily. We believe that if investors are demanding transparency, accountability, disclosure and attention to Modern Slavery within their operations, that we as investors must also be transparent and accountable as to how we address modern slavery ourselves.
Investing in a responsible and sustainable way for the long term is at the core of what we do.
The Responsible Investment Policy recognises that Ethical Partners Funds has an integral commitment to investing in a responsible, ethical and sustainable manner.