Sustainability at portfolio level

¹UN GC = UN Global Compact, UN GPBHR = UN Guiding Principles for Business and Human Rights, ILO = International Labour Organization

Source: Bellevue Group, as at December 31, 2021

Bellevue addresses sustainability at the portfolio level as well as at the corporate level. All investment portfolios and investment funds are systematically screened for sustainability risks and violations of basic human rights (e.g. in accordance with the UN Global Compact Guideline). Besides upholding strict exclusion criteria – such as serious controversies that violate universal norms regarding the environment, human rights or good corporate governance – environmental, social and governance factors are integrated into the fundamental analysis of every company through an ESG integration process in which the associated financial risks or opportunities are evaluated with respect to future stock market performance. ESG ratings compiled by global leading ESG research providers are included in this process, which are interpreted with some degree of caution and, in certain cases, with a rather critical eye.

Bellevue endorses the goals of the Paris climate agreement adopted in December 2015 and supports measures to mitigate global warming. Bellevue thus attaches considerable importance to green investment portfolios which can help to achieve the climate goals of the Paris Agreement. Carbon intensity is measured regularly at the portfolio level and scored based on the relevant investment universe or fund benchmark.

Portfolio managers are engaged in an active and constructive dialog with the executives and other relevant stakeholders of portfolio companies on environmental, social and governance issues (engagement). Voting rights at annual general meetings of shareholders are actively exercised through proxy voting.

Management of sustainability risks and ESG integration approach

Transparency

In accordance with Regulation (EU) 2019/2088 of the European Parliament and the Council of the European Union of November 27, 2019, on sustainability-related disclosures in the financial services sector, Bellevue Group is committed to transparency with respect to:

• Policy for managing sustainability risks
• Adverse sustainability impacts at entity level
• Compensation policies in relation to the integration of sustainability risks
• Integration of sustainability risks
• Adverse sustainability impacts at portfolio level
• Promotion of environmental or social characteristics in pre‐contractual disclosures
• Sustainable investments in pre‐contractual disclosures
• Promotion of environmental or social characteristics and of sustainable investments on websites
• Promotion of environmental or social characteristics and of sustainable investments in periodic reports

Sustainability risks

«Sustainability risks» is defined in Regulation (EU) 2019/2088 of the European Parliament and of the Council of the European Union of November 27, 2019, on sustainability-related disclosures in the financial services sector (Sustainable Finance Disclosure Regulation, SFDR) as an environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment.

Bellevue Asset Management AG and its subsidiaries have integrated sustainability risks into the investment decision-making processes of all their actively managed strategies and associated funds with the aim of identifying, assessing and, if possible and appropriate, mitigating such risks.

While every investment strategy can be exposed to such sustainability risks to varying degrees, the projected impact of sustainability risks on the returns of the investment strategies will depend on the specific investment strategy.

The results of this integration and evaluation are summarized as follows:

For those investment strategies that promote environmental or social characteristics in the sense of SFDR, the projected negative impact on financial returns is lower compared to «non-ESG» investment strategies. This is attributed to the risk-mitigating ESG investment strategies, their future-oriented investment approach, their emphasis on sustainable financial frameworks, their activism in dealings with companies/issuers as well as their avoidance of non-compliant companies/issuers.

All investment strategies invest in accordance with international environmental, social and corporate governance standards (hereinafter referred to as «ESG»). The investments or securities selected in accordance with such criteria can entail a significant subjective element. ESG factors that are integrated into the investment process may differ with respect to investment themes, investment categories, investment philosophy and the subjective application of ESG indicators that determine portfolio design and the underlying assets. Accordingly, no guarantee is made that every investment by an investment strategy will meet all of the ESG criteria.

ESG investment guidelines

ESG framework in portfolio management

Exclusion of breaches against global norms

Bellevue Asset Management AG is committed to adhering to internationally recognized norms and excludes companies with serious violations of human rights, environment, labor norms and involvement in corruption. No investments may be made in companies that are implicated in serious environmental, human rights and business ethics issues. Compliance with the principles and guidelines of the UN Global Compact Compliance and the UN Guiding Principles on Business and Human Rights and with the standards and rights of the International Labour Organization serves as an indicator in such cases.

Value-based exclusions

In contrast to exclusions based on violations of global principles and standards, value-based exclusions are based on social, ethical or moral values. Thresholds have been defined for the percentage of overall revenues that can be generated from business areas with high ESG risk scores such as conventional weapons, thermal coal or tobacco production. Companies that exceed the generally accepted annual revenue thresholds in the business areas below are excluded from Bellevue’s investable universe:

Company affiliations with animal experiments, medical genetic engineering and embryonic stem cell research may also fall into this category. As a healthcare investment specialist, Bellevue Asset Management applies a nuanced approach in this respect. Their healthcare strategies accommodate generally recognized principles where possible. They categorically rule out investments in companies associated with illegal activities, an example of which would be intervention in the human genome for cloning purposes. However, nowhere in the world can medical products be approved without animal testing, even today. Our healthcare experts prioritize compliance with humane animal research principles in line with the principle of the 3Rs: Replace, Reduce and Refine.

ESG integration

Environmental, social and governance factors are integrated into the fundamental analysis of every company through an ESG integration process in which the associated financial risks or opportunities are evaluated with respect to future stock price development. This approach gives our portfolio managers a holistic picture of an enterprise.

The Environment sub-category focused on aspects such as whether a company systematically measures its carbon footprint and discloses the related data. The Social sub-category covers aspects such as product quality, data privacy policies and employee development. Examples of Governance issues are board independence, board compensation and corporate ethics.

Based on the premise that sustainability risks can have a negative impact on returns, the aim of ESG integration is to identify and address such risks within the scope of the investment process. The data gained through ESG screening is also used by the asset manager to anticipate new developments with respect to sustainability and to incorporate these findings into its investment decisions.

A system of ESG ratings forms the basis by which sustainability criteria are integrated into the asset manager’s investment decision process. Every issuer of securities in its investment universe is assigned an ESG rating based on various sub-scores. These sub-scores are based on data from independent third-party providers (currently MSCI ESG Research Inc, www.msci.com). Subsequently, the relevant ESG factors for an industry or individual company, examples of which are product quality, data privacy, human capital development and corporate ethics, are qualitatively integrated into the regular fundamental research process, in which metrics such as valuation multiples, sales growth rates, profit margins and competitive positions are examined, and thus help the asset manager to make sound security selection and portfolio weighting decisions.

The aggregate ESG scores generally used for this purpose are often interpreted with caution and critically examined. Most ESG rating methods are based on a predefined systematic approach that does not always result in an objective or «fair» assessment of a company’s ESG risks. In fact, such methods often systematically disadvantage start-ups and small cap companies relative to large cap companies. A lack of manpower and experience in handling ESG issues can result in a company being underrated, and the rating methodology used might not be equally applicable to every company in a given sector. Early-stage companies still in the drug research and development stage may be systematically underrated because they are not yet generating (much) revenue from the sale of medicines, which naturally puts them at a disadvantage versus established healthcare giants in the highly weighted «access to healthcare» criterion. It is also not unusual for a newly listed company to have a weaker ESG rating, simply because the ESG data available is still insufficient. That is why our portfolio managers always take a closer look at potential or ostensible «ESG laggards» (CCC, B rating) and reach out to the ESG specialists at its external ESG research providers and at the companies with lagging ESG ratings. Investments in «ESG laggards» are to be avoided and any justified investments in alleged «ESG laggards» must be documented in detail. Bellevue Asset Management does not apply a «best-in-class» approach for the reasons mentioned above, unless otherwise dictated by a specific investment strategy.

Evaluation of good governance practices, such as sound management structures, employee relations, compensation practices, and tax compliance is part of the overall assessment of ESG ratings and compliance with global norms. As an active, fundamentally oriented asset manager, good corporate governance is also an elementary component of our investment research process.

ESG stewardship

Portfolio managers are engaged in an active and constructive dialog with the executives and other relevant stakeholders of portfolio companies on environmental, social and governance issues. If there are any indications of a significant controversy related to ESG issues before a company representative is contacted, the portfolio managers constructively discuss the issue with the company and document subsequent developments (e.g., change in strategy or processes, improvement of ESG rating) over time. Engagement will be undertaken taking into account materiality and proportionality considerations. The level of engagement can vary depending on the size of the position held by an investment strategy, the market capitalization of the company, the stage of corporate development an entity is in and other factors. Written records of ESG engagement activities are maintained as part of the regular documentation of conversations with company representatives. Individual case studies may be suitable for external publication and thus for distribution to a wider audience.

Bellevue Asset Management AG also protects the long-term interests of its investors by making active use of its voting rights at the general meetings of shareholders of the companies in its portfolios via proxy voting.

Voting guidelines issued by third parties, for example by independent sustainability and voting rights organizations, can be taken into consideration. Bellevue Asset Management AG is under no obligation to take such guidelines or recommendations into consideration. It may go against the voting recommendations of third parties if it determines that these are not in the best interests of the investors.

Bellevue Asset Management AG actively exercises its voting rights as a rule.

It generally votes in line with the recommendations of company boards regarding agenda items that will not have a material impact on the long-term development of the company in question. Agenda items that we believe could have a material impact on the long-term development of the company will be examined in detail before deciding how to vote. Below are typical examples of such items:

• Mergers and acquisitions
• Divestment of business units
• Changes in capital structure or outstanding voting rights
• Corporate governance matters (acquisitions, restructuring projects, etc.)

The responsible portfolio managers will conduct this analysis. The analysis is based on the currently available information from various sources, for example, analyst reports or media releases and other reports published by the company itself.

Voting rights can be exercised directly through active participation in a general meeting; via an online voting platform (e.g., Broadridge or ISS) or through one or several representatives / proxy advisory firms.

Climate change factors

Bellevue Asset Management AG endorses the goals of the Paris climate agreement adopted in December 2015 and supports measures to mitigate global warming. Considerable importance is attached to green investment portfolios which can help to achieve the climate goals of the Paris Agreement. Carbon intensity (tons of carbon emitted per USD 1 mn of revenues) is measured regularly at portfolio level and scored based on the relevant investment universe or fund benchmark. It is also noted that more than 80% of our assets under our investment are invested in the healthcare sector, which is characterized by lower levels of carbon emissions than the manufacturing, commodities or energy sectors and the broadly diversified global equity indices.

Principal adverse impacts on sustainability factors (PAI)

Bellevue Asset Management AG currently does not take the adverse impact of its investment decisions on sustainability factors (so-called principle adverse indicators) into consideration due to the lack of the relevant market data required to determine adverse sustainability impacts and the corresponding weightings. Bellevue Asset Management AG will provide information on whether and how the most important adverse effects of investment decisions on sustainability factors will be taken into account by December 31, 2022, at the latest.

Signatory of UN PRI

Our commitment to sustainability is reflected in Bellevue Asset Management AG and StarCapital AG’s status as a signatory of the UN Principles for Responsible Investment (UN PRI). As a responsible institutional investor, we have always been bound to act in the best interests of our stakeholders over the long run. In this role, we believe that environmental, social and corporate governance (ESG) topics will have a growing impact on the risk-return profiles of investment portfolios and on their performance. We acknowledge that adherence to these basic ESG principles will lead to a better alignment between investor interests and the broader aims and interests of society.

As a signatory to the UN PRI, we continuously adapt our investment processes to the latest industry findings regarding sustainability aspects and are in constant dialog with our investment specialists regarding the integration of ESG. In addition, our experts actively share their experience and convictions in this regard at international sustainability conferences.

For the 2021 reporting cycle, PRI tested a new reporting system for signatories designed to streamline and improve the reporting process. However, due to the feedback from a large number of signatories, the release of UN PRI reporting results has been delayed. The next reporting cycle has also been postponed to 2023. We will publish the final report on our website as soon as it is ready.

Strategies with a focus on sustainability

Bellevue Asset Management AG applies stricter ESG criteria for two dedicated sustainability strategies that it offers which are aligned with sustainability labels recognized throughout Europe and which are audited and certified annually by external consultants. The Bellevue Sustainable Healthcare (Lux) which was launched in June 2018 complies with the strict requirements of the Austrian Ecolabel (UZ49) and the Bellevue Sustainable Entrepreneur Europe (Lux) which was relaunched in October 2021 meets the requirements of the FNG label. For both funds, Bellevue Asset Management AG is also a signatory to the Eurosif Transparency Code for sustainable investment products.