SUSTAINABILITY SPOTLIGHT

Setting
the bar high

With FP Carmignac European Leaders laying a benchmark for sustainable investing, Jennifer Hill explores the roots of Carmignac’s sustainability practices, which go back three decades
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What are Carmignac’s credentials in sustainable investing?

Carmignac’s sustainable investment heritage dates back to 1989, when it started excluding many sectors, including tobacco, weapons and adult entertainment, from all its funds for ethical reasons.

The company has since accelerated its focus on sustainability. In 2007, Sandra Crowl joined the company as head of product and a member of the investment committee. She became head of its responsible investment team in 2017. Today, she has the title of stewardship director and the team has grown to seven.

In 2012, Carmignac became a signatory of the United Nations Principles for Responsible Investment, and in 2013, Maxime Carmignac, daughter of the group’s billionaire owner Édouard, became managing director of Carmignac UK. She is instrumental in setting the strategy of the firm and has a particular focus on responsible investment.
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What makes the FP Carmignac European Leaders fund sustainable?

Since its inception in May 2019, the FP Carmignac European Leaders fund has used both negative and positive screening to focus on companies that are contributing to sustainability.

At the end of 2021, it made this more explicit by adding an emphasis on alignment with the United Nations Sustainable Development Goals (SDGs).

‘There is wide familiarity with the SDGs, so it makes sense to use that framework to express our focus,’ says portfolio manager Mark Denham.

Out of the 17 SDGs, Carmignac has selected nine. Additionally, it has put in place a set of rules to make sure the fund complies with its commitment to sustainability.

How these rules work? Generally speaking, the majority of the investments made by the fund have to align with one of the selected SDGs. However, there is only one way investments are deemed aligned: the majority of a company's revenues have to be derived from activities that align with an SDG.

At present, the fund is far outstripping these rules, with actually 73% of its investments being in companies that align with one of the nine selected SDGs.

The fund also has an explicit low carbon objective and avoids companies with high CO2 emissions per unit of revenue and those with material exposure to fossil fuels or energy generation through fossil fuels. Carmignac Portfolio Grande Europe, the SICAV version of the fund sold on the continent, holds the French and Belgian SRI labels.*
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"Our ESG team has done a complex analysis of every possible level of company activity and subsector to a very focused level"

Mark Denham Image
How much data is available on the fund’s sustainability?

Its monthly factsheet contains a full-page portfolio ESG summary. It identifies the top five ESG-rated portfolio holdings and top five active weights and their ESG scores. It also assesses the portfolio based on MSCI ESG company ratings and carbon emissions based on S&P Trucost data, which uses estimated or declared data on scope one and scope two carbon emissions. Scope one emissions are those thata company emits directly, through its production or manufacturing, for example. Scope two are those used to fuel a company’s operations, such as those associated with electricity consumption. Over time, it is hoped that disclosure of the fund’s sustainability will further increase as more data becomes available,such as that on scope-three carbon emissions – which relate to the company’svalue chain and are the hardest to measure as they are outside its direct control. Examples include the use and end of life treatment of sold products and leased assets.

What ratings or analyses are used when integrating ESG?

For Denham and his colleagues, environmental, social and governance factors are explicitly part of the investment decision. To facilitate deeper and more insightful analysis, Carmignac launched its proprietary ESG research system START(System for Tracking and Analysis of a Responsible Trajectory) in November 2020. The result of in-depth work conducted by its responsible investment team over the course of a year, START provides a formal, structured analysis on each company regarding its responsibility, purpose and trajectory. It combines a wide range of third-party data with in-house qualitative assessment to help portfolio managers and analysts identify potential ESG risks and assess the positive outcomes a company may have for the environment and society.
Having input the ticker of a company, the tool generates more than 30 data sources from different providers one very thing from CO2 emissions and water usage to inclusion and employee satisfaction.‘It’s a fantastic tool,’ says Denham. ‘Rather than trawling through a lot of information to get that stock page, we have this tool as a cost and time saving initiative. I can see the weak or strong points a company has from an ESG perspective and the areas to investigate, where further investigation is warranted.’

How has a sustainable focus benefited the fund?

Far from detracting from performance, the focus on sustainability has helped the fund outperform. Since inception on 15 May 2019 to 31 May 2022, the fund has returned 41.39%, while the MSCI Europe ex UK index** has gained 24.12%.

‘Most of the fund is in high quality companies that have high profitability and are reinvesting for the future,’ he says. ‘The reason we focus on those is we think fundamentally they have excellent long-term prospects. And I don’t think you can say a company has good long-term prospects unless you are scoring well on sustainability.’

* SRI label obtained January 2019 (lelabelisr.fr); label towards Sustainability obtained February 2020 (towardssustainability.be)
** MSCI Europe Ex UK Net Total Return USD, converted to GBP end of day
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