We are delighted to share with you that the CSSF (Commission de Surveillance du Secteur Financier) has approved the classification of the Mobius Emerging Markets Fund as an Article 8 fund. According to the Sustainable Finance Disclosure Regulation (SFDR), an Article 8 fund is “a fund which promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices”.
The SFDR was introduced as part of the European Commission’s 2018 Sustainable Finance Action Plan to improve transparency in the market for sustainable investment products and to prevent greenwashing. It regulates the requirements for financial service providers and owners of financial products to assess and disclose environmental, social and governance (ESG) considerations publicly. The aim is to enable investors to better understand, compare and monitor the sustainability characteristics of investment products.
As a quick reminder, MCP’s investment philosophy utilises an active ownership approach with an emphasis on improving ESG-standards. We do not constrain ourselves to conventional definitions of ESG but also place a heavy emphasis on rigorously assessing corporate culture (ESG+C®). Our engagement with companies is highly focused, with the aim of increasing long-term shareholder value.
While we are happy to see the fund achieve the Article 8 status and the team’s engagement around improving ESG+C® factors being recognised, the process has also revealed the limitations of this framework. To be able to distribute Article 8 funds to investors with a preference for sustainability as per MiFID II, in addition to promoting environmental and social characteristics, funds will have to invest a percentage of their portfolio sustainably similarly to an Article 9 fund. This triggers additional reporting requirements. The SFDR-mandated disclosure on Principal Adverse Impact (PAI) factors focuses on possible harm that investment decisions may have on sustainability factors. Examples of PAI factors include greenhouse gas (GHG) emissions, water pollution and gender diversity at the board level.
The difficulty for emerging markets funds in general—and small- and mid-cap funds in particular–is limited data availability. While many developed market companies are publishing GRI compliant sustainability reports and are on the radar of ESG rating agencies, EM companies are still lagging behind. Furthermore, the EU Commission promotes SFDR aligned reporting for EU-based companies but there is no comparable initiative in emerging markets yet. While the awareness of the importance of sustainability factors is constantly growing in emerging markets, reporting on a set of 14 PAI indicators across the portfolio will prove challenging.
The team at MCP has created a proprietary framework that uses a variety of publicly available sources to capture material data to assess the ESG+C® performance of each portfolio company. It also engages with companies to improve and make their ESG reporting compliant. The progress the portfolio is making along ESG parameters is tracked in our quarterly reporting. The latest Q3 2022 report is now available on www.esgplusc.com. This data feeds into a tailored action plan for every portfolio holding aiming at improving the companies ESG+C footprint.
This very customised approach to sustainable investing goes, in our opinion, far beyond a reliance on ESG-ratings. We do not invest in companies which are already ESG leaders but in businesses which have the potential to become such, and we support them actively throughout this process. We would argue that working with these companies on improving their ESG footprint and making their reporting SFDR compliant adds significant shareholder value while reducing potential harm to the environment, employees and other stake holders. This in turn, should make the fund an attractive investment option for investors with sustainability preferences as per MiFID II. However, it remains challenging for a fund like ours to fulfil the data requirements stipulated by the SFDR for sustainable investments for a significant portion of the portfolio.