sustainable investment report: esg a key tool for emerging ......beatrice bushati presenting the...

Sustainable investment reportResults and impact 2019

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Sustainable investment report:

ESG — a key tool for emerging and frontier market investments

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Sustainable investment report

Important informationEvery effort has been made to ensure the accuracy of the information in this document, but it may be based on unaudited or unverified figures or sources. Full information about East Capital’s funds, such as the prospectus, key investor information document (KIID) and other fund documents can be obtained free of charge from East Capital, from our local representatives and are available on East Capital’s website. The availability of East Capital’s funds may be limited or restricted in some countries. The information about East Capital’s funds is only directed at those investors located where East Capital is authorized to make this information available, and is not intended for any use which would be contrary to local law or regulation.

Investment in funds always involves risk. Past performance is no guarantee for future performance. Fund units may go up or down in value and may be affected by changes in exchange rates. Investors may not get back the amount invested.

In Dubai this document is distributed by East Capital (Dubai) Limited (“ECL”), which is regulated by the Dubai Financial Services Authority, (“DFSA”). The information contained in this document is intended for Professional Clients with sufficient investment knowledge and experience as defined in the DFSA COB Rules and no other persons should act upon it. Further, the information contained in this document is not intended as financial advice and should not be treated as such.

© East Capital 2020Graphic design and production: East Capital & Thure AB. Photos by East Capital staff, Alamy/TT (cover), Christopher Penler/Alamy Stock Photo (page 3), Snežana Vučetić Bohm (page 3, 5, 29), Fredrik Reuterhäll (page 5, 18), Etalon Group (page 18), Jonathan Chu/TT (page 20), Länsförsäkringar (page 23), IMH Gallery (page 25), Natalia Beshkareva/AP/TT (page 32), Rensource/Adamola Adesina (page 35).

Cover page: Chongqing, a fast-growing megalopolis in western China with a population of over 30 million.

East Capital is a leading active asset manager specialising in emerging and frontier marketsOur investment teams base their investment strategy on in-depth knowledge of local markets, fundamental analysis and frequent company visits. Evaluation of ESG-related risks and opportunities forms an integral part of the investment process. We favour investments in companies that show long-term sustainable growth and have responsible owners.

East Capital is part of East Capital Group − an independent asset management group that comprises several strategies and specialisations to offer active management solutions in equities, bonds and real estate assets with a clear ESG framework. Founded in Sweden in 1997, East Capital Group manages a total of EUR 3.8 billion for a broad range of international investors including leading institutions, companies and private individuals. The main operations include East Capital − specialising in emerging and frontier market equity investments, East Capital Real Estate − managing commercial real estate investments in the Baltic region, Espiria − offering bespoke global and Nordic equities and fixed income strategies, and Adrigo − offering hedge fund strategies targeting absolute returns. East Capital Group also has a significant holding in the listed company Eastnine (OM:EAST), which owns, develops and manages sustainable, premium office space in the Baltic region.

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Contents

6 How we generate value

7 ESG in each step of the investment process

8 Our ESG tools

9 Our proprietary ESG scores

11 Engagement approach and methods

15 Engagement summary

16 Direct engagement with companies

19 Voting

22 Support to associations and initiatives

25 Dialogue with regulators and market participants

33 Understanding climate change related impact

33 Best Corporate Governance Award

Page 15Page 12 Page 18

58company engagements during 2019

More than

1,000company meetings every year and our engagement to impact and drive change

Nordic approach to sustainable investingNordic countries have long been at the forefront of the ESG movement. Chief Sustainability Officer Karine Hirn on Nordic values to inspire Asia at the Bloomberg GPF Sustainable Investing conference in Bangkok.

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Testing Russia’s climate resilienceDavid Nicholls, Assistant Portfolio Advisor, shares lessons learned from a proprietary model we developed to assess transition risks for Russian holdings

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Fearless woman in emerging marketsInitiatives to advocate for greater gender diversity in the boardrooms of our portfolio companies

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Senior Analyst Beatrice Bushati presenting the results of a successful investor engagement in Russia

The company ratings from ESG data providers are still mainly based on existence of policies rather than actual practices Page 9

No time to rest on the ESG journeyChairman Peter Elam Håkansson and Karine Hirn, Chief Sustainability Officer, reflecting on a busy year and latest ESG investment trends

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Is ESG really compatible with emerging & frontier markets? The answer is: ESG investing is what these markets need.

Active ownership report

Our approach and framework

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An intensive year for East Capital2019 was a very busy year for us. We added a sustainable strategy, East Capital Global Emerging Markets Sustainable, to our fund range, which received the LuxFlag ESG label by the end of 2019. We deepened our activities in terms of ESG integration on the public equity, fixed income and the real estate side, as well as intensified our active ownership activities.

We decided to join three Climate Action 100+ engagements, became a supporter of TCFD and contrib-uted to the launch of the Global Investors for Sustainable Develop-

No time to rest on the ESG journeyESG momentum

However you define it – and definitions do vary – the trend is indisputable: ESG investing is growing exponentially.

For instance, last year in Europe there were a record EUR 120bn of fund inflows into the asset class, which by the end of 2019 reached a value of EUR 668bn. On top of that, 360 sustainable funds were launched1.

The number of PRI signatories grew from 2,234 to 2,810 during 2019-2020, implying a 26% y-o-y growth2. The number of Asian signatories is growing, bearing witness to the pick-up in awareness outside of Europe, which nevertheless remains ahead in terms of practices and regulatory developments. In 2019 we joined the PRI in Person conference for the fourth time, and the event broke new records in terms of participants joining the event in Paris, and we noted two trends: an increasing number of investment professionals (and no longer only ESG specialists) among delegates and more gender balance on stage and in the room. Green bonds issuance also broke new ground, as USD 225bn were issued during the year, a growth of nearly 50% y-o-y3, reflecting the increasing focus on climate risks.

1997 20112002 2004 2007 2010

East Capital is founded. Based on sound Nordic values, we set out to be long-term, active and

responsible owners. Start engagement and voting.

Expand voting and nomination

and election of independent

directors.

Send our fi rst annual letters to all portfolio companies, detailing our expectations as owners. Become active

members of Russian corporate governance association, API.

Launch of East Capital Awards, to

reward the progress of outstanding

companies in East Capital’s portfolios.

Implement sector exclusion criteria

(weapons, tobacco, pornography)

for all fund products.

Start semi-annual controversy screening of all funds using external

research partner. Establish new role within investment team: Head

of Corporate Governance and Sustainability.

1 Morningstar2 UN PRI3 Climate Bonds Initiative

ment (a UN-backed alliance inspired on the model of the Swedish SISD), and we awarded our Best Corporate Governance Award to a leading Rus-sian steel producer, Severstal.

We joined CDP’s annual disclosure campaign and supported global international statements on climate change as part of the Investor Agenda. We also actively shared our views on responsible investing in general, and specific ESG topics from gender diversity to climate, at several conferences around the world, such as in Bangkok, Cyprus, Hong Kong, London, Luxembourg, Moscow, Oslo, Stockholm, Saint Petersburg, Shanghai, Shenzhen and Vilnius.

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Total assets under management Asset owners' assets under management

Number of asset owners Number of signatories

AUM (USD trillion) Nº Signatories

The growth of PRI - the world’s leading proponent ofresponsible investment

Source: www.unpri.org

Emerging and frontier markets offer both huge challenges and unparalleled opportunities for responsible investing.

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What are the drivers for ESG investing?

The two most significant growth drivers are seeking better returns and meeting client expectations. The first - which for us is the most important - is the fact that it has proven to be profitable in terms of value creation. We started investing in Russia 22 years ago and already then paid a lot of attention to companies’ ownership structure, board and management quality and their labour and environmental practices. It was not called ESG at that time, but made a lot of sense for investors like ourselves, who wanted to invest beyond indices and in companies often unknown to others and not covered by sell-side analysts. 22 years down the road, we are equally or even more convinced that ESG plays a huge part in the fundamental analysis we perform to create risk-adjusted returns.

The second driver is fuelled by client demand. With our roots in Sweden and Northern Europe, this dimension came early to East Capital, as our investors both on the retail and the institutional side started engaging with us on these topics more than ten years ago.

2012 20192013 2015 2016–2018

Become signatory of UN-backed

Principles of Responsible

Investment, PRI.

Launch of East Capital Global Emerging Markets Sustainable, awarded an

ESG label by LuxFlag.

Join likeminded investors in external engagement forum

which engages on ESG contro-versies. Launch of East Capital Best Corporate

Governance Award.

Integra, a landmark court case, puts us on the map

for protecting minority in-vestors all over the world.

Implementation of ESG scorecards, further integrating sustainability and SDGs in our

investment process.

Our take on this is that we prefer to invest in companies with the potential to become ESG leaders, and to support them on the way. As shareholders, we are fundamentally better positioned to push these agendas, using various tools such as dialogue, voting, and a collaborative approach.

This is a much more value-added approach than excluding the “bad companies,” or only investing in best-in-class companies according to ESG data providers, especially when the scores are mainly based on existence of policies, while our ESG analysis is based on actual practices.

Responsible investing is not a goal per se, that can be defined as a specific objective or a destination. It is the journey that matters, as we, together with our portfolio holdings, with our investors and with other stakeholders, are committed to exploring ever-changing landscapes along the way. Emerging and frontier markets offer both huge challenges and unparalleled opportunities for responsible investing, and we are proud of our framework and results.

Peter Elam HåkanssonChairman and CIO

Karine HirnPartner and ChiefSustainability Officer

Today, there are hardly any requests for proposals sent to us by prospective investors without a section on ESG practices, and hardly any Q&A session following presentations to clients without ESG questions. We think this is great and hope this trend will continue, as our investors’ capital and interest in sustainability are very important drivers for the transformation of our industry and the world of investing.

Is ESG reallycompatible with emerging & frontier markets?

This is a question we often get when we meet with investors, as some might believe these markets are a “lost cause”. We usually reply that it is actually the other way around: ESG investing is what emerging markets need.

Companies in our investment universe are making tremendous progress in terms of ESG practices. There are several reasons for this progress, but in many markets the impetus actually comes from investors such as ourselves.

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The East Capital team, Beatrice Bushati (in the middle) and David Nicholls (second from right), meeting with the Chairman and Deputy Chairman of Norilsk Nickel in Moscow alongside other investors from the Climate Action 100+ initiative to discuss climate change. Norilsk Nickel is the largest palladium and refined nickel producer in the world. As an example of positive development, they appointed the former director of conservation policy at WWF Russia to their board last year, something that would have been inconceivable a few years ago.

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How we generate value

Since day one, we have set out to be a long-term, active and responsible investor. Our investment teams base their investment strategy on in-depth knowledge of local markets, fundamental analysis and frequent company visits. Evaluation of ESG-related risks and opportunities forms an integral part of the investment process. We favour investments in companies that show long-term sustainable growth and have responsible owners.

Over the years, our investment teams have interacted with thousands of companies, management teams, regulators, governments and other investors. We have consistently worked on developing how we address sustainability and ESG to ensure that we are able to offer sustainable investment products to our clients. This has resulted in a unique and proprietary approach that has been diligently carried out by our investment teams for over 20 years. Our ultimate goal remains the same: to make better informed investment decisions and enhance the value of our portfolio companies through active ownership, while contributing to the advancement of sustainability in our investment universe.

Local Frequent on-the-ground meetings with company owners, management teams and policymakers is an integral part of the investment process, providing us with in-depth local knowledge, access to information and an extensive network. In emerging and frontier markets, a true regional presence is vital to make better informed investment decisions and monitoring existing holdings.

Research-drivenDiligent research is essential for identifying key performance drivers and correctly assessing risk. We rely on our own research, including risk scenarios and a proprietary ESG analysis, in our investment process.

Long-term We look beyond the short term. While we can make some short-term adjustments, we do so without sacrificing the overall long-term focus and the low core turnover of the portfolios. We focus on companies with long-term growth prospects. Companies that are benefitting from structural growth outside of the energy and commodity spaces. Companies with strong and predict-able growth profiles, high and consistent return on equity, high free cash flow and high capital efficiency. Businesses with these attributes are primarily found within consumer staples and discretionary, infor-mation technology and healthcare sectors, but also among the solution providers to sustainability-related challenges; primarily environmental technologies such as clean energy, energy efficiency, clean water and air, waste management and clean transpor-tation. Fundamentals matter over time.

Active stock pickers We look beyond index compositions and invest by conviction on a company by com-pany basis. Our portfolios typically have a high active share. Our off-benchmark ex-posure includes allocation to smaller com-panies, frontier markets and local Chinese A-shares. Smaller companies offer a larger exposure to certain fast-growing sectors responsive to local market dynamics (such as consumer discretionary, industrials and healthcare). Frontier markets are in gen-eral both faster-growing and less correlated to the developed world than emerging markets, and thereby offer interesting opportunities for well-informed investors. To find meaningful exposure to renewable energy and clean technologies in emerging markets, allocation to local Chinese shares is critical. China is the largest cleantech universe of all emerging markets by a wide margin, and most of these companies are listed on the local exchanges in Shanghai and Shenzhen.

Key characteristics of our portfolio management approach

ResponsibleESG factors are an important driver of long-term investment returns from both an opportunity and a risk-mitigation perspec-tive. Significant overweight positions have strong or clearly improving sustainability ratings based on a proprietary ESG score-card with critical ESG areas relating to main shareholders, management, placements, dividends, extraordinary events, account-ing, auditing, environmental and social factors, corruption and ethical issues.

Active owners We are enforcing improved ESG standards and strengthening the chain of accountabil-ity in portfolio companies through our monitoring capacity and constructive engagement. Continuous dialogue with portfolio companies includes developing a clear and consistent dividend policy, pro-fessionalising board work and processes, raising and addressing environmental con-cerns, improving transparency, reporting and investor relations, improving rights for minority shareholders or reaching a better fair-value in buyouts. Our experience has shown that an engaged and constructive dialogue will more often lead to convincing the company to initiate positive change, while simply exiting the investment achieves nothing. Voting at AGMs/EGMs is another important way for us to communi-cate our views to the companies and their management. Throughout the years, we have also engaged in numerous dialogues with governments, stock exchanges, regula-tors, standard-setters, industry initiatives and other market participants to promote improvements in the institutional and legal framework of specific markets.

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ESG in each step of the investment processAll East Capital strategies follow the same investment process, designed to systematically select the companies with the best risk/return profile.

1 Key active positions are our largest overweight positions, several of which might not be in the benchmark or, in other words, represent how we deviate from the broad market.2 Source: East Capital’s proprietary ESG scorecards, portfolio as of 31.12.2019

Defi nition of investable universe

The overall investment universe is divided into regions, countries and themes and screened by market cap and ESG exclusion criteria.

Company focus

Identifying quality companies with long-term growth prospects

Six investment criteria:

1. Access to structural growth

2. Long term competitive position and strong management

3. Strong FCF or highly profi table investments

4. 1-3 areas where we diff er to consensus

5. Reasonable valuation or signifi cant upside

6. High East Capital ESG Score

Fundamental research

Company meetings are an integral part of the investment process to support and comple-ment the fundamental analysis. Proprietary research is performed on revenue drivers, cost drivers, competitive strength, fi nancial capa-bilities, management and on ESG factors such as ownership, manage-ment, placements, div-idends, extraordinary events, accounting, audit, environmental and social factors, corruption and ethical issues.

Portfolio construction

Key Active Positions1

Overweight (> versus benchmark, level of over-weight varies between the regional strategies) meet several criteria: quality companies with a sig-nifi cant upside, quality management/owners and strong ESG standards in accordance with the pro-prietary ESG scorecard. These companies we endeavour to meet four times each year, we engage as active share-holders, create our own model and research to understand key perfor-mance drivers in detail.

Implementation& monitoring

Detailed performance and risk analysis. Monitoring of ESG fac-tors, proxy voting and ESG engagement. Our ESG scorecards are reviewed annually, or upon a major event, and voting and engage-ment activities are car-ried out continuously throughout the year.

Overall investment

universe

Investable universe

Focus list

Focus list with

conviction and views

Model portfolio

Actual portfolio

Case: East Capital Global Emerging Markets Sustainable portfolio2

42% average independent non-executive directors (INEDs)

99% of the portfolio is engaged in offering certain goods or services that has potential to contribute to 1 or more SDGs

89% More carbon efficient than the benchmark

Diversity and independence, reporting and transparency, incentive schemes

Contribution to sustainable development

31% of the portfolio has a board where INEDs comprise > 50%

12% average female board directors

Report emissions data to CDP

Produce sustainability report based on framework such as GRI or IIRC

Have best in class incentive program supporting value creation

37%61%54%

14 Companies in the portfolio with on-going engagement activities

21 Engagement initiatives conducted with these companies

Engagement

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ESG pillar 1:

Sector exclusions (negative screening)Since 2007

What:

All portfolios excludecompanies that are known to generate signifi cant share of revenues from:— Weapons— Tobacco— Pornography

No investment in any company with any exposure to controversial weapons

Global Emerging Markets Sustainable also excludes companies generating significant share of revenues from:— Fossil fuel— Gambling— Alcohol

How:

Screening implemented in analyst’s/PM’s initial analysis

External screen available if uncertain

Portfolios re-confirmed annually

ESG pillar 2:

Controversy(norms-based) analysisSince 2010

ESG pillar 3:

ProprietaryESG scoresSince 2016

What:

Alerts us of suspected breach of international conventions and norms on human rights, labour standards, environ-ment, health & safety orbribery

Input for dialogue and engagement

How:

Screening implemented in analyst’s/PM’s initial analysis

External screen available ifuncertain

Ongoing monitoring by analysts/PMs

Portfolios re-confi rmed annually

ESG pillar 4:

Active ownershipSince 1997

What:

Active ownership to add value post investment

Communicate our views andexpectations as owner

Initiate engagement where relevant

How:

Proxy voting

Filing shareholder proposals

Nominating and electing independent directors

Letters to portfolio companies

Engaging on our own

Collaborating with other investors, associations, initiatives if relevant

What:

10 Red Flags section + more extensive ESG scoring section

Separate SDG module

Leverage our unique resources,experience and track record in emerging and fontier markets

Focus on most relevant and material ESG risks AND opportunities in our markets

How:

Scoring done by analysts/PMs: own judgment remains critical

Calibration performed with ESG team

Start with Red Flags for all holdings, full ESG score and SDG module score for all Key Active Positions and largest holdings

Scores reviewed annually or upon major event

The practical ESG tools used in our investment activities are organised in four pillars: sector exclusions (negative screening), controversy (norms-based) analysis, proprietary ESG scores, as well as active ownership.

Our ESG tools

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Our proprietary ESG scores

Our expectation is that companies should act and operate in a manner that is supportive of achieving these SDGs, e.g. work toward gender equality and decent work (and not actively contribute negatively). These goals are addressed in our overall ESG assessment of the company, as the proprietary scorecard is cross-referenced against each of these goals, with questions within the E, S and G sections.

The 2030 Agenda for Sustainable Development (SDGs)

Our scorecard guides us in our assessment of relevant and material ESG risks and opportunities from an emerging and frontier markets’ perspective. As the scorecards are filled in by the relevant research analysts, portfolio managers and portfolio advisors, with the support of our Chief Sustainability Officer, we ensure that the entire investment team integrates relevant and materials risks and opportunities in their fundamental analysis, ensuring a more holistic analysis of company quality. The scorecard comprises 10 Red Flag questions and 50+ additional questions within E, S and G, which structures our review to consider relevant and material ESG risks and opportunities and an SDG module.

Some of the main benefits of the ESG scorecard are that it:

• ensures that we consider relevant and mate-rial E, S, and G related factors, including risks and opportunities related to the SDGs;

• generates a list of issues/questions to research further or raise with the company;

• identifies areas of improvement that we can address through constructive engagement;

• helps to focus our internal resources and ensures that we bring sustainability topics onto corporate agendas;

• ensures an integrated approach and a holistic analysis of company quality due to its being executed by the investment team;

The 17 SDGs are grouped into two categories:

In order to assess the impact of these goals in a structured way, the SDG module contains questions and examples per goal that help us to identify streams of revenue from a company’s products/services or technologies that are expected to either:

• BENEFIT due to greater demand in order to achieve the SDGs, e.g. clean energy, education, health OR

• SUFFER due to lower demand or total substitution in order to achieve the SDGs, e. g. fossil assets or unhealthy food.

1. Goals that we believe may impact the demand for, or attractiveness of, a company’s products, services or technologies.

2. Goals that we see as the universal responsibility of all companies to address in their operations, regardless of size, market or sector.

In 2016 we developed and launched a proprietary ESG scorecard to further integrate ESG into our investment process. The decision to develop our own scorecard was mainly driven by the desire to formalise and structure our own knowledge, experience and views of relevant and material ESG-related risks and opportunities. It was further compounded by the lack of coverage of external ESG research on emerging and frontier markets. Since 2017, it also includes a separate SDG module to ensure that we integrate risks and opportunities related to these goals on the path to 2030.

Company ratings from ESG data providers are still mainly based on “tick the box” questions on existence of certain policies. A stark contrast to our scorecard, where to improve its score the company must implement tangible changes.

• allows us to adjust our scenarios and modelling assumptions, if needed;

• helps to determine a level of conviction, (together with financial quality, significant upside, etc), reflected in the stock allocation.

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East Capital’s proprietary ESG scoring model

Red fl ag score

ESG score

SDG module

Holdings Aim Area covered Score levels

All existing holdings

When initiatingresearch on newcompanies

All Key Active Positions and top holdings as a minimum

All holdings in some selected strategies (Global Emerging Markets Sustainable)

All Key Active Positions and top holdings as a minimum

All holdings in some selected strategies (Global Emerging Markets Sustainable)

Focuses on major Red Flags related to corporate governance, ethics and corruption

Covers international norms and standards and severe systematic environmental or social controversies

Goals: 1- 4, 6, 7, 9 and 11-1512 Goals that we believe may impact the demand for, or attractiveness of, a company’s products, services or technologies.

Goals: 5, 8, 10, 16 and 17The remaining 5 Goals that we see as the universal responsibility of all companies to address in their operations, regardless of size, market or sector are assessed in the E, S and G sections of our scorecard.

Governance (75%)• Shareholders/board/

management• Dividend policy• Capital allocation• Ethics and corruption• Transparency

Environment (12.5%)• Impacts on CapEx/OpEx

next 5 years• Management’s

understanding of relevant risks and opportunities, incl. climate change

• Significant controversies

Social (12.5%)• Impacts on CapEx/OpEx

next 5 years• Supply chain• Health & safety• Significant controversies

At the outset, considers the 10 most critical ESG questions in emerging and frontier markets

Gives quick ESG overview and understanding

Helps focus research resources

Framework to identify streams of revenue from a company’s products/services or technologies that are expected to either:

BENEFIT due to greater demand in order to achieve the SDGs, e.g. clean energy, education, health; OR

SUFFER due to lower demand or total substitution in order to achieve the SDGs, e.g. fossil assets or unhealthy food

50+ questions to consider relevant and material ESG risks and opportunities in EMs and FMs

Helps to determine level of conviction (together with financial quality, significant upside, etc.)

Generates a list of issues/questions to research further or raise with the company

Allows us to adjust our scenarios and modelling assumptions, if needed

Maximum 2 Red Flags for Key Active Positions

More than 3 Red Flags should not warrant further research or investment unless specific reason to accept higher ESG risk is warranted, accepted and documented

Determine to which extent an issuer can be categorised as being a “solution provider”

Adjust modelling assumptions, level of conviction or stock selection

Key Active Positions should have an ESG score of at least 70

Other holdings are typically scoring above 60

However, specific insight or reason may allow us to accept a lower score – and higher ESG risk – if warranted, accepted and documented, for example, if we have sufficient evidence and tangible triggers for near-term ESG improvements. We may, for certain reasons, such as liquidity requirements, be forced to hold certain companies that we see as laggards from an ESG perspective.

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Engagement process

Identify

Proactive based on issues or areas of improvement identified in East Capital’s proprietary ESG scorecards.

Reactive based on:• current events• norms-based analysis• invitation from other investors

Assess

Engagements are prioritised based on East Capital’s ability to influence a company and add value.

Portfolio weighting is also considered when prioritising engagements.

Main goals of the engagement are identified.

Engage

We engage directly with either the management team, the board or other shareholders through:• on-the-ground meetings with companies as well as our extensive local networks• letters, phone calls or emails to companies

We collaborate with other investors and stakeholders

Monitor/Report

Discussed in team meetings.

Progress is monitored on a case-by-case basis.

Where there are no signs of progress, there may be changes to the portfolio (depending on the materiality of the issue).

Sustainable Investment Report is produced annually.

Since day one, we have set out to be a long-term, active and responsible owner.

We are long-termWe see beyond the short-term gain and look for long-term investment value

We are activeFace-to-face involvement through company visits helps us make better-informed investment decisions, and we constructively engage on issues that are important to us as owner

We are responsibleOur fundamental bottom-up research process addresses and integrates investment risks and opportunities associated with relevant and material environmental, social and corporate governance factors.

When contemplating an investment in a new company, understanding the shareholder structure is key. So, the first section we turn to in the annual report is the list of share-holders. Is there a controlling shareholder? What are the incentives and goals of this shareholder and how do they align with those of us as minority investors? Assessing the main shareholders’ incentives consti-tutes an important part in determining alignment. When possible, we aim to directly engage with other shareholders to build trusting relationships where we can maintain an open dialogue on the compa-ny’s progress and, if needed, also be able to convey any constructive suggestions we believe may generate and support shared value creation for all shareholders.

We encourage all companies’ management teams and boards to make sure that rigorous analyses are done to 1) identify and prioritise their relevant and material environmental and social factors on a market, sector and operational level, and 2) address and integrate these into the company’s strategy. We see this as an additional responsibility under good governance, making companies better positioned to react to changes in regulation, consumer demand and other develop-ments, thereby ensuring that they remain relevant in the long term.

There are numerous examples where our assessment of ESG standards has helped us avoid investments in companies that later failed, or where we have preserved value by blocking unfavourable resolutions at shareholder meetings. But more important-ly, East Capital is using its role as an active owner to engage with portfolio companies to ensure that the ESG risks and opportuni-ties that, in East Capital’s view, are relevant to a company’s operations, are strategically assessed and integrated.

We encourage all companies’ management teams and boards to make sure that rigorous analyses are done to identify relevant and material environmental and social factors and to integrate these into the company’s strategy.

Engagement approach and methods

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Prioritising engagementsWe have a formalised approach for how we allocate our internal engagement resources:• Prioritise engagements in key active

positions and 10 largest holdings of any strategy;

• Prioritise ESG topics seen as especially important to our EM/FM investment universe.

Engagement resourcesAll analysts, portfolio managers and portfolio advisors are actively involved in ESG matters as part of their everyday work; through the completion of ESG scorecards, participating and contributing in engage-ments and proposing and deciding on voting instructions.

Since 2010, the Head of Corporate Governance and Sustainability (succeeded in 2019 by Partner Karine Hirn as Chief Sustainability Officer, with the help of a Research Assistant, Paul Nissan) has been evaluating and structuring the practical ESG-related tools used in investment activities, supporting the investment team in identifying and interpreting the impact and consequences of existing and emerging ESG related factors on issuers and portfolios, as well as ensuring relevant and material ESG matters are reported and discussed in investment team meetings and reported to the investment committee and board meetings.

East Capital’s on-the-ground team and exten-sive local networks provide us with a range of valuable tools that can be used to initiate and advance engagement. These include:• dialogue with company representatives;• a letter from our CIO to new portfolio

companies, communicating our role and aim as an active owner;

• dialogue with stock exchanges and other authorities and institutions on longer term and more universal improvements in the market framework;

• cooperation with other investors and active participation in investor-led initiatives, such as Climate Action 100+;

• legal action.

Engagements are formally logged and developments and follow-ups are discussed at each regional portfolio review meeting, held every second month. The board of directors of East Capital is updated on notable developments on a quarterly basis, in addition to receiving the full engagement log.

Continuous dialogue with portfolio companies includes developing a clear and consistent dividend policy, professionalising board work and processes, raising and addressing environmental concerns, improving transparency, reporting and investor relations, improving rights for minority shareholders or reaching a better fair-value in buyouts.

Own dialogue with company representatives

Our experience has shown that an engaged and constructive dialogue will more often lead to convincing the company to initiate positive change, while simply exiting the investment achieves nothing.

In addition to numerous telephone conferences and written correspondences, East Capital’s research analysts, portfolio managers and portfolio advisers maintain a continuous dialogue with management teams, board members and other owners through more than 1,000 company meetings every year. Typical ESG topics may include working with companies to develop a clear and consistent dividend policy, professionalising board work and processes, raising and addressing environmental concerns, improving transparency, reporting and investor relations, improving rights for minority shareholders or reaching a better fair-value in buyouts. These meetings also provide an opportunity to discuss and understand how the company is positioned in relation to current and future ESG issues.

Company meetings frequency is structured according to the following:• Key Active Positions: meet 2-4 times/year• Any other top 10 holding:

meet 1-2 times/year• Other holdings: at least 1 time/year

The number of conducted company meetings is one of the data sets provided to the monthly investment committee.

Ilya Kiselev, Analyst, and Tim Umberger, Partner, in Istanbul visiting Turkish companies.Here at VakifBank in October 2019.

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Nomination of boardmembers

East Capital encourages all portfolio com-panies to appoint a board of directors that represents an appropriate and diverse range of competencies and backgrounds to enable it to effectively carry out its duties.

Board members should be selected based on skill, integrity and the ability to devote a suf-ficient amount of time to their work. East Capital also strives to influence companies to ensure that an appropriate ratio of the board of directors/supervisory is independent in relation to the company and its executive management. Although the definition of independent director may vary between markets, the essence is the same — that direc-tors should have a proven ability to exercise objective judgment in making decisions that are in the best interests of all shareholders.

Over the years, East Capital has participated in the nomination and election of 10-20 inde-pendent directors per year in our investment region, primarily in Russia, South East Europe and the Baltics. In Russia, we either nominate directors on our own or in collabo-ration with other minority investors through our membership in the Russian Association of Institutional Investors (API). Throughout the years, the API and its members have con-tributed to nominating and electing approxi-mately 500 independent directors to Rus-sian boards.

Our experience has shown that independent directors are able to contribute with many improvements to the work of the boards, including:

• establishing board committees and improving board practices;

• improving transparency and investor relations;

• proposing revised dividend policies;

• implementing KPI-based executive compensation plans and new, financials-based KPIs;

• challenging and blocking value-eroding deals.

Dialogue with regulators and market participants

Our experience from over 20 years in emerging and frontier markets is that an effective corporate governance system, not only within individual companies, but across the entire capital market, is a clear prerequisite to stand out in what today has become a truly global competition for capital. It also makes life easier for investors who can spend time on performing invest-ments, and creating value, rather than fighting to protect and regain investments in companies where they have been mistreated.

Throughout the years, East Capital has, by invitation or through own initiative, engaged in numerous dialogues with governments, stock exchanges, regulators, standardsetters, industry initiatives and other market participants to promote improvements in the institutional and legal framework of specific markets. We see it as a worthwhile investment of our time and knowledge to constructively contribute with our views on what we as investors, believe could strengthen the attractiveness of that particular financial market in the eyes of the international investor community.

Legal action

Since its founding in 1997, East Capital has invested in more than one thousand companies in emerging and frontier markets. We always prefer active engagement above exit or legal action and have a long track record of successfully resolving issues and preserving minority shareholder rights through open and constructive dialogue. However, if dialogue fails and East Capital deems that it has a responsibility and duty to take further steps to protect the capital that our clients have entrusted us with, we will evaluate the cost-benefit of initiating legal action. On average, East Capital is involved in one to two legal processes per year. This means that East Capital, since 1997, has been involved in 25-30 legal disputes, some of which have carried on across more than one year. Not all legal disputes have gone to court.

Numerous dialogues with governments, stock exchanges, regulators, standardsetters, industry initiatives and other market participants to promote improvements in the institutional and legal framework of specific markets.

Voting

The majority of our portfolio holdings are limited liability companies, where the ultimate decision-making body is the shareholders’ meeting. Although a still highly manual, complex and costly process, we believe investors should exercise their voting rights at annual and extra-ordinary shareholders’ meetings (AGMs/EGMs) where this makes sense for their investment. Shareholder participation in AGMs and EGMs serves as a monitoring effect on the company’s management and board and instils respect for the highest decision-making body — and ultimately the entire governance structure of the company. We see voting as one important way to communicate our views to the companies and their management.

East Capital uses an external proxy voting platform, which provides an efficient voting interface, an important source of informa-tion on upcoming AGMs/EGMs and their respective agendas, as well as a tool for track-ing and reporting on voted meetings. Given that East Capital’s funds are highly diversi-fied, comprising mainly minority stakes in a large number of markets, we are unable to attend all AGMs/EGMs in person. More often, we vote by proxy or issue a power of attor-ney and voting instructions to someone who can represent East Capital at the meeting. Agendas for upcoming AGMs and EGMs are sent to our team on a weekly basis. In deter-mining if and how the voting rights shall be exercised, relevant members of the invest-ment team, comprising research analysts, portfolio managers and portfolio advisors, will consider all available information related to the meeting as well as our own analysis of the specific company, including contacting the company to get further clarification on specific resolutions. East Capital’s general views on typical resolutions and other ownership-related issues are described in East Capital’s Ownership Policy. The investment team will use this policy as a basis for deciding on how to vote in a meeting, while taking into account relevant market specifics.

Voting decisions are independently reached within the investment team and East Capital will not delegate decision making to any third party, although we may take third party recommendations into consideration. Ultimately, all voting decisions are made on a case-by-case basis, in the best interest of clients. Follow-up and the results of voting are presented at team meetings and board meetings.

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As active investors, we hope to play a key role in implementing and enforcing improved ESG standards and strengthening the chain of accountability in portfolio companies through our monitoring capacity and constructive engagement — or in the worst case, through litigation or exit. We believe that engagement and voting constitute two key components of active ownership.

Visiting EV production plant at ChangAn Auto factory in Chongqing, China. ChangAn ranks among top four OEM car producers in China and operates joint ventures with Ford, Mazda and Suzuki. The photo is taken during one of our investor trips, which we organise on a regular basis, offering the participants an opportunity to follow us off the beaten track in the regions we invest in, to gain deep insights on key developments and current trends by meeting members of our investment team, local experts and company representatives and to tap into the reality of our portfolio companies during visits to factories, facilities and offices.


Active ownership report

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Engagement summaryEngagement type

Africa / Middle East

Region

Asia

Sector

Europe

Geographical Breakdown

Engagement Map

During 2019, East Capital engaged with 47 companies, adding up to a total of 58 different engagements during the year.

● China 50%● Korea 19%● Thailand 19%● Taiwan 12%

● Morocco 34%● Saudi Arabia 33%● UAE 33%

● Energy 17%● Communication Services 11%● Consumer Staples 11%● Financials 10%● Industrials 10%● Information Technology 10%● Real Estate 9%● Consumer Discretionary 7%● Materials 5%● Utilities 5%● Health Care 5%

● Russia 54%● Poland 15%● Romania 13%● Estonia 5%● Lithuania 5%● Serbia 3%● Slovenia 3%● Hungary 2%

● Environmental 23%● Social 17%● Governance 60%

● Europe 67%● Asia 28%● Africa / Middle East 5%

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Issues EngagementType

Country Sector Objectives and Scope Process and Results

Company A has a poor gender diversity in the board and non-transparent capital allocation process.

Company B does not have adequate practices related to plastic waste management.

Company C’s overall approach to material environmental and social topics is subpar.

Company D’s management incentivization structure is unclear and potentially not aligned with our interests as a long-term shareholder.

The board of Lukoil, a Russian oil major, did not have any truly independent directors.

Auga, a vertically integrated organic food company from Lithuania, had a governance structure under which the roles of Chairman and CEO were combined.

Other concerns included: absence of an adequate Investor Relations function, lack of a clear strategy and dividend policy and subpar sustainability disclosure.

China

Russia

Russia

Russia

Russia

Lithuania

In order to increase gender diversity, we informed company A that they lack a sufficient level of women on the board. Furthermore, we argued that we wanted an enhanced disclosure of the firm’s capital allocation process.

Plastic waste presents severe implications on Life on earth and under water, and as a shareholder we want to be part of the solution to this problem. We encouraged Company B to implement a comprehensive single-use plastics policy with metric targets, initially focusing on significant reduction of single-use plastic bags.

We advised Company C on what we as a shareholder consider being a best-in-class approach on environmental and social topics based on materiality analysis.

It is important that the management is incentivized in a way which is beneficial to all shareholders, and it is critical to have such information communicated in their company filings.

The importance of having an independent non-executive director on the board was identified when we conducted our ESG analysis.

The combination of Chairman and CEO roles is not in line with our expectations of a good governance system.

An adequate Investor Relations function is important to ensure quality and reliability of information to all shareholders.

G

E

ES

G

G

EG

Communication Services

Consumer Staples

Energy

Energy

Energy

Consumer staples

The engagement was initiated in 2019 by sending a letter to the company, and scheduling a conference call with the head of Investor Relations.

The engagement is still ongoing.

We sent a letter to the Board and have interacted with the Head of Strategy through phone calls and one-on-one meetings.

The engagement is ongoing, we expect the company to announce a comprehensive policy in 2020.

We met with the Director for Investment Planning and Investor Relations to explain our views and subsequently provided them with the relevant SASB metrics, which was well received.

We await the publication of their 2019 sustainability report.

A letter was sent to the company which led to discussions internally. The Head of Investor Relations mentioned that it was very helpful in pushing for further disclosure internally.

We await the 2019 annual report.

We discussed this issue with other shareholders and searched for adequate candidates. Once candidates were secured, we gained support from other shareholders.

We successfully nominated and elected the first truly independent, non-executive director in Lukoil.

Following several interactions with the CEO and the main owner, we succeeded in contributing to the following major achievements: election of an independent and highly functional supervisory board, separation of the CEO and the chairman functions, professionalization of the Investor Relations function now conducting webinars.

Auga continues to work on brokerage coverage and has initiated a sustainability reporting process. The progress will be monitored.

Active ownership:

Examples of East Capital’s direct engagement with companies

Company E’s board composition, audit reliability and sustainability disclosure are concerns to us as shareholder.

China Truly independent non-executive directors on the board are key to ensure good governance. Auditor rotation is crucial to guarantee the quality of the audit process. Investors need access to properly disclosed information on material sustainability topics in order to assess the company’s ESG risks and opportunities.

ESG Utilities Discussions are ongoing with the company.


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Poor disclosure from Company F

Insufficient governance on bribery risks and insufficient management of supply chain risks at Company G.

Unsatisfactory board composition and diversity, absence of women in management positions and lack of a clearly-stated dividend policy at Company H.

Unfavorable transaction at Company I.

Company J did not report on material ESG factors in their company filings.

Saudi Arabia

China

Poland

Estonia

Romania

Transparency is key, and company filings should be presented in English or other major languages.

We engaged with Company F due to the lack of sufficient disclosure in English.

We do not tolerate bribery, and closely monitor which procedures companies have in place to manage such risks.

A comprehensive, transparent and responsible supply chain management program is expected for a state owned enterprise of that caliber.

A board should consist of independent non-executive directors with international and relevant experience within the given field, and Company H lacks both.

Moreover the absence of women in management positions and the lack of a clearly-stated dividend policy need to be addressed by the company.

Company I was about to be part of a merger that lacked both business rationale and synergies.

The main objective with the engagement was to define material ESG topics and encourage the company to communicate material ESG topics through a sustainability report.

G

G

G

G

ESG

Industrials

Industrials



Health Care

The issue was brought to the CFO by email. The initial response was positive, and the CEO responded in a constructive way. The company plans to publish annual reports in English.

Progress will be monitored.

Discussion on bribery risks and actions held with the board secretary in a conference call.

Company G has started to standardise some processes within the supply chain.

The company recognised the importance of these issues and committed to address them as part of its ongoing state-owned enterprise reform.

Progress to be monitored.

Discussion with the main owners on including more independent, non-executive directors with international experience in a relevant field. The search for a suitable candidate in our networks is ongoing, as are discussions about a dividend policy with management at upcoming meetings.

To be continued.

The M&A-related risk was addressed with the main owner during several meetings, phone calls and discussions. We have also engaged with other minority investors.

M&A/dilution avoided (but cannot be disclosed)

The company has published a CSR report in English recently. We monitor the progress on that matter and will continue our dialogue with the company to encourage them to initiate a full-scale sustainability report.

NominationsIn 2019, East Capital contributed to nominating and electing nine independent directors, all in Russian companies and in key active positions (our largest overweight holdings). Although this is fewer in number than in previous years, especially for Russia, it should be noted that the size of these holdings is significant. All in all, we have actively influenced the board com-position in companies corresponding to approximately 12% of the market value of our assets under management, and 23% of East Capital Russia and 15% of East Capital Eastern Europe.

Active ownership:

Examples of East Capital’s direct engagement with companies

Issues EngagementType

Country Sector Objectives and Scope Process and Results

9 INEDs nominated and elected

ACTIVELY INFLUENCING BOARD COMPOSITION


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East Capital continues to actively engage with Etalon, one of Russia’s largest homebuilders and real estate developers, which has been listed on the London Stock Exchange since 2011. In 2018, we successfully recommended a new, truly independent board member to Etalon’s nomination committee. East Capital subsequently created a consortium with other institutional investors to provide additional support to the newly-appointed INED. Together the consortium represented 25% of the free float, or 15% of the company’s total shares.

In February 2019, Etalon’s shareholding structure changed when the company’s founding shareholder, Viacheslav Zarenkov, decided to retire and sell almost all of his own and his family’s shares to the Russian investment company Sistema PJFSC, amounting to a 25% stake in Etalon. Etalon subsequently consolidated the real estate development division of Sistema, called Leader Invest, through a related-party transaction.

Thanks to East Capital’s hard work, together with the independent board member, the deal became more transparent, and a “Relationship Agreement” was signed between Etalon and Sistema, protecting minority shareholders’ rights. This agreement set out key elements of the relationship between the two parties, with a focus on upholding high standards of corporate governance and ensuring that the parties continue to act in the interests of all shareholders in Etalon.

Following the Leader Invest transaction, Etalon has become one of the leading real estate developers in Moscow, with a substantial land bank and a strong new management team to ensure the long-term prospects of the company.

While the market digested the news, East Capital developed an action plan for Etalon to improve shareholder returns. The suggestions were well received by the board and by Sistema, and led to an important announcement in January 2020, covering the following four key elements:

Beatrice BushatiSenior Analyst

• An improved dividend policy with a dividend floor guaranteeing at least 10% yield on the date of the announcement

• A share buyback program of up to 10% of the share capital

• A new strategy to improve efficiency and technological transformation, strengthen presence in key markets and expand geographically where it makes economic sense

• A listing on Moscow Exchange on 31 January 2020

The positive news also resulted in a share price rally of 29% in the weeks following the announcement. In 2020, we will continue our efforts focusing on the company’s implementation of the new strategy, buyback and dividends.

Successful engagement in Russia


Etalon City in Moscow, a flagship project by Etalon Group - one of Russia’s largest and longest-established development and construction companies. The striking building facades are inspired by Japanese artist Katsushika Hokusai’s well-known print The Great Wave off Kanagawa.


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We aim to vote at all AGMs and EGMs in all of our most significant holdings, defined as our key active positions (“KAPs”) and the 10 largest holdings in all fund strategies. We will also vote in any additional holdings where it makes sense and is important from a shareholder perspective.

During 2019, we voted at 339 AGMs and/or EGMs in 229 different companies out of a total of approximately 310, corresponding to 85% of the market value of our assets under management, excluding fixed income investments, in our UCITS funds. Historically, East Capital has focused on voting in Russia, Turkey, Balkans, Baltics and the CIS countries. In early 2016, we expanded our voting activities to include shareholder meetings in Asia, as well as certain other frontier markets on the African continent and in the Middle East. Our voting activity in Russia remained the largest, with more than half of the proxy voting taking place in Russian companies. The next biggest regions in importance of voting activity were the Balkans (12%), China (7%) and CEE (6%).

Of the votes we cast, the highest number of votes against the management’s proposals was in East Capital China Environmental (25% of all votes) and East Capital Russia (12%).

Breakdown per region, %Percentage of total AUM voted, %

Fund % of AUM voted 2018 % of AUM voted 2019 % of votes with mgmt 2019 % of votes against mgmt 2019

Balkans 77% 97% 99% 1%

China A-Shares 45% 89% 92% 8%

China Environmental 74% 73% 75% 25%

Eastern Europe 66%1 92% 95% 5%

Global Emerging Markets Sustainable 25% 68% 97% 3%

Global Frontier Markets 34% 77% 93% 7%

Multi-Strategy 29% 60%2 94% 6%

New Europe 71% 84% 98% 2%

Russia 45%3 93% 88% 12%

1Voting was attempted in Russian companies corresponding to an additional 3% of AUM, but was blocked due to US sanctions.2Excluding fixed income3Voting was attempted in Russian companies corresponding to an additional 6% of AUM, but was blocked due to US sanctions.

Further reading: East Capital’s Voting Policy

● Voted 85● Not voted 15

● Russia 60● Balkans 12● China 7● CEE 6● Africa 4● Asia 3● Turkey 3● CIS 3● Middle East 1● Baltics 1

Active ownership:

Voting

Voted at

339AGMs and/or EGMs

85%of UCITS equitymarket value

We see voting as an important way to make our voice heard and to influence the strategic direction and governance of the businesses we own.


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While the progress remains slow, we continue to use our voice and vote to advocate for greater gender diversity in the boardrooms of our portfolio companies.

The famous Fearless Girl statue, which was installed in 2017 facing down the Charging Bull statue near Wall Street and later moved to the New York Stock Exchange, symbolizes the power and potential of women leadership aimed to increase boardroom diversity.

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Under pressure from regulators, investors and the society at large, board and management gender diversity has become a global main-stream ESG issue. It is showing an improving trend, but the progress remains slow. Some asset managers recently announced a pledge to vote against all nominations to boards in North America and in the UK where there isn’t at least 25% female repre-sentation. A top tier investment bank from the US earlier declared that it would not help companies go public in the US and in Europe, without at least one female board member in 2020 and two in 2021. In California, 43 companies that failed to add at least one woman to their board in 2019 will be hit with a fine, while a study1 showed that 83% of board directors opposed diversity quotas.

A far cry from a global Womentum

Today, there is on average 20% female directors in companies included in the MSCI ACWI index, which is a 2.1 percentage-point increase compared to the year before. On the current path, a 50/50 gender split among global directors could be reached by 2044.2

Globally, the number of companies with majority female boards doubled in 2019 compared with 2018. Yet these 22 firms accounted for fewer than 1% of the constituents of the MSCI ACWI index as of October 2019; 98.7% of the boards remained male-dominated. Other appalling statistics show that 7% of the world’s government leaders and 3% of chief executives are female and only 23 of America’s Fortune 500 companies are led by female CEOs. This is at a time when women make up 47% of the global workforce.

And even less so in emerging and frontier markets

It is hard to make sweeping statements covering such a culturally and geographically diverse universe as ours, but still fair to say that gender diversity is even worse than in developed markets.

In our ESG scorecard, our minimum expectations for female representation are 30% of the board and the management, with a negative score for those not meeting these expectations.

It is our conviction that board diversity boosts the quality of decisions. In consumer-facing sectors it is also crucial that boards representing the customer base have better intuition, and we still meet too many companies that seem not to understand this. We therefore see it as an important task to let them know that this matters.

Across our portfolios and on the basis of our own ESG scorecards (as not all our companies disclose data in external databases), the average number of female directors is 14%. The two strategies with the highest number are East Capital New Europe and East Capital Balkan, both with 17%. There are only 2 boards with more than 50% women, both in Asia (a China A-shares company and a Vietnamese company).

Raise the bar in the boardroom

Our engagement with boards leans historically on having truly independent and truly competent board representatives as a priority, but we are intent on increasing our focus on the gender issue as our portfolio companies’ ESG profiles improve. We have noticed that introducing competent INEDs raises the overall ESG bar and enables a dialogue on gender diversity within companies. In the Baltics, where we have a strong local network, we work to influence gender diversity and make the management aware of the risks for a company’s business and reputation. In Central Europe, we have focused our engagement on regulators, pointing out the low presence of women to Polish capital market institutions. In Russia, gender diversity is also increasingly being discussed when it comes to finding INED and climate change-competent candidates.

Other initiatives

During 2019, we joined a “ESG and Gender Diversity” panel as a speaker at the Annual Deloitte Fund Forum, and shared our views on gender diversity in the fund management industry. We became a signatory to “My Pledge,” a Luxembourg initiative aimed at ensuring diversity at public events and actively encouraging diversity. As a member of the Women on Board Initiative in Hong Kong, we have joined the conversation with other likeminded investors to make changes happen faster in Hong Kong, which is lagging behind in terms of diversity, with 13.4% female directors in the Hang Seng Index and 11 all-male director boards.

Fearless woman in emerging markets

1 PriceWaterhouseCoopers Annual Corporate Directors Survey, https://www.pwc.com/us/en/services/governance-insights-center/library/annual-corporate-directors-survey.html2 MSCI Women on Board 2019 Progress Report, https://www.msci.com/www/research-paper/women-on-boards-2019-progress/01667826614

Independent Non-Executive Directors (INEDs) play an important role in providing independent oversight, objective judgement and constructive challenge to the executive directors.


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East Capital sees significant potential in collaborating with other investors on specific ESG topics, especially when issues are more complex. We have identified a number of initiatives that we have decided to support as signatories or active members.

Local governance associationsThe Association of Institutional Investors in Moscow (API), the Asian Corporate Govern-ance Association (ACGA) and the Baltic Insti-tute of Corporate Governance (BICG) con-tribute to improved standards and dialogue around new legislation in their respective regions. Common strengths for these associ-ations are broad networks, a deep under-standing of the local financial market, signifi-cant knowledge of international best prac-tice, legal competence, a desire to contribute to educational efforts, active investor mem-bers, and not least, a constructive and col-laborative approach.

Further reading: api-russia.orgacga-asia.orgbicg.eu

Swedish Investors for Sustainable Development (SISD)During the year, we were particularly active within Swedish Investors for Sustainable Development (SISD), a partnership formed in 2016, currently comprising 18 institutional investors, pension companies, investment companies with over EUR 600bn in AUM, and the Swedish International Development Cooperation Agency (SIDA). The members of the initiative are committed to working together to address and support Agenda 2030 and the 17 Sustainable Development Goals in their investment activities. SISD is a dynamic network where participants and other actors work constructively with learn-ing, sharing experiences, voluntary projects and communication about the SDGs. East Capital is currently part of three working groups; Clean water and sanitation/Life below water (goals 6/14); Sustainable Cities (goal 11); and a group that focuses on identi-fying and removing hurdles for mobilising

further investment towards the SDGs. Work-ing groups aim to promote learning, support each other in developing processes that address the SDGs in our respective invest-ment processes, and also to explore future (and potentially collaborative) investments in support of the goals.

During the year, East Capital represented the operative working group from SISD as pan-elist at Stockholm World Water Week. We shared our insights on how the financial industry can scale sustainable investing to meet the common water goals globally, aligned with Goal 6 on the UN Agenda 2030.

Furthermore, in October 2019, the SISD initiative was exported to a global setting, when the “Global Investors for Sustainable Development (GISD) Alliance” was launched, sponsored by the UN, with top international financial institutions (such as Bank of America, Citi, UBS, Pimco, ICBC, Allianz and

CalPERS) joining the network. Inspired by the working method of the SISD, the GISD has formed three working groups addressing the sustainable development goals, with a focus on (i) increasing the available supply of long-term investment for sustainable development, (ii) realising SDG investment opportunities in developing countries, and (iii) enhancing the impact of private investment on sustainable development. We are actively feeding into these working groups through the SISD-network, via a specific GISD reference group formed for this purpose. We are also a member of the GISD committee, which rotates members representing SISD into the GISD Alliance.

Further reading: sida.se

Active ownership:

Support to associations and initiatives

Magnus Lekander, Head of Group Operations, participating in a panel with representatives of EU Commission and UN PRI on how financial industry can scale sustainable investing to meet SDG 6 (Clean Water and Sanitation) at the World Water Week 2019 in Stockholm.


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Principles for Responsible Investment (PRI)Since 2012, East Capital has been a signa-tory of the Principles for Responsible Investment (PRI). The PRI, which was initi-ated in 2006 with the support of the United Nations, has quickly developed into the world’s largest investor initiative for respon-sible investment. The PRI works to encour-age its international network of investor sig-natories in understanding the investment implications of environmental, social and governance (ESG) factors, and to support them in integrating these factors into their investment and ownership decisions.

The PRI also facilitates investor collabora-tions on various topics, as well as the impor-tant annual “PRI in Person” event, which offers an important platform for exchanging ideas about ESG and establishing valuable new contacts for future collaboration and engagement.

Further reading: unpri.orgOur latest PRI Transparency Report and Assessment Report are available here: eastcapital.com/esg

Climate Action 100+East Capital joined Climate Action 100+ in 2018. It is an investor initiative launched in 2017 to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change. The initiative com-prises 450 investors, with over USD 40tn in AUM. It engages with companies to curb emissions, improve governance and strengthen climate-related financial disclo-sures.

East Capital is an active member of the initia-tive and was invited to co-lead engagements with two Russian companies; Lukoil and Gazprom, together with other established asset managers. The engagement with Lukoil aims to encourage the company to (i) report on GHG emissions (Scope 1 and 2) in accord-ance with the GHG Protocol Corporate Accounting and Reporting Standard, and to provide a y-o-y comparison, (ii) set clear GHG emission reduction targets and disclose actions taken to reduce such emissions, (iii) develop and report on climate change gov-ernance and (iv) ensure that the board of directors consists of members with adequate knowledge and experience on climate- related risks and opportunities.

Gazprom, the third largest polluter in the world, emitted 240 mt of greenhouse gases in 2018, 3.7 times greater than Sweden’s total emissions in the same year. If you add emis-sions from customers using its products, it has been the world’s third largest polluter from 1965–20151. Much of this is due to its sheer size — it provided 36% of Europe’s gas in 2019. As a long-term shareholder of the company, we have been engaging with them for many years on a variety of topics, and in 2019 we significantly stepped up our efforts in relation to climate action. As co-lead inves-tor for the Climate Action 100+ initiative together with two other large asset manag-ers, we leverage our local presence in Russia and strong relationship with Gazprom, built on frequent meetings with the management and deep understanding of the company, to push for improved climate governance, bet-ter disclosure and reduced emissions. In 2019, the company announced a goal of an 11–19% cut in emissions intensity of its gas business (50% of the company’s total GHG emissions) by 2030. This is a very positive start and we believe there is much more to be achieved in 2020 and beyond.

Further reading: climateaction100.org

1https://www.theguardian.com/environment/2019/oct/09/revealed-20-firms-third-carbon-emissions

A+A+, the highest score possible, retained in 2019 UN PRI assessment in the category “Strategy & Governance” and for ESG screening and integration strategies for equities

Peter Elam Håkansson, East Capital CIO, receives the first prize for the best engagement and active ownership activity in “Sustainable fund achievement of the year” competition by the leading insurance platform Länsförsäkringar in Sweden. We appreciate this recognition for our efforts in Russia, where we are one of the largest investors, with over 20 years of experience in engagement and dialogue with companies to impact and drive change within ESG issues. An important part of our work is performed within Climate Action 100+ initiative, which assembles the world’s largest investors, including East Capital and Länsförsäkringar, to ensure the world’s largest greenhouse gas emitters take necessary action on climate change.


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Asian Corporate Governance Association (ACGA)Member since 2009acga-asia.org

The Association of Institutional Investors (API)Member since 2002api-russia.org

CDPSignatory since 2014cdp.net

China Environmental Chamber of Commerce (CECC)Member since 2016cecc-china.org

Association of the Luxembourg Fund Industry (ALFI)Member of the responsible investing working group since 2016 alfi.lu

Baltic Institute of Corporate Governance (BICG)Supporter since 2009bicg.eu

Climate Action 100+Joined in 2018climateaction100.org

Swedish Investment Fund Association Member of the working group for ownership issues and sustainability since 2011fondbolagen.se

Hong Kong Green Finance AssociationJoined in 2018 as a founding memberhkgreenfinance.org

UN Principles for Responsible Investment (PRI)Signatory since 2012unpri.org

Swedish Investors for Sustainable Development (SISD)Member since 2017sida.se

Swedish Sustainable Investment ForumMember since 2016swesif.org

Task Force on Climate-related Financial Disclosures (TCFD)Supporter since 2019fsb-tcfd.org

CDPSince 2014, East Capital has been an investor signatory of CDP (formerly Carbon Disclo-sure Project), an independent, not-for-profit organisation. CDP makes an important con-tribution to increasing awareness of and attention to climate, water and forest issues by providing a transformative global system that helps and motivates companies to meas-ure, disclose, manage and share relevant environmental information (emissions, water and forest data). This is done through sending CDP’s Climate change question-naires to thousands of listed companies around the world, which in our case responds to 60% of our AUM. The response rate from companies in our investment uni-verse is unfortunately still relatively low. Portfolio holdings responding to CDP’s Cli-mate change questionnaire amounted to 59% of requested AUM. East Capital there-fore works actively to contribute to an improved response rate through direct engagement with portfolio companies, encouraging them to respond, and highlight-ing the growing importance of carbon disclo-sure to investors.

countries across the globe. In order to support the goals of the Paris climate agreement, this voluntary disclosure platform is designed to “provide a frame-work for companies and other organizations to develop more effective climate-related financial disclosures through their existing reporting processes” and support “more informed investment, credit [or lending], and insurance underwriting decisions”. Further, it suggests describing the resilience of the organization’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower global temperature rise scenario.

Further reading: fsb-tcfd.org

During 2019, East Capital supported CDP’s Non-Disclosure Campaign and acted as lead and co-lead investors. We sent out letters to 21 different companies and managed to encourage seven of them to submit responses to CDP’s different questionnaires.

Further reading: cdp.net

TCFDEast Capital became TCFD supporter in 2019. The TCFD (Task Force on Climate-related Financial Disclosures) was established by the Financial Stability Board in December 2015 to develop a set of voluntary, consistent disclosure recommendations for use by companies in providing information to investors, lenders and insurance under-writers about their climate-related financial risks. The members of the Task Force are drawn from a wide range of industries and

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Active ownership:

Dialogue with regulators and market participantsPromoting ESG & Sustainability through conferences, seminars, publications and surveys

We spoke at the inaugural Bloomberg GPF Sustainable Investing conference in Bangkok, at a panel entitled “Nordic approach to sustainable investing.” Read more on page 28.

We spoke at the 5th Annual Funds Summit in Cyprus. The topic was ESG investing as a significant trend, and we shared our views on ESG investing with a focus on our four-pillar framework and an emphasis on our proprietary scorecard.

We joined a roundtable in Luxembourg organised by a third-party management company and the largest group of independent directors, to present our ESG investing approach, focusing on our proprietary scorecard and active management. The key takeaway was that many fund managers define themselves as leaders in ESG but don’t always have a thorough and well-defined process.

We share our investor perspective on ESG as speakers at numerous conferences, seminars and other events globally each year.

We moderated the Sustainable Transportation seminar hosted by the Swedish Chamber of Commerce in Hong Kong. The panel consisted of leading corporate managers within the transportation sector.

We participated as a panellist at an ESG conference in Moscow hosted by KPMG. We shared our view of materiality as the cornerstone of ESG, as well as our expectations. There were also discussions however on how to obtain high marks in leading ESG ratings and some case studies from various companies.

We joined the 2019 UN Global Compact High-Level CEO Roundtable in New York, with the topic of mobilising corporate strategy and investments for the SDGs, and shared our views on the contribution of the SDGs in emerging markets.

Paul Carr, the CEO of East Capital Asset Management S.A., was invited to speak at the 5th Annual Funds Summit in Cyprus. The topic was the rise of ESG investing as a significant trend in asset management, and East Capital’s method for ESG investing with a focus on our four pillar framework and an emphasis on our proprietary scorecard. The event was very well attended, with a mix of around 500 international and local speakers/attendees.


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We participated as a panellist at the Annual Deloitte Fund Forum and contributed to the gender diversification discussion.

We spoke at a panel on green finance: “Accelerating Hong Kong’s Green Finance Agenda,” hosted by the FSBC of EuroCham (Financial Services Business Council) in Hong Kong.

We attended the St Petersburg International Economic Forum and contributed as a panellist to the discussions on whether the global climate challenges restrict or drive development.

We participated as a panellist in the seminar held by cKinetics in Mumbai, where we shared East Capital’s views on catalysing green opportunities, and the assessment of transition and physical risks in investment analysis and ESG integration. Moreover, we also shared our views on best practice for recognising and managing climate risks in emerging markets.

We contributed with a key-note speech at the event “Investing in China’s Sustainable future,” organised by the Sustainable Finance Institute (SFI) and Peking University HSBC Business School (PHBS), held in Shenzhen.

We joined a panel discussion at a Moscow Exchange conference on sustainability, and our message was that we believe that sustainability now is about much more than disclosing huge volumes of information and chasing ESG scores through ticking boxes.

Anders Borg, Member of the Advisory Committee, Emre Akcakmak, Portfolio Advisor, and Jacob Grapengiesser, Partner & Deputy CIO, at Borsa Istanbul, Turkey.

David Nicholls, Assistant Portfolio Advisor, joined a panel discussion at a Moscow Exchange conference on sustainability, together with some of Russia’s leading directors. Our message was that at East Capital, we believe that sustainability is now about much more than disclosing huge volumes of information and chasing ESG scores through ticking boxes. We see that best-in-class companies are identifying material ESG factors that will drive their businesses over the next 5 - 10 years and creating reasonable metric targets that ensure managers are aligned with these.


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East Capital has been a supporter of the Baltic Institute of Corporate Governance (BICG) since 2009, with recurring lectures on “ESG from an asset manager’s perspective” at the BICG’s semi-annual executive program for professional board members. We hosted BICG’s Chair education program in 2019, with a strong focus on corporate governance.

East Capital is an active member of the Asia Corporate Governance Association in Hong Kong. In 2019, we held a seminar in Stockholm for Nordic asset owners and asset managers with the general secretary of the association, to present their findings on corporate governance standards across Asia.

We spoke at a seminar on ESG in Moscow, hosted by KPMG, presenting our approach to responsible investing, the state of ESG in Russia compared to other countries and recommendations for issuers.

East Capital joined the Global Investor Statement to governments on climate change, a joint statement issued at the United Nations Climate conference. The letter was co-signed by 631 investors representing over USD 37tn in assets, and urges global leaders to (i) achieve the Paris Agreement’s goals, (ii) accelerate private sector investment in the low carbon transition and (iii) commit to improving climate-related financial reporting.

East Capital is a member of the Asian Corporate Governance Association (ACGA), an independent, non-profit membership organisation dedicated to working with investors, regulators and companies on enhancing corporate governance practices in Asia. During the year, ACGA has, among other projects, engaged with the Securities and Exchange board of India (SEBI), enlightening the SEBI as to the implications of differential voting rights and dual-class shares.

During 2019, East Capital engaged with the Polish Development Fund, one of the main entities involved in developing the capital markets and future pension system in Poland, to highlight our concerns about the Polish standards. This was in response to the results of the ESG Scorecards of our Polish portfolio holdings. Our main finding was that Polish companies lag in ESG standards in a regional perspective, especially SOEs. We noted that there is a lack of independent, non-executive directors on the supervisory boards and a lack of ESG-supportive incentive programs. Besides, gender diversity among key executives and reporting on relevant and sustainability factors in corporate disclosures are below par. As active owners, we strive to improve these issues through dialogue with the companies, and we monitor the progress of Polish companies and assess their improve-ments, or lack thereof, carefully. Either way, the support of authorities and regulators is important to accelerate the progress.

In October 2019, we joined the inaugural Bloomberg GPF Sustainable Investing conference in Bangkok, where discussions took place between the Thai regulators, Thai stock exchange, and domestic and regional asset owners and asset managers regarding best practices related to ESG and responsible investing. Read more on page 28.

Engagement with governments and regulators

Support of authorities and regulators is important to accelerate the progress

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David Nicholls, Assistant Portfolio Advisor, at a KPMG seminar in Russia on ESG, explaining our methodology and advising companies to not forget about governance, to focus on identifying material factors, to work on measurement metrics targets for improvements, and to look at best-in-class companies abroad.


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At the end of October, I partook in the inaugural Bloomberg GPF Sustainable Investing conference in Bangkok, where I heard the interesting viewpoints of asset owners, peer managers, corporates and regulators from across APAC and Europe on a variety of ESG topics. I spoke at a panel entitled “Nordic approach to sustainable investing.” This was a new and inspiring topic for me — in the past my contributions have been more about the views on corporate governance standards in emerging markets.

CollaborationThe first pillar in the Nordic approach is the collaborative model in Northern Europe, which enables investors to be open and cooperative in order to achieve results. A few examples are the ethical council of the four AP funds in Sweden, or the practice of nomination committees, whereby share-holders collaborate to appoint the most appropriate people to sit on boards of listed companies, diminishing the risk of “ownerless companies”. Another example,

Swedish Investors for Sustainable develop-ment (SISD), also embodies the collaborative mindset, where major Swedish asset owners and managers – ordinarily competitors – come together and find a common cause in addressing the challenges posed by the UN Agenda 2030 and the 17 sustainable develop-ment goals (SDGs). The network is organised by the Swedish International Development Cooperation Agency (SIDA), which also provides a platform for cooperation between private financial institutions, academia and

Nordic approach to sustainable investing


As East Capital was founded in 1997 in Sweden, Nordic values have been at the core of our operations since day one. At the Bloomberg GPF Sustainable Investing conference in Bangkok, Chief Sustainability Officer and Partner Karine Hirn reveals how the Nordic countries throughout history have consistently managed to overcome challenges creatively and pragmatically, resulting in modern economies marked by an attractive blend of innovation and growth.


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sciences, government agencies, and NGOs. In October, a UN-backed global initiative called Global Investors for Sustainable Development was announced in New York, inspired by the Swedish SISD.

We are an active member of SISD, where we are engaged in a number of working groups; two are dedicated to specific SGDs (Clean Water, Sustainable Cities) and another focuses on identifying and addressing barriers and hurdles in the financial system for increasing the capital for sustainable investing in line with the Agenda 2030 goals.

This collaborative approach is something that at East Capital we have fully embraced from the very beginning, working alongside other minority shareholders and being an active member of investor or fund associations, such as API in Russia, ACGA in Asia, ALFI in Luxembourg, the Swedish Investment Fund Association (SIFA), UN PRI and Climate Action 100+ to name a few.

TransparencyThe second pillar is about transparency. Sweden and its neighbours consistently rank best in the Corruption Perceptions Index, and this can partly be explained by the “offentlighetsprincipen,” a principle of public access to official documents, which has been engraved in the Swedish constitution since 1776. It is said that this principle has enabled Sweden to leave behind its past, extremely corrupt, model, during which foreign diplomats complained that nothing could be done without succumbing to bribery.

Back to our modern age, Swedish state-owned enterprises were among the first in the world to adopt GRI reporting, the global standards for sustainability reporting at the

end of the 90s. During the panel, I took out a copy of Dagens Industri, the leading Swedish business daily, from 14 October 2019 to highlight how Dagens Industri was the first in the world to publish GHG data (scopes 1, 2 and 3) on listed companies, alongside financial indicators and stock prices. This transparency principle not only enables people to make more informed decisions, but also highlights what data is missing, thereby pushing for better disclosure.

At East Capital, together with other Swedish fund management peers, we were among the first to disclose our portfolio holdings in Russia and Eastern Europe. We have also always strived to be transparent about our expectations as responsible owners in companies in the emerging and frontier markets space. This is expressed in our frequent dialogue with the management teams, as well as the invitations we extend for them to join us when we organise investor summits in their region, and the letters we send them to introduce ourselves as shareholders.

EngagementEngagement, or “action for positive change,” is the third pillar of the Nordic approach. Norm-based screening, or controversy screening, is said to have started in Sweden, and is something that Nordic asset owners and managers truly pay attention to. Finding companies around the world who do not respect international conventions is the first step. The second step is to engage with them so that they feel the pressure from share-holders. This engagement predisposition can also be seen at individual investor level —according to a recent study by the SIFA, 64% of Swedes think it is good to be able to choose some investment funds themselves for their pension.

Karine HirnPartner and Chief Sustainability Officer

Engagement is a cornerstone of our active ownership model. Once we have analysed the risks and opportunities related to ESG for our holdings, we identify which relevant areas we should focus on in terms of engagement, and try to make these as specific, measurable and achievable as possible. The activities within the SISD network also show that the engagement is widespread and collaborative within the Swedish investment community.

An approach well-suited to emerging marketsI often hear that emerging and frontier markets pose immense challenges in terms of ESG — a statement that is partly understandable, but at the same time one which is not correct. Challenges can be overcome with the right approach, which is one that would ideally combine the collaboration, transparency and engage-ment pillars outlined above. ESG factors should not be solely viewed as risks, but rather as opportunities for companies that know how to tackle them, and for investors that know how to push companies to tackle them.

ESG factors should not be solely viewed as risks, but rather as opportunities for companies that know how to tackle them, and for investors that know how to push companies to tackle them.


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The underlying logic is simple – currently in most countries, emitting greenhouse gases is essentially free despite there being very real and (somewhat) quantifiable impacts on the surrounding environment. The solution is to make sure these emissions are priced at a reasonable level, something that will encour-age innovation, as well as directly reduce emissions. In 2020, it is expected that 25% of global emissions are subject to some form of carbon pricing1, including certain emissions in large emerging markets such as Brazil and China.

However, while this logic is (almost) unani-mously agreed upon, the methodology of assessing the potential impacts is certainly not. Partly this is due to the large uncertainty regarding actual carbon prices in the future.

Internal researchLike our approach to general ESG analysis, where we use our proprietary scorecards, we believe that the real way to generate investment insights and engagement priori-ties from these processes is to do the work ourselves rather than purchase “off-the-shelf” ESG scores or carbon pricing analy-ses. The methodologies behind the latter are highly subjective, and hence without understanding the underlying approach in detail, it is difficult to get insights that can be leveraged in valuable engagement with the company management and that we can use in portfolio management.

We decided that our analysis, to start with, would focus on transition risks (i.e. carbon pricing) rather than physical risks (extreme weather etc). This makes the modelling slightly more manageable, and focuses on the more material risks in Russia, where 74% of the benchmark comprises of energy, materials and utilities companies. Finally, the more extreme physical effects are likely to emerge somewhat later (after 2050) as we reach 3°C+ of warming versus pre-indus-trial levels (we are now at 1°C), whereas the carbon pricing is a more immediate and hence material issue.

Carbon pricing scenariosAfter a lot of deliberation, we created two carbon pricing scenarios. The first one is what we see as a realistic base case, which imposes carbon prices for direct emissions for steel and aluminum exports from 2022, and oil from 2025. Consultations on such a “carbon import tax” have been launched as part of the recently published European Cli-mate Law2 ; such tax will likely apply at first to the products whose European producers already fall under the carbon trading scheme like steel and aluminium produc-ers. We believe this will have a significant impact on steel producers and utilities com-panies when it comes into existence, some-thing that the market is not discussing at the moment. In Russia, we assume carbon prices are implemented only from 2030 and are at levels below the carbon price paid in international markets.

The other scenario is based on the Interna-tional Energy Agency’s 2°C Scenario, which is much more ambitious and reflects the pricing the IEA believes is required to achieve less than 2°C of warming with 66% probability. While this may well be neces-sary, this scenario would require immense political capital to implement as it would have a significant impact on global growth. The price we assume for exports is shown in Figure 1.

Testing Russia’s climate resilienceIn 2019-2020, as part of our commitment to TCFD, we developed a proprietary model to assess transition risks for our Russian holdings. It was an interesting exercise which provided a useful insight into the level of preparedness of our portfolio companies for what we see as an inevitable and necessary global policy response to climate change.

1 United Nations Climate Change secretariat, accessed 05.03.20. https://unfccc.int/about-us/regional-collaboration-centres/the-ci-aca-initiative/about-carbon-pricing#eq-12 https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12228-Carbon-Border-Adjustment-Mechanism

Figure 1. Assumed carbon pricing for exports, USD / t

Figure 2. EBITDA in RUBbn for Russian oil company

Figure 3. Value of Russian oil company implied by discounted cash flow analysis, in USDbn

Value destruction Vs market cap Vs DCF value

Base case -13% -15%

2°C Scenario -33% -35%

EBITDA loss 2030 2050

Base case -10% -23%

2°C Scenario -21% -38%

Source: East Capital



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No carbon pricing Base case carbon pricing2°C Scenario

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Currentmarket cap

Implied valuewith base casecarbon pricing

Implied valuewith 2°C Scenario

carbon pricing

Implied valuewithout

carbon pricing

The model looks at the very simple question – what would be the impact to each company’s profits if they had to pay for their green-house gas emissions?It looks at two specific impacts:(1) impact to EBITDA from 2020–2050(2) implied equity valuation using a dis-counted cash flow approach.Figures 2 and 3 show these impacts for one of the large Russian oil companies.

Transition risks are risks related to the transition to a lower-carbon economy, such as extensive policy, legal, technology, and market changes to address mitigation and adaptation requirements related to climate change. Carbon pricing has emerged as a key policy mechanism to curb and mitigate the impacts of greenhouse gas pollution and drive investments towards cleaner, more effi cient alternatives.


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The model then aggregates these numbers based on current portfolio weights to under-stand total “climate value at risk”. We note that we only have data for 57% of the portfo-lio, as most of the non-resource companies are significantly lagging their international peers in developed markets with regards to disclosure.

Not only fossil fuel producers

In fact, highlighting the gaps in disclosure and climate awareness is one of most helpful out-comes of this exercise, and we have already started engaging on this topic with certain non-exporter companies. For example, the tech and communications sector accounted for about 4% of total greenhouse gas emis-sions in 20183 (more than the aviation indus-try), with the share expected to rise thanks to enormous data requirements. Did you know that sending 20 emails a day for a year creates the same carbon emissions as a car travelling 1,000km?4

Despite this, the leading tech companies in Russia do not even report their emissions, let alone disclose plans for reduction – this will certainly be a focus area for our engage-ments going forward. For other companies we estimated emissions based on available data, for example Russia’s largest retailer X5 publishes that its trucks drive almost 450 million kilometers a year.

ResultsFigure 4 shows the implicit value lost to our portfolio based on the two scenarios. There are several assumptions, however, that mean for the time being, this is primarily a theoretical exercise. The main value driver for exporting companies is the underlying commodity prices, and so any long-term analysis such as this is more sensitive to price than carbon price. For energy companies, when we did the exercise, we estimated the market was pricing in around a USD 60/bbl oil price and we used this price. As of the middle of March 2020, in the midst of oil price collapse, this looks unreasonable, and in the future, we will likely use a range of oil price scenarios.

The model also assumes zero emissions reductions, apart from one company where concrete emissions targets have been announced (steel company Severstal). How-ever, we expect this to change in 2020-2021, partly as a result of our engagement activi-ties, including with Climate Action 100+ where we are very active, and co-lead inves-tor for two companies. Our largest oil hold-ing Lukoil has already publicly announced they are considering aiming for carbon neu-trality by 2050 for example. This would of course significantly reduce the impact of car-bon taxes. We also assume no substitution or emergence of large-scale carbon capture industrial projects.

Increased awareness and informed engagement

This exercise, although reasonably theoreti-cal, has been very helpful for many reasons. Firstly, it has significantly improved aware-ness of climate issues among the team and yielded some surprising results with regard to how companies would be impacted. For example, some steel companies would be impacted more than oil companies as the production process is considerably more carbon intensive and uses coal.

It has also informed our engagement efforts, not least with regards to disclosure. We already recommend incorporating car-bon pricing into internal models as primary tool for companies to address the crucial strategic question on how to deal with the transition to a low carbon economy. Having done the modelling ourselves, it will be a lot easier to explain this and provide compa-nies with very visible examples of how the value of their companies could be impacted if they do not act.

Further developments

We will continue to develop our framework during 2020 and beyond, in particular to include physical risks. We will also focus on the real estate sector which is lagging behind global peers due to very limited emissions regulation in Russia. It will also be interesting to start benchmarking our portfolio versus peers and index. We would expect our portfolios to be considerably more resilient due to our structural under-weight in energy and mining companies, preferring high-quality, growing domestic names.

David NichollsAssistant Portfolio Advisor, Moscow

3 Energuide, accessed 05.03.20. https://www.energuide.be/en/questions-answers/do-i-emit-co2-when-i-surf-the-internet/69/4 ibid

Base case 2 °C Scenario

2030 EBITDA at risk -10% -27%

Value destroyed -15% -39%


Figure 4. Results for the Russian portfolio

Having done the modelling work ourselves, we can provide companies with clear examples of how their valuations could be impacted if they do not act.


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Environmental protesters against the construction of a landfill in Russia’s Northwestern Arkhangelsk region. During the course of the year 2019, the protests evolved into a nationwide movement against Moscow’s plans to freight its garbage to poorer and less populated areas in the Russian hinterlands. Increasing extreme weather, droughts drying up rivers, massive wildfires in Siberia, concern over the melting permafrost, and also the highly-contentious issue of waste management have driven up public climate awareness. In September 2019, in a move widely unnoticed by the world, Russia formally ratified the Paris Agreement. While the targets are highly unambitious, we believe this does indicate a growing focus on climate change inside the country. We also see that most of the positive change is “bottom-up,” i.e. driven by the large companies we invest in rather than by the government. This is partly as a result of investor pressure, something we are proud to play a role in.

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Of our portfolio companies that have been requested to report to CDP (representing 60% of our AuM), 59% have reported, which means that 36% of our portfolio holdings report emissions data to CDP. Some companies might of course report emission data outside of the CDP framework but in general there is still a lack of disclosure in our investment universe. Therefore our conclusions are still largely our own qualitative assessment of the management’s and board’s awareness, understanding and readiness to effectively strategies around and manage both risks and opportunities related to climate change. Our conclusions from our ESG Scorecard may lead us to avoid investing, adjust our level of conviction, reassess our modelling assumptions or more importantly to start an engagement with companies.

In order to increase the level of self-reporting in our markets, we actively engage with companies in our portfolios, both through letters and/or company meetings, to highlight the importance of this information to investors. We have also been an investor signatory to CDP since 2014, and in addition to publicly endorsing their work as widely as we can, we have participated in some of their more specifically targeted company engagements and workshops for reporting.

In 2019 we became supporter of the TCFD and have increased our level of activities in term of engagement with portfolio holdings on the topic of climate risks, directly or in collaboration with others such as through Climate Action 100+ and CDP, as well as with governments together with other investors when we joined the 2019 Global Investor Statement to Governments on Climate Change.

Understanding climate change related impactClimate change is a global challenge, shared by all nations. The Paris Agreement, reached among more than 190 nations in Paris in December 2015, was a major positive milestone in addressing climate change.Agreeing that temperature increases must be capped at two degrees at the very most, ideally closer to 1.5 degrees, now allows governments, companies and individuals to shift focus to executing on national action plans detailing how they intend to decrease national emissions in contribution to the common global goal.

From an investor perspective, we need to consider how we can invest in support of the generally agreed 2°C goal. When looking more closely at all our strategies, we can conclude that East Capital’s investment strategy typically results in an active underweight in the energy sector, which translates into lower carbon intensity than the funds’ respective benchmarks.

In terms of climate-related risks and opportunities on a company level, we have included specific questions in our proprietary ESG Scorecard to help us to understand and consider a company’s exposure and response to climate change within the context of its operations, its business and its physical locations to make an assessment of the potential financial implications in terms of CapEx or OpEx, but also potentially make adjustments to our assumptions of future revenues, assets and liabilities.

Our main limitation to assessing carbon impact, currently, is the lack of reliable self-reported emissions data even if we start to see companies report according to the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD).

Best CorporateGovernance AwardEast Capital firmly believes in recognising exceptional companies in our investment region through the annual East Capital Awards, which were initially launched in 2004. The Awards are presented in the following four categories: Best Growth, Best IPO, Best Corporate Governance, and Discovery of the Year. The “Best Corporate Governance Award” recognises a company that demonstrates a clear aim to create value for all shareholders by demonstrating strong standards in the area of corporate governance, and addresses the opportunities and risks related to environmental and social concerns.

In 2019, East Capital presented this award to Severstal, a leader in the EM metals and mining space in terms of ESG, with very impressive corporate governance. The prize was awarded to Severstal with the following motivation: Severstal has best-in-class capital allocation, with a flexible and highly-efficient investment program. According to the company’s guidance, the program should increase EBITDA by 10-15% annually, and generate superior ROIC compared to its peers in Russia. Starting from 2019, Severstal is applying an adjusted FCF approach for dividend calculation, which excludes extra CAPEX. Hence, despite being in its investment cycle’s intensive stage, the company is securing solid dividend flow for investors. The company is also very focused on improving its environmental footprint, and has invested USD 250m in this area over the past 4 years. Severstal is reporting on climate to the CDP and is also the only company in the sector in Russia to report emissions on pollutants and greenhouse gas. Moreover, the management has clear long-term goals relating to material ESG factors, with management remuneration linked to Health & Safety results.

36%of our portfolio holdings report emissions data to CDP.


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PRI principles

PRI Principles

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Examples of what East Capital does

Supported by the United Nations, the Principles for Responsible Investment (PRI) provide a voluntary and aspirational set of six investment principles to refl ect the increasing relevance of ESG issues to investment practices. The six principles off er a menu of possible actions for incorporating ESG issues into investment practice, and have been developed by investors, for investors.

• ESG factors and SDGs are an integral part of our investment approach. No variations or exceptions.

• We engage with companies on ESG issues on our own or in collaboration with others

• We cast our (proxy) votes directly or via dedicated voting providers

• We monitor portfolios to detect violations of international conventions and guidelines

• Typical ESG topics include working with companies to develop a clear and consistent dividend policy, professionalising board work and processes, raising and addressing environmental concerns, improving transparency, reporting and investor relations, improving rights for minority shareholders or reaching a better fair-value in buyouts

• We are promoting responsible investments independently, as well as together with collaborative organisations/initiatives. This includes participating as speakers in diff erent forums and providing media comments

• We are collaborating with other shareholders and taking part in relevant stakeholder and investment associations

• Dialogue with governments, stock exchanges and fi nancial regulators to promote improvements in the institutional and legal framework

• We publish an annual Sustainable Investment Report, as well as PRI Transparency Report and Assessment Report

www.eastcapital.com/esg

We will incorporate ESG issues into investment analysis and decision-making processes.

We will be active owners and incorporate ESG issues into our ownership policies and practices.

We will seek appropriate disclosure on ESG issues by the entities in which we invest.

We will promote acceptance and implementation of the principles within the investment industry.

We will work together to enhance our eff ectiveness in implementing the principles.

We will report on our activities and progress towards implementing the principles.

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Climate neutral company since 2012

East Capital is a climate-neutral company in accordance with the UN definition of climate neutrality. The Stockholm office pioneered this effort by becoming a climate neutral office already in 2010, and as of 2012, all offices are included in emission calculations and our efforts to reduce climate impact. Our clear ambition is to actively decrease our negative climate impact. This means that we every year calculate our greenhouse gas emissions, according to the international standard Greenhouse Gas Protocol, imple-ment measures to reduce our emissions and offset any remaining emissions. Our emis-sions are mainly related to our business travel and offices.

The emissions that we are unable to eliminate are offset by carbon credits in various projects that create renewable energy or have other positive sustainability effects in our invest-ment universe. During the years, the projects that East Capital has selected have contrib-uted to several environmental and social ben-efits, including:

• Supporting the shift to low carbon renewa-ble energy in Turkey, while the country meets growing electricity demand through wind farms

• Reducing deforestation while improving local health and safety in Uganda through improved cooking stoves

• Increasing biodiversity and carbon seques-tration capacity while supporting local employment in Georgia through reforesta-tion using hazelnut forests

The latest project, an investment through an impact fin-tech company TRINE is bringing finance to local solar entrepreneurs in emerging countries. East Capital offset

A matter of course a total of 970 tons CO2, which is more than double the actual generated emissions in 2019, by investing in solar loans in Kenya, India, Uganda, Nigeria, Tanzania and Myan-mar.

TRINE aims to eliminate energy poverty. The company seeks to solve this problem by clos-ing the gap between private capital in devel-oped countries and local solar partners in emerging markets. Using crowd investing, TRINE helps people support solar energy projects, while also delivering a return on investment. TRINE provides the expertise, organisation and the platform for enabling secure investments in carefully selected pro-jects and bringing finance to local solar entrepreneurs in emerging nations to elec-trify the world. Read more about TRINE on www.trine.com.

During the years we have taken several sys-tematic steps to reduce our environmental impact and choose more sustainable alterna-tives where possible. Examples include:

• Use of video conference calls as the pre-ferred venue for most internal meetings requiring participation of more than one office, limiting unnecessary travel

• Use of tablets and software for meeting notes and materials, to facilitate knowledge sharing and eliminate unnecessary printing

• Recycling of waste in our offices• Choosing eco-friendly options when pro-

curing office supplies, fruit, beverages and other catering

• Imposing environmental criteria on our suppliers regarding their policies on low-emission company vehicles

• Using only eco-labelled electricity, heating and cooling on our business premises

• When travelling by taxi, using eco-certified taxi companies

Investing in the community

Our social contributions to support our investment universe are primarily focused on helping children and young people to ensure a better future. We prefer to build long term relationships and we actively ensure that any initiative that we support is efficiently run with lasting positive effects that are congru-ent with the aim of our support.

SOS Children’s VillagesSince 2007, East Capital has been a proud partner of the SOS Children’s Village in Keila, Estonia. SOS Children’s Villages is pro-viding a loving home to children who do not have the opportunity to grow up with their biological family. SOS Estonia is part of SOS Children’s Villages International, with high standards in operations, quality control and organisation. Throughout these years, we have been funding a family with five chil-dren who live with their SOS mother in the SOS Children’s Village in Keila. Our relation-ship with the family offers our employees a lot of joy, as we regularly visit the family in Keila, and they also have come to Stockholm to stay with us on several occasions.

RAOULSince 2014, we have been engaging with the charity foundation RAOUL in St Petersburg, founded in honour of Raoul Wallenberg, a legendary Swedish businessman and diplomat. East Capital is focusing on a special project, which aims to help young people with special needs and orphanage graduates to enter the workplace. The support involves education, arranging employment, and pro-vides training in social adaptation and self-organisation. Over 1000 young people have been coached, aiming to enable them to get and retain a job with an official income.

Solar panels installed by Rensource at Sabon Gari Market in Kano, Nigeria’s second largest city. TRINE is bringing finance to local solar entrepreneurs in emerging countries, such as Rensource.

East Capital offset a total of

970 tons CO2which is more than double the actual generated emissions in 2019

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Private Investors Phone: +46 8 505 97 [email protected]

InstitutionsPhone: +46 8 505 88 [email protected]

www.eastcapital.com

sustainable investment report: esg a key tool for emerging ......beatrice bushati presenting the...

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