Sustainability & ESG

According to Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial sector (the SFDR), financial markets participants shall publish on their websites information about their policies on the integration of sustainability risks in their investment decision-making process.

Adrigo Small & Midcap L/S is classified as an Article 6 Fund under the SFDR, which means that we integrate sustainability risks in the investment decision-making process. We consider good corporate governance as well as environmentally and socially responsible behaviour as essential in managing a company with the aim of maximising long-term shareholder value.

Adrigo is part of East Capital Group, and we use the Group’s ESG Framework for integrating sustainability risks. The Framework consists of four pillars: Sector Exclusions (Negative Screening); Controversy (Norms-Based) Screening; Proprietary ESG Analysis; and Active Ownership.

Adrigo’s investment philosophy is based on a belief that companies with long-term and sustainable growth prospects generate greater returns. For this reason, we have chosen not to invest in certain sectors, which we believe have negative environmental and social impacts, and which we do not believe offer our clients attractive prospects of long-term returns.

Adrigo will not invest (or consider investing) in any company known to generate over 5% of its revenues from weapons, tobacco, adult entertainment, gambling, or alcohol. No investments are made or considered to be made in any company known to have any exposure to unconventional (controversial) weapons.

The portfolio’s compliance with the sector exclusion criteria is reviewed quarterly and re-confirmed annually. The criteria apply to both long and short positions.

Through a controversy (norms-based) screening, provided by an external service provider, Adrigo monitors companies’ compliance with international norms and standards. The screening is intended to capture severe, systemic and structural violations of international norms as enshrined by the UN Global Compact Principles. Adrigo’s portfolio is quarterly reviewed to confirm compliance with the norms-based screening criteria, which apply to both long and short positions.

Reports about potential controversies and violations will be used as input to initiate a company dialogues, on our own or together with other investors, in order to request and encourage companies to improve. While breaches occur rarely, holdings which are Non-Compliant could be companies for which we believe we have both a possibility and a duty to engage with, in order to request improvements regarding disclosure of the violations, accountability about the incident and remediation measures.

As a general rule, Adrigo will not invest in new holdings which are deemed Non-compliant and will divest from Non-compliant companies if the breach is based on events that occurred after the time of first investment (or information about the events has been made available thereafter) and the company is deemed as not having taken/taking adequate measures.

Prior to investment, we complete a Red Flag Analysis for the potential holding. The Red Flag Analysis consists of 10 questions for long positions and 4 questions for short positions, focusing on the most relevant and material sustainability risks and opportunities in our markets. The questions concern key corporate governance indicators, including board and management quality, auditing, transparency and corruption risk, as well as potential environmental and social controversies.

The Red Flag Analysis enables us to identify and assess the most relevant sustainability risks for a potential holding. Our long-term holdings generally consist of companies that have no or very few Red Flags, since we believe that strong ESG features have a positive impact on long-term returns. Furthermore, Adrigo will not invest in any company with more than three Red Flags.

The Red Flag Analysis is also used as input for dialogues and company engagements (further outlined under Pillar IV). As a general rule, Adrigo initiates engagements with long-term holdings that have been assigned Red Flags for environmental or social controversies, as well as with holdings that have more than two Red Flags related to governance issues.

For Adrigo, Active Ownership is an important way to integrate sustainability risks and to add value to our holdings after initial investment.

When we have identified relevant areas of improvement on specific ESG issues or if we believe that a portfolio company has not met our expectations as owners, we will evaluate if it is suitable for us as investors to initiate an engagement process where we seek to encourage and influence the company to make necessary improvements. We aim to be constructive and supportive in our dialogue with the companies.

Our experience has shown that engaging with the company, either directly or collectively with other owners, usually generates greater positive effects as opposed to immediately exiting our investment. If the company does not respond in an adequate manner or does not undertake the necessary changes, however, we may ultimately decide to divest.

Engagement activities are communicated in relevant forums where applicable, in particular in client due diligence requests.

For more information about our active ownership, please see East Capital Group’s ESG Policy, which guides all strategies managed by companies in East Capital Group when it comes to exercising our ownership rights in and positively influencing portfolio companies. The Policy, which is reviewed and approved annually by the Board, is available on Adrigo’s Website.

As part of our sustainability work, Adrigo shall ensure that the remuneration is consistent with the sustainability work undertaken by us and that sustainability aspects shall form part of the evaluation of the employees that serves as a basis for determining remuneration.

According to the SFDR, financial market participants shall also publish and maintain on their websites, where they consider principal adverse impacts (PAI) of investment decisions on sustainability factors, a statement on due diligence policies with respect to those impacts, taking due account of their size, the nature and scale of their activities and the types of financial products they make available.

Adrigo is part of East Capital Group, which does consider principal adverse impacts of investment decisions on sustainability factors.

The norms-based (controversy) screening, described above, covers PAI indicators related to violations of UN Global Compact principles and OECD Guidelines for Multinational Enterprises, or lack of processes and compliance mechanisms to monitor compliance with those regulations, as well as exposure to controversial weapons (antipersonnel mines, cluster munitions, chemical weapons and biological weapons).

Furthermore, Adrigo’s Investment Team is responsible for considering PAI indicators when holistically assessing company quality and when filling in the Red Flag Analysis prior to investment. The Red Flag Analysis for each holding is reviewed by East Capital Group’s ESG function. Potential PAI indicator outliers are identified and discussed.

Following the requirements of Regulation (EU) 2019/2088, and the information to be disclosed pursuant to Article 11(2) of that Regulation, the information on principal adverse impacts on sustainability factors will be published in the Annual Report referred to in Article 69 of Directive 2009/65/EC no later than 30 June 2023.

Statement on principal adverse impacts of investment decisions on sustainability factors. 

The Principal Adverse Impact (PAI) statement is available on East Capital Group website.