1. Introduction to the Sustainability Risk Integration Policy in the Investment Decision-making Process
As an independent asset management boutique founded in 2015, Azvalor develops its long-term investor vocation by applying fundamental analysis criteria in its investment process, analyzing each investment thoroughly and aligning its interests with those of its co-investors as part of its fiduciary responsibility towards them.
Sustainability risk or ESG risk is defined as any environmental, social or governance or condition which, if it occurs, could cause an actual or potential material negative impact on the value of the investment. In this respect, Azvalor has no specific product labelled as ESG nor does it fall under the European Commission’s classification of environmentally sustainable activities. The European Securities Market Regulator (ESMA) recently expressed its concern about ESG ratings, highlighting the heterogeneity of methodologies and, therefore, the current difficulty of comparability for investors. We understand that this lack of unification of criteria will be corrected as the implementation of the new regulations progresses.
Azvalor dedicates a lot of time and effort to find, understand and analyze listed companies, trying to invest in good businesses, managed by honest managers whose interests are aligned with shareholders. We study the financial situation of the company, the quality of its management team, the evolution of its business and its competitive environment, its cash generation, and, of course, its valuation. The objective of Azvalor is to invest in companies whose intrinsic value is not reflected in their share price, trying to take advantage of the short-term inefficiencies between price and value, in order to maximize long-term investment returns, minimizing, as far as possible, errors or permanent losses in value. This process includes interviews and meetings with different stakeholders of each company, including key executives, employees, former employees, competitors, customers, suppliers, regulators and experts in the particular industry or company, among others. This analysis is carried out both before the decision to invest in said companies is taken and during the investment period, monitoring that there are no changes that question the investment decision taken.
A complete analysis of a company entails for Azvalor the identification and analysis of all the potential risks that may negatively affect the future value of the company, and within this framework are included, among many others, those sustainability risks related to its corporate governance, social and environmental practices, which could affect its future value and therefore the profitability for the shareholder in the long term. The holistic integration of the analysis of all types of risks is inherent to the philosophy that Azvalor’s investment team has been practicing for more than two decades. However, in light of the new regulatory framework related to ESG (Regulation 2019/2088, in force since March 10, 2021), we now incorporate some risk control tools, so that risks are monitored in a more visible and explicit way, with the help of complementary risk analysis platforms and which we detail later in this document.
The ESG and political correctness phenomena are leading a growing number of investors and institutions to completely disregard sectors that are absolutely essential to maintain and improve global well-being. This is not the approach taken by Azvalor which, consistent with its corporate culture values in line with the free market, prudently decides not to disregard any sector in general, but to evaluate each case individually on a company-by-company basis. Each situation is unique and, therefore, Azvalor considers the relevant facts and risk factors in each case individually.
 The preparation of this report has taken into account international benchmarks for ESG reporting in asset management, such as SASB (sectorial asset management & custody activities), TCFD (climate risk implications of portfolios), GRI standards, and the recommendations of the INVERCO association. The PRI principles (Principles for Responsible Investment) as well as the industry’s best practices in ESG integration and transparency have also been taken into account.
With the entry into force of Regulation 2019/2088 of the European Parliament and of the Council on sustainability-related disclosures in the financial services sector, and in an environment in which during 2021 and 2022 we will see further developments within the European Commission’s Sustainable Finance Plan, Azvalor’s intention is to offer regular information in this regard, although no products are marketed under taxonomy.
If you have any questions, please do not hesitate to contact us through our various communication channels (toll-free number +34917374440 or firstname.lastname@example.org).
2. Integration Policy. Regulatory Compliance and Risk Control
In compliance with the transparency requirements of Regulation 2019/2088 (entry into force March 10, 2021) on sustainability-related disclosures in the financial services sector, the Board of Directors of Azvalor has approved the new sustainability risk integration policy, which is incorporated into the Risk Policy.
In order to identify the levels of exposure to sustainability risk of the assets and portfolios, the following analyses are performed on a recurring basis:
- Sustainability analysis of each of the underlying assets, with a breakdown of each of the three ESG pillars. This information, which incorporates in-house and external analysis, is integrated into the analysis template used by Azvalor’s analysts and managers for each invested company.
- Aggregate analysis of the portfolio to obtain its average sustainability profile, based on external suppliers.
- Assessment of the portfolio’s extra-financial risk (ESG) with a parameterization similar to the assessment of financial risk (market, credit and liquidity), comparing both sources of risk jointly. Example:
- Aggregate portfolio analysis of ESG risk exposure by sector. Example:
- Aggregate portfolio analysis of ESG risk exposure by sector with a breakdown of each of the pillars (E, S and G).
- Evolution of the portfolio’s ESG risk factors over time, in aggregate and by segment (sector, country, and type of asset), which allows us to evaluate the appropriate transition of the different risk exposures.
- Data quality analysis: confidence level of the data used, and percentage of the portfolio requiring approximations or adjustments.
2.1 Sources of information
For the analysis of sustainability risk, information and analytical software from three suppliers is used to complement the different sources of financial information handled by Azvalor. This process aims to ensure the highest degree of integrity and solvency of risk reports. The suppliers are:
- Azvalor’s regular supplier of financial information, a leading entity of recognized international prestige. It also provides information on ESG indicators at issuer level (Bloomberg)
- Fintech supplier, specialized in financial risk management and modelling, which provides a periodic integrated analysis of financial and extra-financial risks, both of the aggregate portfolio and of specific issuers, including a breakdown of each pillar (E, S and G). Its report takes into consideration potential ESG controversies that ultimately affect the corresponding rating. (Serfiex)
- External platform specializing in ethical and social valuation, which provides quantitative and qualitative information on all the companies in Azvalor’s portfolio. (Altum Explorer)
A relevant aspect of the process is to ensure a good quality of ESG data from the different international suppliers, a quality that is currently very heterogeneous and therefore needs to be considered in this context. In terms of ESG risk analysis of a specific company or investment, the qualitative criteria of Azvalor’s analyst or investment manager will prevail, which is focused on a global and holistic risk analysis carried out during the due diligence process of each company.
Although Azvalor has a sustainability risk integration policy, it does not take into consideration in the management of its funds the adverse impacts of investment decisions on sustainability factors, as it does not currently have due diligence policies in relation to such adverse impacts.
2.2 Corporate governance, engagement and active exercise of voting rights
Following the procedure for the exercise of rights inherent to the securities that make up the portfolio and as co-owners of the companies in which it invests, Azvalor exercises the political rights inherent to minority shareholders. There is no proxy advisor providing voting recommendations, but the direction of the vote will seek to ensure the maximum protection of minority shareholders’ interests. Normally the direction of the vote is aligned with the company’s proposal, as the analysis of the board structure, the quality of the management team, its strategy, business management, and alignment of interests are critical variables before investing in a specific company. However, the voting decision is made on a case-by-case basis in an agile manner thanks to an in-depth knowledge of its corporate governance, which includes meetings with its management team and other stakeholders.
Furthermore, Azvalor has one of the most advanced and widely used proxy edge platforms at national and international level (Broadridge), which provides early warning of all shareholder meetings and agenda items. This platform has recently incorporated additional ESG options to strengthen financial and non-financial risk integration. As mentioned, Azvalor usually exercises voting rights, including those aspects related to the ESG implications of the company, and always with a comprehensive risk management perspective.
In addition to the thorough analysis prior to the investment, Azvalor maintains a periodic and intense level of engagement or involvement with the management team of the companies over time. Meetings, calls, on-site visits, news tracking and other forms of engagement enable a close and detailed monitoring of the corporate governance of its investments. This concept of engagement, in ESG terminology, is something that Azvalor’s investment team has been doing throughout its professional life, as an integral part of the long-term investment philosophy.