The portfolio of the Warakirri Ethical Australian Equities Fund is subject to a proprietary ethical overlay applied by Warakirri. The overlay incorporates both positive and negative components.

Positive Overlay

The positive overlay component incorporates a focus on investment in businesses that exhibit sound environmental, social and governance practices, as determined by Northcape’s consideration of ESG factors.

Negative Overlay

The negative overlay excludes investment in companies that Warakirri considers have significant business, that is revenue of greater than 5% from the audited financial statements of a company, involved in:

• manufacture of alcoholic beverages;
• provision of gambling products and/or services;
• production of sugary drinks, confectionery and fast food chains; and
• extraction of thermal coal and/or coal seam gas.

A revenue threshold of 0% is applied to companies involved in:

• production of tobacco, manufacture of nicotine alternatives and tobacco-based products; and
• manufacture (development and production) of controversial weapons (biological and chemical weapons, depleted uranium ammunition / armour, antipersonnel mines or cluster munition / sub munition and their key components), firearms, and nuclear weapons, as well as associated delivery systems.

Warakirri is ultimately responsible for the application and implementation of the Warakirri Ethical Overlay in consultation with Northcape.

Northcape's consideration of ESG Factors

For consideration for the Approved List for each Fund by Northcape, companies must attain a minimum internal ESG rating of 6 points out 10.  The avoidance of egregious ESG risks is a central objective of the assessment process, with the aim of fewer capital loss events and/or adverse sustainability outcomes.

Each company is rated out of a maximum of 10 points, split between the 3 ESG pillars of:

• Environmental (3 points),
• Social (3 points), and
• Governance (4 points).

Analysts make assessments of the materiality of a specific risk to the business and rate the company on those perceived to be material. Deductions are made from the maximum possible score for each identified material risk factor. In summary, the main objectives of the ESG rating process are:

• To identify and assess material ESG risks and opportunities faced by investee companies.
• To enhance and protect returns through judgements about the impact of ESG factors on the sustainability of returns and company suitability for investment portfolios.
• To inform investment stewardship activities to manage ESG risks and opportunities.         

ESG Factors

Environmental factors (3 points) that may be considered by analysts, where relevant, include:

• Transition risk and decarbonisation.
• Physical risks of climate change.
• Waste, pollution, packaging, and water use.
• Risks related to the use of natural resources.
• Energy transition opportunities. 

Social factors (3 points) that may be considered, where relevant, include:

• Human rights, labour rights and supply chain.
• First nations rights.
• Human capital development.
• Employee health and safety.
• Product quality and customer protection.
• Social opportunities.

Governance factors (4 points) that may be considered, where relevant, include:

• Board independence, effectiveness, and composition.
• Audit and disclosure quality.
• Executive and board remuneration.
• Shareholder rights.
• Regulatory issues and other controversies.  

ESG ratings are monitored by analysts for new information or company disclosure. If the ESG rating falls to below the minimum threshold, the company is removed from the Approved List, and if held, divested.

Limitations of ESG integration

Northcape recognises ESG integration involves a series of judgements about the likely impact of ESG factors on company returns over the long-term investment horizon. However, the financial materiality of ESG factors can vary over time and are among many drivers of investment value.  It is therefore not certain ESG integration will meet the objectives of capital enhancement and protection over the investment period.

Nonetheless, the rating process provides investment teams a valuable opportunity to consider long-term risks and opportunities that may fall outside traditional financial analysis to inform the stock selection process, better understand the sustainability outcomes from investment activities, and prioritise stewardship efforts.

In summary, consideration of ESG factors does not imply:

• That there are restrictions on the investment universe, other than the exclusions outlined in Warakirri’s proprietary ethical screen outlined previously.
• That ESG factors are given more or less consideration than other types of factors.
• That all ESG factors are given equal consideration.
• That the resulting portfolio will have any characteristics.

The Warakirri Ethical Australian Equities Fund provides investors access to an actively managed, high-quality portfolio of leading Australian companies listed on the ASX, aimed at delivering above average growth over the long term. Utilising a “quality” approach, the Fund is managed by our specialist investment partner, Northcape Capital, a well established, highly skilled and passionate team that has successfully been managing Australian equities since 2004.

Northcape Capital’s Australian Equities team have the principles of ethical investment at the forefront of their approach, with ESG considerations incorporated into their investment decision making process.

Warakirri applies its own unique Ethical Overlay screen, integrating Northcape’s consideration of ESG Factors, along with a negative overlay.