Sustainability

Since its inception, the Aescap investment team has taken Environmental, Social and Governance (ESG) factors into consideration when analyzing the outside in and inside out facets of its portfolio companies and potential new investments. By continuously doing so, we aim to encourage companies in our sector to act with the well-being of people and our planet in mind. The Aescap Funds focus their investments in companies developing treatments that are aimed to significantly improve the life of patients and benefit society as a whole.

ESG at the Aescap funds

Our approach to ESG factors is twofold. Firstly, outside in sustainability risks are monitored following the Materiality Map by the Sustainability Accounting Standards Board (SASB) to define ESG risks considered to be material in the Biotechnology & Pharmaceuticals sector.

Secondly, the Funds promote a social characteristic with their investments having an inside out effect, in line with Article 8 of the EU Sustainable Finance Disclosure Regulation (SFDR).

Both approaches are outlined in more detail below.

Sustainability risks

Considering the sector focus of the funds, the following sustainability risks have been identified to be likely material for the investments made by the Aescap investment team in the economic sector Biotechnology & Pharmaceuticals:

  • Safety and quality of clinical trials and participants.
  • Access to medicine, affordability & pricing.
  • Medicine safety, defects, inadequate disclosure of risks during pre-clinical studies and clinical trials.
  • Patient follow-up and support for marketed products and during clinical trials.
  • Ethical marketing to medical specialists and patients.
  • Employee engagement, diversity & inclusion.
  • Quality and safety of supply chain management.
  • Excessive pricing and uncompetitive behavior.

SFDR Sustainable Investment Disclosure

Summary Aescap Life Sciences
Aescap Life Sciences (“The Fund”) aims to gain value by investing in publicly traded shares of biopharmaceutical companies and potentially also diagnostics and/or medical device companies. The Fund’s objective is to make an average minimum annual net return (after deduction of costs) of 20%+ over the mid-term. It will typically invest in companies with the potential to (more than) double their share price over a period of maximum 4-5 years.

Next to the goal of creating a financial return for investors, the Fund also promotes a social characteristic. The main focus of the Fund’s investments is in researching, developing, or producing treatment/solutions for diseases with a high unmet medical need. A high unmet medical need has been defined as diseases that are characterized by an (inadequacy of) available treatments, which severely impact the patient and the healthcare system, prevalent in the geographies the company currently markets or plans to market or distribute its current or future product(s).

The Fund aims to construct a portfolio of approximately 20 investee companies that contribute to the social characteristic, and of which a minimum proportion of 30% (of the invested capital of the Fund) are considered sustainable investment. Invested capital is the Fund Assets, excluding cash.

Next to establishing which sustainability risks are considered material for each investee company based on the Sustainability Accounting Standards Board (“SASB”), the Fund also analyses the investee companies’ preparedness to these sustainability risks as part of the due diligence process. The Fund takes the Principe Adverse Impact (“PAI”) indicators into account to determine if an investment can be considered sustainable. It investigates the processes and policies of any potential investment on environmental and social risks in the biotechnology sector as defined by the SASB and by the PAI indicators.

Monitoring of investee companies regarding their Environmental, Social and Governance (“ESG”) performance happens monthly based on sustainability risks, investment allocation towards to the social characteristic and the proportion of the investments determined as sustainable.

The Fund engages with investee companies to improve their, ESG performance through engagement. Engagement can consist of meetings with management, data requests to investor relations to improve the policies and practices or formal voting of the investee companies when considered necessary.

Reporting happens on a monthly and quarterly occasion with updates on the financial returns. The Fund publishes an annual engagement report highlighting the engagement activities of the Portfolio Manager as well as any changes in policies and practices of the investee companies.

Summary Aescap Genetics
Aescap Genetics (“The Fund”) aims to gain value by investing in publicly traded shares of genetics biotech / life sciences companies. It invests in highly innovative companies that develop and market new genetics medical treatments such as gene, RNA and cell therapies. It can to a limited extent also invest in companies that develop and market medical genetics diagnostics. The Fund’s objective is to make an average minimum annual net return (after deduction of costs) of 20%+ over the mid-term. It will typically invest in companies with the potential to (more than) double their share price over a period of maximum 4-5 years.

Next to the goal of creating a financial return for investors, the Fund also promotes a social characteristic. The main focus of the Fund’s investments is in researching, developing, or producing treatment/solutions for diseases with a high unmet medical need. A high unmet medical need has been defined as diseases that are characterized by an (inadequacy of) available treatments, which severely impact the patient and the healthcare system, prevalent in the geographies the company currently markets or plans to market or distribute its current or future product(s).

The Fund aims to construct a portfolio of approximately 18 companies that contribute to the social characteristic, and of which a minimum proportion of 30% (of the invested capital of the Fund) are considered sustainable investment. Invested capital are the Fund Assets, excluding cash.

Next to establishing which sustainability risks are considered material for each investee company based on the Sustainability Accounting Standards Board (“SASB”), the Fund also analyses the investee companies’ preparedness to these sustainability risks as part of the due diligence process. The Fund takes the Principe Adverse Impact (“PAI”) indicators into account to determine if an investment can be considered sustainable. It investigates the processes and policies of any potential investment on environmental and social risks in the biotechnology sector as defined by the SASB and by the PAI indicators.

Monitoring of investee companies regarding their Environmental, Social and Governance (“ESG”) performance happens monthly based on sustainability risks, investment allocation towards to the social characteristic and the proportion of the investments determined as sustainable.

The Fund engages with investee companies to improve their, ESG performance through engagement. Engagement can consist of meetings with management, data requests to investor relations to improve the policies and practices or formal voting of the investee companies when considered necessary.

Reporting happens on a monthly and quarterly occasion with updates on the financial returns. The Fund publishes an annual engagement report highlighting the engagement activities of the Portfolio Manager as well as any changes in policies and practices of the investee companies.

All below information is applicable to both the Aescap Life Sciences Fund and the Aescap Genetics Fund (“The Funds”).

No sustainable investment objective
The Funds, promote environmental or social characteristic, but do not have as its objective sustainable investment. The Funds aim to have a minimum proportion of 30% of sustainable investments that contribute to the social characteristic.

  1. The Funds will, in determining the 30% proportion of sustainable investments, take the PAI indicators into account. It investigates the processes and policies of any potential investment on environmental and social issues in the biotechnology sector as defined by the SASB and by the PAI indicators. In addition, the Funds exclude potential investments with a history of poor performance on sector best practice that have insufficient policies or that has insufficient plans to improve in their social and environmental impact.
    The funds have prioritized the PAI indicators into “very important” and “important”, respectively based on their relevancy to the biotechnology sector and the specific areas where a company is most likely to do significant harm. Two of the mandatory PAI indicators are not deemed relevant for the companies within the scope of investment of the fund. The Fund’s PAI reports, available on its website, contains a detailed explanation of the PAIs considered. If the Fund deems an investment is at risk of having a negative impact/doing significant harm on more than 1 of the very important indicators or on 5 or more of the important indicators, then the investment cannot be classified as sustainable. It may still contribute to the fund’s social characteristic, however.
  2. Each analysis includes a scan for violations of the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights for processes and compliance mechanisms that each investment needs to have.

More details in the Pre-Contractual Disclosure Document, in the Aescap Life Sciences PAI report and the Aescap Genetics PAI Report.

Environmental or social characteristics of the financial product
In addition to the financial aim of both Funds to gain value by investing in publicly traded shares of biopharmaceutical, diagnostics and/or medical device companies, they also promote a social characteristic. The main focus of the investments of both Funds are in researching, developing, or producing treatment/solutions for diseases with a high unmet medical need.

The Aescap investment team considered the heterogeneity behind this notion and defined that these types of diseases (for example Alzheimer’s Disease, Arthrosis, Diabetes, Multiple Sclerosis, Obesity, Cancer, Parkinson’s Disease) are characterized by:

  • inadequacy of available treatments
  • severity of impact on the patient and on the healthcare system
  • in the geographies the company currently markets or plans to market or distribute its current or future product(s).

The Funds believe the inadequacy in these three items encompass what an unmet medical need is in the biopharmaceutical industry.

More details in the Pre-Contractual Disclosure Document.

Investment strategy Aescap Life Sciences
The Fund aims to gain value by investing in publicly traded shares of biopharmaceutical companies and potentially also diagnostics and/or medical device companies. The Fund’s objective is to make an average minimum annual net return (after deduction of costs) of 20%+ over the mid-term (4-5 years). It will typically invest in companies with the potential to (more than) double their share price over a period of maximum 4-5 years. Given the particular innovation power in biotech in Western Europe and North America most investments will be made in these geographical areas. The Fund has a focused portfolio, investing in approximately 20 companies. Within this focus it will ensure that the portfolio is diversified over different diseases, development phases and geographical areas.

Investment strategy Aescap Genetics
The Fund invests in the shares of publicly listed genetics biotech / life sciences companies. It invests in highly innovative companies that develop and market new genetics medical treatments such as gene, RNA and cell therapies. It can to a limited extent also invest in companies that develop and market medical genetics diagnostics. The investee companies are active in the concept of precision medicine. The concept of precision medicine is based on the fact that people respond differently to the same treatment. Based on gene profiling and biomarker data a patient can be given the right treatment from the start. Investee companies can also contribute to the Fund’s social characteristic: investing in companies researching, developing, or producing treatment/solutions for diseases with a high unmet medical need.

The Fund will typically construct a focused portfolio, investing in approximately 18 companies with the potential to (more than) double their share price over a period of maximum 4-5 years. It aims to make investments in companies located globally, but most investments are likely to be made in companies located in Europe and Northern America given the innovation power in biotech in these markets.

For both Funds:
The investment team of both Funds has a deep knowledge of the biotechnology sector and the ability to understand investee companies from both a financial and ESG perspective.

The ESG evaluation includes a Good Governance analysis, determining intended investment’s preparedness to deal with material governance risks identified by SASB. If an intended investment is found to have a low average preparedness on any of the material governance risks investigated, the Funds may include the investment in its portfolio and start an engagement project to improve its preparedness.

More details in the Prospectus of Aescap Life Sciences and Aescap Genetics.

Proportion of investments
The Funds aim to select as much of its portfolio as possible to be aligned with its social characteristic, and targets a minimum of 30% of the Fund’s invested capital. This consists of:

  • listed shares of biopharmaceutical companies and potentially also diagnostics and/or medical device companies.
  • warrants of such companies. Often these warrants are received as part of an equity issue by a company.

Other fund holdings may be:

  • Cash: the Funds may hold cash freely available for investment or cash for portfolio management purposes.
  • Borrowings: the Funds may temporarily borrow (no longer than one month) up to 10% of its NAV for portfolio management purposes or to benefit from an investment opportunity.
  • Non-aligned assets: holdings whose activities do not contribute to the social characteristic of the funds. For non-aligned assets, at minimum a material ESG risk analysis based on the standards of the SASB is performed.

More details in the Prospectus of Aescap Life Sciences and Aescap Genetics.

Monitoring of environmental or social characteristics
The Funds have determined that an investment that contributes to the promotion of both Funds social characteristic needs to be an investment that is researching, developing, or producing treatment diseases with a high unmet medical need. The Funds will analyse per investee company what percentage of their activities is related to developing drugs for diseases with high unmet medical need.

The Funds monitor the attainment of the social characteristic:

  • Monthly monitoring of investment allocation towards social characteristic of the Funds with the percentage of investee companies researching, developing or producing treatment for diseases with a high unmet medical need.
  • Monthly overview of the exposure of the Funds to sustainability risks are reviewed and discussed in the monthly meetings.
  • Progress on ESG best-practice engagement following a sustainable investment strategy.

The Funds report the attainment of the social characteristic it promotes:

  • annually on the percentage of investee companies researching, developing, or producing treatment for diseases with a high unmet medical need.
  • annually on the engagement priorities with investee companies using the findings from the ESG material risk analysis and Do No Significant Harm analysis.

The companies the Funds invests in should not only have strong financials, good management and comply with the regulations, but they should also continue to improve their ESG performance wherever possible. The Portfolio Manager has a long history of investing in- and engaging with biotech companies. Engagement with small-cap companies can be very effective and can have a concrete and direct impact on their policies and practices.

More details in the Pre-Contractual Disclosure Document.

Methodologies for environmental or social characteristics
The Funds use the following methodologies to measure how investments contribute to the social characteristic of the funds:

  • The Funds apply the Materiality Map of the SASB to determine which sustainability risks are material to consider in the investment decision-making process. SASB has identified more than 25 sustainability risks divided across the E, S, and G topics. Dependent on the economic sector the investment is active in, these risks are marked either 1) not material, 2) not likely material, 3) likely material. For a risk to be classified as likely material, SASB has found that for over 50% of the companies active in that sector, the risk has a significant impact on the financial position or operational activities. The Funds will provide an analysis based on policies, practices, and incidents to determine if the investee company has a low, average or high estimated sensitivity of the value of the investment to material sustainability risks.
  • The Funds determine if a company qualifies to contribute to the attainment of the social characteristic for both Funds if:
    • For a company with product(s) on the market that has been profitable in the past 3 years:
      ≥ 50% of the products it markets are aimed at treating diseases with a high unmet medical need
    • For an unprofitable company with product(s) on the market or for a company without product(s) on the market:
      ≥ 50% of its pipeline programs and products on the market are aimed at treating diseases with a high unmet medical need

    If a company qualifies, then the actual percentage of pipeline programs and/or products on the market addressing a high unmet medical need will be used in the calculation of how much of the individual Fund’s assets under management (“AUM”) is contributing to this characteristic, proportionate to that company’s weight in the portfolio. If a company does not qualify, then it counts for 0% to the fund’s calculation of AUM contribution to the high unmet need goal.

More details in the Pre-Contractual Disclosure Document.

Data sources and processing
The Funds use data for the following purposes:

  • Sourcing of the investee companies
  • Monitoring the sustainability risks
  • Reporting on PAI indicators and engagement activities

Data used and processed by both Funds to attain the social characteristic and report on PAI indicators are as follows:

  1. Sources: Publicly available investee company data financials, company policies, annual reports and ESG ratings from external entities. PAI indicators data requested by the Fund to the investee company
  2. Data quality: An investment candidate needs to be willing to communicate and/or share information regarding the relevant topics and risk factors for the fund ESG policy (e.g. SASB, PAI). The investee company cannot be responsible for inadequate disclosure of defects of safety issues relating to one or more of its products.
  3. Data processing: the Funds process data from investee companies via a software provider, checks the received data and does not process data beyond preparing investor communications with data received at a.

Limitations to methodologies and data
The Funds expect limitations to occur with the current methodologies and data collection as all small cap investee companies are transitioning to new reporting methods required under the Sustainable Finance Disclosure Regulation (“SFDR”). As the financial services industry matures, the availability of data related to sustainability, both Fund’s methodology and data sources are expected to evolve.

Due diligence
The Funds follows the below investment processes, including due diligence:

  1. Sector coverage: all securities in the biotechnology sector reviewed annually with research, screening, data analysis, information gathered in the field.
  2. Identification of Edge vs market: Using proprietary financial models as the basis of the Fund’s expectation for a company the teams review companies in the pipeline quarterly against market expectation.
  3. Investment thesis construction: Securities reviewed monthly to map to which extent they fit into each Fund’s portfolio. A review regarding the contribution to the social characteristic of both Funds is part of this analysis.
  4. Constant monitoring: after the team has reached their conviction regarding a security an investment decision is made by the Portfolio Manager. Findings from the ESG material risk analysis and Do No Significant Harm analysis are combined to inform the engagement priorities for a portfolio company.
  5. All investments and their contribution to the Fund’s social characteristic are audited annually by an external third party.

More details in the Pre-Contractual Disclosure Documents.

Engagement policies
The Funds uphold the following approaches with regards to engagement with its investee companies:

  1. Indicator to monitor if an investee company contributes to the social characteristic: the investee company either Fund invests in should not only have strong financials, good management but they should also continue to improve their ESG performance wherever possible. On an ongoing basis, the sustainability risk analyses for the investments of the Funds are reviewed and updated if and when applicable. Material changes to the individual sustainability risks of an investment are not expected to occur often. In addition, the Funds exclude potential investments with a history of poor performance on sector best practice that have insufficient policies or that has insufficient plans to improve in their social and environmental impact.
  2. Voting: As an active investor, the Funds regularly engages with companies on a wide range of topics, including ESG and other factors related to investment fundamentals. Through its regular monitoring and screening activities, engagement is initiated when the Funds identify a concern. The Funds engage with an investee company through meetings/calls with the company’s management or Chairperson, email communications with investor relations or company representatives on specific matters, company site visits, interactions with external industry experts or other industry participants and action through formal voting when we deem it necessary.

Progress on the portfolio’s ESG performance and engagement activities of both Funds are reported in each Fund’s annual engagement report.

More details in the Aescap Life Sciences PAI report and the Aescap Genetics PAI Report

Designated reference benchmark
The Funds do not compare its ESG performance to a benchmark or index.

Sustainability