1. Summary

Temperantia fund has environmental and social characteristics and additionally partially makes sustainable investments in accordance with Regulation (EU) 2019/2088 on sustainability disclosures in the financial services sector, even though it does not pursue any sustainable investments as an objective. This means investing in companies with good corporate governance practices, while focusing on structural changes in the economy and society. A minimum ESG rating for the companies in which the fund invests, exclusions of controversial economic activities and priority thematic areas are applied to align investments with environmental and social characteristics. In order not to significantly impair any of the sustainable environmental or social investment objectives, investments are made in investments that are rated as sustainable and whose economic activity contributes positively to the achievement of the environmental or social objectives, which, considering the main adverse impacts, do not cause significant harm and which meet minimum social standards. For the fund’s sustainable investments, indicators of the most significant adverse impacts are taken into account in the investment decision-making process. The OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights are also taken into account in the investment decision-making process for the fund’s sustainable investments.

As part of the investment process, companies are identified and ranked according to certain criteria. As filtering criteria, Julius Baer uses, among others, its own ratings, such as climate rating, natural capital rating, human capital rating and value rating:

Julius Baer assesses eligible financial instruments for the investment universe based on its own ESG assessment methodology. Direct investments (as opposed to funds) in companies involved in certain sectors are completely excluded from the investment universe of the fund.

In addition, investments are made in accordance with the fund’s sustainable themes, which specifically address the important challenges of the near future.

Good governance of investee companies is ensured by reducing risk by excluding companies with poor governance.

The fund permits direct holdings as well as investments in funds or similar products such as ETFs. The asset classes considered cover the money markets/liquid funds, equities and bonds. At least 70% of the investments take environmental and social characteristics into account. At least 10% of the investments involve sustainable capital investments.

The other investments consist of financial instruments, which were classified as Traditional by the ESG rating methodology by Julius Baer, investments in instruments that were not evaluated by the ESG rating methodology of Julius Baer and investments in money markets-/liquid funds. Observance of the environmental and social characteristics by the fund is ensured by Julius Baer Investment Controlling and its Responsible Investment Committee, which are also entrusted with product monitoring and the due diligence of the fund.

The following measurable variables for the leading disadvantageous impacts are currently used as sustainability indicators to measure the attainment of the environmental and social characteristics of the fund: greenhouse gas emissions, emissions in water, ratio of hazardous and radioactive waste, breaches of the UN Global Compact and OECD Guidelines, share of investments in particular portfolio companies and connection to controversial weapons.

Julius Baer uses its own ESG rating methodology, among other things, which is administered by an internal team of ESG specialists.

In several cases, the data coverage by external data providers is inadequate for all attributes needed for the methodology. Sector averages of external data providers and internal thematic research can be used in such cases The overall share of the estimated data is less than 20% of the total input data used to calculate the ESG scores or categories.

The Responsible Investment Committee mentioned of the Julius Baer Group guarantees that the investment decisions integrate all relevant ESG information. Investment limit breaches are monitored by Investment Controlling.

A systematic collaboration policy regarding ESG topics applies to Temperantia Fund of Julius Baer as part of the regular exchanges with the respective management teams.

2. Sustainable investment objectives

Although the fund does not pursue any sustainable capital investments as an objective, a share of at least 10% of the net asset value is invested in sustainable investments. The sustainable investments included in the fund are intended to have a long-term positive impact on the central sustainability targets in connection with the environmental and social themes of the fund (water, low-carbon economy, efficient exploitation of resources, equal economic opportunities, nutrition and health). The fund achieves this by investing capital in sustainable economic models with environmental and/or social advantages. To avoid seriously impairing any of the environmental or social sustainable investment objectives, investments are made that are classified as sustainable and whose economic activity makes a positive contribution to environmental or social objectives. After making allowance for the most important disadvantageous impacts, these are investments that do not cause any serious impairment and include minimum social standards.

Indicators for the most important disadvantageous impacts are taken into account in the investment decision-making process for the fund’s sustainable capital investments.

The most important disadvantageous impacts are taken into account directly or indirectly, since they are part of the Julius Baer ESG rating methodology.

The OECD Guidelines for Multinational Enterprises and the UN Guiding Principles for Business and Human Rights are also taken into account for the sustainable capital investments of the fund during the investment decision-making process. Financial instruments of issuers associated with a breach of the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles for Business and Human Rights are in general excluded.

3. Environmental or social characteristics of the financial product

The fund promotes environmental and social characteristics by investing a substantial portion of the portfolio in companies with strong environmental, social and governance (ESG) quality. The ESG quality of companies is assessed using ESG data provided by different independent data providers as well as internal thematic research on investment themes, applying Julius Baer’s ESG assessment methodology. No benchmark has been designated to achieve the environmental and social characteristics promoted by the fund.

4. Investment strategy

Temperantia takes into account assessment criteria for its selection of investments, identifying positive initiatives of companies that promote the social responsibility of the firm and support the ethical criteria of the fund. These criteria will be open and focused to cover, among others that may be adapted later and communicated in advance to shareholders, the following themes:

• Environment: supporting environmental improvement, climate change, use of natural resources, pollution, water and waste treatment.
• Corporate Social Responsibility: promoting initiatives that uphold respect for human rights, human dignity and care for human capital, occupational health and safety standards, product responsibility and impact, as well as corporate initiatives that provide communities and countries with access to resources for “life-saving” pharmaceuticals and employee training.

In addition, for the excluded criteria included in the Ethical Principles, the fund uses the methodology provided by MSCI ESG Research called “MSCI Catholic Values Screening Research”. This tool follows the investment guidelines provided by the US Conference of Catholic Bishops (USCCB) and provides information on whether companies, in which the fund may invest, engage in business activities excluded from the Ethical Principles. If so, it provides, on a quantitative basis, the degree of involvement. This information will enable fund managers to automatically exclude the above-mentioned companies from the investment universe.

5. Proportion of investments

The fund permits direct holdings as well as investments in funds or similar products such as ETFs with underlying investments in equities. The asset classes considered cover the money markets/liquid funds, equities and bonds.

Only portfolio companies that meet the selection criteria of the fund are included in the investment universe. These include the criteria from the above-mentioned exclusions, application of the filter criteria and the thematic priorities. Consequently, at least 70% of the investments take environmental and social characteristics into account, of which at least 10% of the investments involve sustainable capital investments.

The other investments consist of financial instruments, which were classified as Traditional by the ESG rating methodology by Julius Baer, investments in instruments that were not evaluated by the ESG rating methodology of Julius Baer and investments in money markets-/liquid funds. The share of liquid funds may be 0-30%.

#1 Aligned to environmental or characteristics, covers capital investments of the financial product made to achieve the advertised environmental or social characteristics.
#2 Other capital investments, covers the remaining capital investments of the financial product, which are neither aligned to environmental or social characteristics nor classified as sustainable capital investments.
The category #1 Aligned to environmental or social characteristics of the financial product covers the following sub-categories:
- The sub-category #1A Sustainable capital investments covers sustainable capital investments with environmental or social goals.
- The sub-category #1B Other environmental or social characteristics covers capital investments, which are aligned to environmental or social characteristics, but which were not classified as capital investments.

6. Monitoring of environmental or social characteristics

The environmental and social characteristics as well as the sustainability indicators are monitored by the portfolio management team. In addition, implementation of the investment strategy is continually monitored as part of the investment controlling.

Monitoring of Julius Baer’s own ESG rating methodology for financial instruments is the task of the Responsible Investment Committee, which as a whole is subject to the Executive Board of the Julius Baer Group. An internal framework ensures the functionality as well as the further development of the Julius Baer rating methodology at the strategic as well as the operational level.

7. Methodologies

The following measurable variables for the leading disadvantageous impacts are currently used as sustainability indicators to measure the attainment of the environmental and social characteristics of the fund:

• Greenhouse gas emissions that cover three indicators:
  a) Scope 1 greenhouse gas emissions
  b) Scope 2 greenhouse gas emissions
  c) Total greenhouse gas emissions (total of Scope 1 and 2)
  The above-mentioned indicators are calculated as emissions in tons for the amount invested.
• Emissions in water:
  Emissions in water caused by portfolio companies, measured in tons per invested million
• Ratio of hazardous and radioactive waste:
  hazardous waste, measured in tons per invested million
• breaches of the Guiding Principles of the UN Global Compact and the Principles for Multinational Enterprises of the Organization for Economic Cooperation and Development (OECD):
  share of investments in portfolio companies, which were involved in breaches of the UNGC Guiding Principles or the OECD Principles for Multinational Enterprises
• Connection to controversial weapons²:
  share of investments in portfolio companies involved in the manufacture or sale of controversial weapons

Due to the continual developments in the field of ESG data, Julius Baer reserves the right to expansion, amendment and replacement of the above-mentioned indicators and/or measurable variables.

² Anti-personnel mines, cluster munitions, chemical weapons and biological weapons

8. Data sources and processing

Julius Baer uses its own ESG rating methodology, among other things, which is administered by an internal team of ESG specialists. This methodology is based on a combination of data from external ESG data providers and Julius Baer’s own research for various instrument classes and asset classes. The result is a series of thematic scores and ESG categories, which are used by portfolio managers in selecting investments.

In several cases, the data coverage by external data providers is inadequate for all attributes needed for the methodology. Sector averages of external data providers can be used in such cases Furthermore, internal thematic research is used to evaluate the element of sustainable transformation of companies, which are linked to sustainability-related themes.

The data, which come from external providers, are not based on estimates by Julius Baer. However, insofar as the data quality is inadequate, it can be ignored in particular cases or not be taken into account for particular sectors. The Responsible Investment Committee is consulted in this case. Information based on internal thematic research, is processed, normalised and estimated to a certain extent. The overall share of the estimated data is less than 20% of the total input data used to calculate the ESG scores or categories.

While Julius Baer draws on ESG data from external data providers, there are still limitations regarding data coverage.

Furthermore, the Julius Baer ESG rating methodology is undergoing continuous further development to take new regulatory requirements or adjustments of existing regulatory guidelines into account and to cover additional instrument types or asset classes.

The planned measures to reduce the limitations include the continuous reassessment of the data quality of external providers in order to improve the coverage and quality, the monitoring of the availability of data required by regulatory law and extension of the coverage in relation to additional instrument types or asset classes.

9. Limitations of the methodology and data

Third party data vendors are providing ESG data for specified universe of investment instruments. Nevertheless, this limits the coverage of company and instrument data to the universe of a data supplier and the instrument types covered. Moreover, important ESG data, such as ESG ratings for derivatives, are not available.

This has no effect on attaining the sustainable investment goal to the extent that Julius Baer has developed its own ESG rating methodology for relevant funds to increase the availability of ESG data for such instruments. The sustainability specialists at Julius Baer check developments in the field of ESG data and indicators with the aim of continuously integrating this additional information in the rating process.
The harmonisation of ESG data methodologies and extension of the coverage are steps planned to counteract these limitations. Julius Baer reviews the extension of the existing data licences in relation to instrument coverage and additional ESG metrics in which further data suppliers are selected. This process is currently ongoing.

10. Due diligence

The due diligence of the underlying total assets, including the risk rating, is carried out by the Responsible Supervisory Committee of Julius Baer. It ensures that the investment decisions take the relevant ESG information into account. It cooperates actively with the analysts and portfolio managers of Julius Baer to reduce the investment risks. Companies with low ESG ratings and public controversies are exhaustively discussed among experts to evaluate risks. In the event of the existence of new or divergent information about the company, analysts or portfolio managers can question the ESG rating and ask the supervisory committee for renewed review of the matter. The committee is authorised to rescind and correct ratings with a three-quarter majority. Continuous reassessments’ are carried out by the same responsible supervisory committee.

11. Engagement policies

Julius Baer is of the view that the identification and analysis of ESG risks that affect companies within their coverage represents an integral part of the responsibility of analysts and portfolio managers. This estimate is part of the regular discussion with the management teams of the companies. As such, Julius Baer concentrates on making these activities on collaboration a regular part of the investment process. The need for direct exchange with management teams is initiated by a company-specific bottom-up process and can also arise from discussions within the Responsible Investment Committee. Activities on collaboration concentrate primarily on sources of ESG risks, which could have a significant financial influence and on controversial activities that could negatively affect the reputation of the company. A systematic collaboration policy regarding ESG topics applies to Temperantia as part of the regular exchanges with the respective management teams.