Handelsbanken Global Småbolag Index Criteria (A1 NOK)

Summary

No significant harm to the sustainable investment objective

In order to qualify as sustainable investments, companies whose economic activities contribute to the achievement of an environmental or social objective must also not counteract sustainable development through other parts of their value chain (the “do no significant harm” principle). For this fund, which has a reduction in emissions of carbon dioxide and other greenhouse gases as its objective at the fund level, the fund company ensures this by following a Paris Aligned Benchmark where the sustainability requirements in the index guarantee that the companies in the fund and the index are selected and weighted in such a way that the index portfolio’s emissions of carbon dioxide and other greenhouse gases are adapted to the long-term global warming targets of the Paris Agreement (i.e. the goal of limiting global warming to 1.5 degrees Celsius). In addition, the index methodology involves the application of the following exclusion criteria when selecting companies to include in the fund and its index:

1. Exclusion criteria for companies with activities linked to controversial sectors as well as specific PAI indicators, such as fossil fuels and controversial weapons.

2. Exclusion criteria for companies with confirmed violations of international norms and conventions.

3. Exclusion criteria for companies that cause significant harm to one or more environmental objectives linked to climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, prevention and mitigation of environmental pollution, protection and restoration of biodiversity and ecosystems.

Within the scope of considering the PAI indicators, the fund company conducts engagement through dialogue and active asset stewardship in order to encourage the companies to manage their sustainability risks and any potential principal adverse impacts on sustainability factors.

For more on the fund company’s method for assessing sustainable investments, including the assessment of “do no significant harm”, refer to the Principal Adverse Sustainability Impacts Statement published on handelsbankenfonder.se. This document also includes a description of the fund company's tools for addressing principal adverse impacts on sustainability factors.

Sustainable investment objective of the financial product

The fund is an equity index fund that aims to follow the performance of the Solactive ISS ESG Screened Paris Aligned Developed Markets Small Cap Index as closely as possible. The index constitutes a registered EU benchmark for alignment with the Paris Agreement (a so-called Paris Aligned Benchmark) pursuant to Regulation (EU) 2016/1011 (the Benchmark Regulation), and aims to reflect equity markets in developed markets, taking into account specific sustainability requirements. The sustainability requirements of the index aim to reduce emissions of carbon dioxide and other greenhouse gases. The companies in the fund and the index are selected and weighted in such a way that the index portfolio's greenhouse gas emissions are adapted to the long-term global warming targets aligned with the Paris Agreement. The fund company reports the fund in accordance with Article 9(3) of Regulation (EU) 2019/2088 of the European Parliament and of the Council on sustainability-related disclosures in the financial services sector (SFDR). More information about the index that the fund tracks can be found at https://www.solactive.com/indices/?index=DE000SL0C1W3. Note that it is the fund as a whole that, according to Article 9(3) SFDR, has a reduction in emissions of carbon dioxide and other greenhouse gases as its objective.

Investment strategy

The fund is an equity index fund managed with the aim of generating returns over time that correspond as closely as possible to the returns of the index. The fund applies the following investment strategy to meet the sustainable investment objective:

Target of reducing carbon emissions: The fund is managed in line with an index that is a registered EU benchmark for alignment with the Paris Agreement (a so-called Paris Aligned Benchmark), pursuant to Regulation (EU) 2016/1011 (the Benchmark Regulation).

The fund and the composition of its index aim for reduced emissions of carbon dioxide and other greenhouse gases. The companies in the fund and the index are selected and weighted in such a way that the index portfolio's greenhouse gas emissions are aligned with the long-term global warming targets of the Paris Agreement. This means the following:

• The index must have a greenhouse gas intensity, measured as emissions of greenhouse gases according to Scope 1, 2 and 3, which is at least 55% lower than the greenhouse gas intensity of the reference portfolio, and it must also show a reduction in greenhouse gas intensity of at least 7% annually.

• The total exposure to the sectors listed as high climate impact sectors in Sections A-H and Section L of Annex I to Regulation (EC) No 1893/2006 (5) of the European Parliament and of the Council must correspond to the total exposure to these sectors in the reference portfolio. The requirement is established in order to ensure that the index provides a realistic picture of the real economy, including the sectors that need to actively reduce their greenhouse gas emissions in order to achieve the targets of the Paris Agreement.

• Within the framework of the index methodology, companies are rewarded if they set Science Based Targets, meaning targets for reducing greenhouse gas emissions that are both clearly established and publicly disclosed, and/or if companies, via their products and services, positively contribute to the attainment of the environmental objectives of Agenda 2030.

Dialogue and asset stewardship: Active engagement is an essential strategy for influencing companies in a more sustainable direction. The fund company and the fund manager do this through company dialogues, asset stewardship and engagement in investor networks. Company dialogues are conducted both directly between the fund manager and the company, as well as together with other investors or within the scope of investor networks and other collaborations. The dialogues cover a wide range of sustainability issues. Through representation on nomination committees and voting at shareholders' meetings, the fund company conducts active and responsible asset stewardship. The basis for this is our Policy for Shareholder Engagement and Responsible Investments as well as our guidelines for nomination committees.

Exclusion strategy: The fund applies sustainability requirements in the form of an exclusion strategy. The strategy applies to companies that produce or distribute controversial weapons, military equipment, alcohol, tobacco, cannabis, pornography, commercial gambling, fossil fuels, as well as companies with confirmed violations of international norms and conventions related to human rights, the environment, employee rights or anti-corruption and anti-bribery. Furthermore, companies are excluded if they cause significant harm to one or more environmental objectives linked to climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, prevention and mitigation of environmental pollution, protection and restoration of biodiversity and ecosystems. The index also excludes companies operating in controversial sectors.

The fund and its index are able to invest in companies in transition. Companies in transition refers to power generation companies that are deemed to be in the process of transforming their operations in a way that is expected to contribute to, rather than counteract, the fulfilment of the Paris Agreement. Exceptions are made from the 5% criterion regarding "fossil fuel – power generation" in the index methodology if all of the following criteria are met:

• The company has established and published targets in accordance with the requirements of the Science Based Targets Initiative to transform its operations in line with the Paris Agreement.

• The company has a maximum of 50% revenue from fossil fuel energy.

• The company has a maximum of 5% revenue from coal power.

• The company has a minimum of 10% revenue from renewable energy. However, exceptions can never be made to the minimum criteria in the Paris Aligned Benchmarks framework (see Articles 2-12 of the Delegated EU Regulation 2020/1818 to the Benchmarks Regulation).

According to the regulation, a company must comply with corporate governance best practices in order for the fund to invest in the company. The fund company ensures this through the strategies for exclusion.

By excluding companies with confirmed violations of international norms and conventions linked to, for example, tax, employee rights, corruption and bribery, it is ensured that the companies the fund invests in live up to best practice in terms of sound corporate governance. Examples of relevant principles and guidelines are the UN Global Compact Principles 1, 3, 6 and 10, the OECD Guidelines for Multinational Enterprises, and conventions such as the UN Convention against Corruption and ILO Convention 111, Discrimination in Respect of Employment and Occupation.

Learn more about the fund company's methods and principles for good corporate governance in the Policy for Shareholder Engagement and Responsible Investment at handelsbankenfonder.se.

Proportion of investments

Monitoring of sustainable investment objective

On a daily basis, the fund company's risk control monitors compliance with the target of reducing carbon dioxide and other greenhouse gases. This is done by monitoring whether the fund is following its Paris Aligned Benchmark. Furthermore, the minimum proportions set out in the Prospectus – found in the annex containing sustainability-related disclosures for the fund regarding the proportion of sustainable investments, pursuant to the requirements of Regulation (EU) 2020/852 – are complied with. The fund company's risk control also follows up on whether the fund complies with its provisions on the exclusion of companies. This verification concerns sectors we exclude and which we believe risk counteracting sustainable development. The fund company's risk control also monitors that the investee companies in the fund do not violate international norms and conventions. For further information, refer to the heading “Methodologies” below.

The following sustainability indicators are used to measure the attainment of the financial product’s sustainable investment objective:

Greenhouse gas intensity/carbon footprint in accordance with the Paris Aligned Benchmark regulatory framework: To meet the objective of reducing carbon emissions and other greenhouse gases, the fund and its index shall reduce their greenhouse gas intensity, measured as Scope 1, 2 and 3 emissions relative to EVIC, at least 7% annually. The fund and its index shall also display a greenhouse gas intensity which is at least 55% lower than the greenhouse gas intensity of the reference portfolio. These emissions reductions shall be achieved by requiring that the total exposure to the sectors listed as high climate impact sectors in Sections A-H and Section L of Annex I to Regulation (EC) No 1893/2006 (5) of the European Parliament and of the Council correspond to the total exposure to these sectors in the reference portfolio. The requirement is established in order to ensure that the index provides a realistic picture of the real economy, including the sectors that need to actively reduce their greenhouse gas emissions in order to achieve the targets of the Paris Agreement.

Methodologies

Data sources and processing

Information about the companies' exposure to excluded activities and incidents that lead to violations of international norms and conventions is obtained for funds that follow sustainability-adapted indices by the index provider from external data providers in accordance with the respective fund's index methodology. Corresponding information is also retrieved directly by the fund company. The external data providers obtain information about the companies' exposure to excluded operations from public presentations published by the companies and/or through direct contact with the companies. EU Taxonomy contributions are obtained from Sustainalytics and SDG contributions from ISS ESG. In addition, the fund company conducts its own analysis regarding contributions to environmental or social objectives, with the assessment based primarily on data from the companies' annual reports.

Information about violations of international norms and conventions is obtained from ISS ESG. For funds that follow sustainability-adapted indices, all requirements for exclusion are built into in the index, and the fund company's risk control verifies that these funds invest in line with the index daily. The proportion of estimated data at the fund level continuously changes seeing as estimates are made per investment, and the fund's exposure to each respective investment changes. The information below is based on data as of 31 December 2022.

Greenhouse gas emissions:
Estimated data for Scope 1 + 2 was 42.8% and reported data was 57.2%. Estimated data for Scope 3 was 86.6% and reported data was 13.4%.
Contributions to the EU Taxonomy:
Estimated data was 100% and reported data was 0%.
Exposure to the fossil fuels sector:
No information available for the share of estimated or reported data.
Company’s sales from products and services considered to be contributing to a social or environmental objective:
No information available for the share of estimated or reported data.

The fund company conducts regular discussions with the external data providers to ensure high-quality data. Specific analyses are performed when there is contradictory information. In case of doubt, the company in question is contacted and given the opportunity to provide their view. However, no exceptions are made for funds that follow sustainability-adapted indices concerning the data provider’s assessment.

The fund company analyses and examines data to capture any potential deficiencies or incorrect information. Data received from external sources is used primarily in its raw form provided that the data is reliable. Examples of the data processing include aggregation and transformation, such as the calculation of carbon footprint based on separate data points for emissions and company value, respectively.

Limitations to methodologies and data

Information about the companies' exposure to excluded activities is limited to the information made available by the companies themselves. Consequently, it is not always possible to ensure the exact exposure to these activities. The limitations are most prominent for companies with a smaller portion of the business involved in the excluded activities, such as a grocery store that also sells alcohol. This is an acceptable limitation since the principal effect of the fund's strategy is attained by the exclusion of companies with significant exposure to the excluded activities.

There are also limitations linked to the use of estimated data to assess positive and adverse impacts, since an estimate does not necessarily correspond to reality. The use of estimated data can, however, still be beneficial, given that it is done conservatively and only in cases when it can be done reliably. It may then be possible, for example, to identify companies with an unwanted exposure to fossil fuels, even if the company does not report the exposure themselves. There are also limitations because a significant amount of data is reported with a lag in companies’ annual reports. This is managed by making use of the most recently available information. Some limitations related to data accessibility and data quality are inevitable but are reduced to the greatest extent possible through conservative assessment processes and continuous development to increase coverage and secure data quality.

Due diligence

Engagement policies

As a significant investor, the fund company has a responsibility and an opportunity to engage with companies to influence them to act responsibly and conduct their business in a sustainable manner, in addition to promoting the development of sustainability efforts in the asset management industry. The fund company engages through company dialogues, asset stewardship and investor networks. Our engagement efforts are based on Handelsbanken's core values, our commitments, as well as the international norms and conventions supported by the fund company. The company dialogues include overall strategic sustainability issues, as well as specific aspects of a company's risks, opportunities and impact linked to sustainable development. Through our corporate governance efforts, we influence companies by participating in nomination committees and voting at shareholders’ meetings. Networking and collaboration with other shareholders and stakeholders contribute to collective learning, development and making an impact through engagement. The engagement is carried out on behalf of the index funds and other passively managed funds through company dialogues, as well as through corporate governance efforts and investor networks. Additional information on the principles and methodologies applied by the fund company in its engagement efforts and asset stewardship, as well as how this work is structured within the fund company, is available in the fund company's Policy for Shareholder Engagement and Responsible Investment at www.handelsbankenfonder.se.