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AVARON ASSET MANAGEMENT
SUSTAINABILITY REPORT FOR THE YEAR 2020
CONTENTS
MESSAGE FROM THE CEO .................................................................................................................... 3
AVARON OVERVIEW ............................................................................................................................. 5
GENERAL INFORMATION ................................................................................................................. 5
GOALS AND VALUES ......................................................................................................................... 5
INVESTMENT APPROACH ................................................................................................................. 6
OWNERSHIP AND MANAGEMENT STRUCTURE ............................................................................... 7
SUSTAINABILITY IN AVARON ................................................................................................................ 9
PEOPLE ............................................................................................................................................. 9
COMMUNITY .................................................................................................................................. 11
ENVIRONMENT............................................................................................................................... 12
RESPONSIBLE INVESTING ............................................................................................................... 14
INTEGRATION ............................................................................................................................... 14
ACTIVE OWNERSHIP ..................................................................................................................... 18
COLLABORATION AND INDUSTRY INVOLVEMENT ....................................................................... 22
GOVERNANCE AND REPORTING ................................................................................................... 23
CONTACT INFORMATION ................................................................................................................... 25
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MESSAGE FROM THE CEO
Covid-19 pandemic causing a public health
crisis and unprecedented disruption to the
global economy has made us more aware of
humanity’s fragility, made us question our
economic growth models and prompted to
ensure we protect the most vulnerable and
disadvantaged among us.
The crisis has brought sustainability issues
into sharper focus, especially the S part of
ESG as companies have been forced even
more to look beyond profits to consider all of
their stakeholders’ interests. For office
workers like us the switch to home office
mode was relatively straightforward but not
everyone has been able to work from home
and the treatment of employees across
different sectors and companies has really
come to the fore.
At the same time efforts to tackle
environmental risks are also gathering
momentum. At the World Economic Forum
2020 for the first time climate change
together with biodiversity loss, natural
disasters, extreme weather and human
induced disasters were listed as the top global
risk areas, edging out other significant issues
such as geopolitical, technological and cyber
risk. The financial sector has a pivotal role to
play in transforming the economy towards
one with lesser the impact of climate change.
Asset managers like us are at the forefront of
forcing the change as capital providers and
setting a new standard for investing.
The pandemic has shown that where there is
political will, there is a way to push for a
change. In European Union we are welcoming
the introduction of Sustainable Finance
Disclosure Regulation (SFDR). It aims to
provide greater transparency on the level of
sustainability of financial products to channel
private investment towards sustainable
investments while preventing green washing.
Its phase-in implementation will start from 10
March 2021 with the disclosure on whether
and how sustainability risks are taken into
account in the investment decision-making
process, as well as on how remuneration
policies are consistent with the integration of
sustainability risks.
We at Avaron Asset Management have an
established culture of responsible investing
dating back to 2011 when we became a
signatory of UNPRI. We pride ourselves that,
as an active investor, it is part of our process
and we are ready to comply with the new
regulative standards. Although we face
challenges in terms of insufficient non-
financial reporting in Emerging Europe, past
few years have shown that active
engagement with issuers can bring along
positive change rather quickly.
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Being stock-pickers who rely on in-house
fundamental analysis we have always kept
close contact with management teams of
regional issuers, which enables us if needed
board level access to push for a change. It is
our belief that fundamental research and
active engagement with companies are
crucial to impactful ownership.
Annually we get feedback on the quality of our
responsible investment related processes via
UNPRI Assessment Report that we have
chosen to make public on our webpage. It
demonstrates how a signatory has progressed
in its implementation of the principles year-
on-year and relative to peers, and is not by
default public. Over the years our ratings have
improved and we are happy to share that
based on 2020 UNPRI Assessment Report
Avaron was rated above the median in all
relevant reporting categories with ratings
from A to A+ in a scale from E to A, proving
that small boutique asset managers like
ourselves can care and initiate a positive
change in environmental, social and
corporate governance aspects in life.
We are proud of our responsible investing
process and achievements so far, but we
know the world does not stand still. To that
effect, I can assure you neither will Avaron
Asset Management. We are committed to
responsible investing and to the use of best
practices for the benefit of our clients, the
financial services industry and society at large.
Kristel Kivinurm-Priisalm, CEO
Avaron Asset Management AS
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AVARON OVERVIEW
GENERAL INFORMATION
Avaron Asset Management AS (the Company)
is a fund management company established in
2007. Avaron holds a license from the
Estonian Financial Supervision Authority to
manage investment portfolios and funds, and
is also a registered Investment Advisor with
the US Securities and Exchange Commission.
The Company manages UCITS funds,
alternative funds and institutional investors’
managed accounts. Asset class wise the core
focus is on Emerging Europe listed equities.
As of end 2020 Avaron managed 303 million
euros, out of which the core long-only
Emerging Europe listed equity strategy
accounted for 291 million euros. Fixed income
investments accounted for less than 1% of the
total assets under management (AUM). The
Company manages two mutual funds
domiciled in Estonia. Avaron Emerging Europe
Fund (AUM €50M) is focused solely on
Emerging Europe ex-Russia listed equities
(UCITS V). Avaron Flexible Strategies Fund
(AUM €10M) is an asset allocation fund
combining predominantly European listed
equities and fixed income but based on the
fund prospectus can invest globally (AIF).
Avaron also provides sub-investment
management services to third party funds and
managed accounts. Investment management
services to professional investors in the form
of third-party funds and managed accounts
have been a dominant business line for the
Company over the years and accounts now for
around 80% of the AUM. The total size of
institutional investors’ mandates in the end of
2020 was 242 million euros. Besides that
Avaron also manages less than 2 million euros
worth of portfolios for high net worth
individuals.
GOALS AND VALUES
Our mission is to be the most suitable partner
for institutional investors catering for their
needs in investing into Emerging Europe listed
equity asset class. We seek to offer positive
risk weighted long-term return to our clients
through value based and responsible
investing. To achieve this, we adhere to our
bottom-up value focused investment process.
Our investment team has a key role in
meeting this objective, which is why the
Investment Managers and key investment
team members are also the Company’s
shareholders. All three Investment Managers
have worked in Avaron since the company’s
launch in 2007. Our research team, dedicated
to the Emerging European region equity
analysis, comprises of 10 investment
specialists and is one of the largest among
our peers.
Avaron has a strong corporate culture where
integrity, passion for investing, diligence,
flexibility and sustainability is highly valued.
Integrity is the foundation of long-lasting
success in asset management industry. To
build clients’ trust we are honest, open,
ethical and fair. People trust us to adhere to
our word and we are accountable for our
actions. Passion for investing is a key
characteristic we look for during our
employee selection process as we consider it
to be essential for self-development and long-
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lasting job satisfaction. In order to keep
excelling one has to have a strong drive.
Without it we would lose our
competitiveness. Success in investing relies on
disciplined, careful and persistent work.
Adhering to our well-defined investment
process and strategy in long-term enables us
to achieve our goals. As a boutique asset
management house flexibility, both towards
our clients and employees, is something that
sets us apart from the competition. We offer
tailor-made solutions to our clients and
opportunities for personal growth for our
employees.
At Avaron we recognise that our business
and investment practices have an impact on
the environment and society. We are
committed to carry out our business activities
in a sustainable manner to ensure diverse
ecological environment and vibrant cultural,
social and economic base for future
generations. Our perception of sustainability
is of something not being harmful to people,
communities, environment or depleting
natural resources, and thereby supporting
long-term social and ecological balance. As
asset managers we also believe that
environmental, social and corporate
governance issues are important contributors
to the long-term performance of investment
portfolios.
INVESTMENT APPROACH
Avaron runs two different investment
strategies across its asset base – long-only
listed equity strategy, which accounts for over
95% of the AUM, and asset allocation
strategy. Both strategies are managed in
accordance to value-driven investment
philosophy. It is based on a premise that
superior long-term results can be achieved by
exploiting the judgmental biases and
behavioural weaknesses that influence the
decisions of market participants. The market
tends to overreact to short-term problems
that from time to time emerge even for
growing and established businesses causing
the stocks or bonds of these companies
temporarily to go out of favour. In such
situations it becomes possible to acquire
stocks or bonds at prices that ignore the
intrinsic value of the instruments.
Portfolio construction is based on picking
stand-alone investment ideas, thus fully
bottom up. Idea generation is proprietary,
driven by the in-house fundamental
research. Our investment universe includes
around 250 entities, which are under close
observation of our investment team. Engaging
with and monitoring investee companies is an
essential element of our investment strategy.
Not a single investment is made without prior
direct contact with the management team.
We regularly follow up with companies we are
invested in via management conference calls
and on-site meetings. We have integrated
ESG analysis into our investment process as
we recognise that companies must exhibit
good corporate governance and address
environmental and social factors in order to
flourish and survive in the long-term. Thus,
we have integrated ESG analysis into our
investment process.
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OWNERSHIP AND MANAGEMENT STRUCTURE
Avaron is an independent, fully employee-
owned fund management company.
Beneficial owners of the Company are its
founding partners Kristel Kivinurm-Priisalm
(CEO), Valdur Jaht (CIO & Chair of Responsible
Investments) and Peter Priisalm (CIO) which
each own via their holding companies one
third of OÜ Avaron Partners that is with
82.41% shareholding the core owner of the
Company. The rest of the Company is owned
by its long-term senior research team – Rain
Leesi (Investment Manager & Head of
Research, 6.85%), Piotr Jurga (Senior Analyst,
5.86%) and Reino Pent (Senior Analyst, ESG
Specialist 4.88%).
Avaron’s Supervisory Board consists of Peter
Priisalm (Chairman, CIO), Maris Jaht and Priit
Sander. Mr. Sander is an independent
Supervisory Board member and has no other
function in Avaron. On daily basis Mr. Sander
serves as an Associate Professor in finance at
Tartu University. The Management Board
consists of Kristel Kivinurm-Priisalm (CEO) and
Valdur Jaht (CIO). The Company is audited by
KPMG and internal audit is carried out by PwC.
Compliance and risk management functions
are internalised and carried out by the
Company’s Chief Compliance Officer Ingrid
Kõrgema.
Avaron functions as a partnership, which is
being managed by the three partners: Kristel
Kivinurm-Priisalm, Valdur Jaht and Peter
Priisalm. Kristel Kivinurm-Priisalm is
responsible for general management, investor
relationship management and operations
management. Valdur Jaht and Peter Priisalm
are the Company’s Investment Managers,
who are responsible for the investments
made by the funds and managed accounts as
well as the smooth running of the investment
team’s work.
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Figure 1. Organization structure
Managing Partner, CEO & COO
Kristel Kivinurm-Priisalm
Formal Committees: Investment Committee Peter Priisalm, Valdur Jaht
Rain Leesi, Reino Pent
Risk Management Committee
Ingrid Kõrgema, Peter Priisalm, Valdur Jaht, Kristel Kivinurm-
Priisalm, Maarja Härsing-Värk, Rain Leesi
Responsible Investment Committee
Ingrid Kõrgema, Peter Priisalm, Valdur Jaht, Kristel Kivinurm-
Priisalm, Rain Leesi, Reino Pent
INVESTMENT MANAGEMENT
COMPLIANCE & ADMINISTRATION
BACK-OFFICE & REPORTING
INVESTOR RELATIONS
3 Back-Office Specialists
Compliance Specialist
6 Analysts and Trader
Head of Back-Office Maarja Härsing-
Värk
Compliance Officer Ingrid Kõrgema
2 CIOs Peter Priisalm
Valdur Jaht
Head of IR Kristel Kivinurm-
Priisalm
Investor Relations Specialists
Investment Manager, Head of
Research and Trading
Rain Leesi, CFA
Senior Partners Kristel Kivinurm-Priisalm
Valdur Jaht Peter Priisalm
Outsourced services: Internal Audit
PWC
External Audit KPMG
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SUSTAINABILITY IN AVARON
Avaron as a company is committed to
sustainable business practices, which are
embedded into our corporate identity. We
review sustainability under the categories of
People, Community, Environment and
Investing (please refer to Responsible
Investing section on page 14). As a fund
management company the main source of
impact is our investment decision-making is
but besides following the best responsible
investment practices we also strive to be
sustainable as an organization.
In 2017 Avaron became a member of the
Responsible Business Forum in Estonia, a
non-profit organization that aims to inspire
and support furthering corporate social
responsibility among Estonian companies
and in society through being the centre of
competence building and communication on
corporate social responsibility matters. In
2017 we participated for the first time in the
Estonian Responsible Business Index and
received the highest gold level quality label
that is valid for two years. In 2019 we retained
our gold label for the next 2 years and are now
up for a fresh evaluation. The Index aims at
assisting Estonian companies to define,
evaluate and monitor their economic, social
and environmental impact. The quality label is
given to organizations that show high
performance and systematic approach in
responsible activities towards local
community, environment, workplace and
marketplace. We scored the highest among
the small enterprises, proving that our
efforts in adopting responsible business and
investment practices are bearing fruit.
Back in 2019 Avaron received an entrepreneurship award from Tallinn City as the Responsible Company 2019 based on our efforts and initiatives in responsible investing.
PEOPLE
At Avaron we recognize that the skills,
experience and commitment of our team
together with a robust, repeatable and long-
term focused investment process are integral
to delivering superior investment returns to
our clients. In order to attract and retain the
best people we aim to make the working
environment enjoyable, flexible and dynamic.
We promote equal opportunities and value
transparency together with mutual trust
highly. Being part of our small but ambitious
team should provide outstanding
opportunities for people that strive for
excellence and are passionate about
investing. We have developed an effective
hiring and on-boarding processes to ensure
that we find talented people and are able to
integrate them successfully into our team. We
do not discriminate because of age, disability,
gender, marital status, maternity, race
(including colour, nationality and ethnic or
national origins), religion or belief, sexual
orientation or any other factor. It is our belief
that long-term success is created via an
environment in which difference and
diversity are respected and welcomed. Trust
in the asset management industry is crucial to
financial stability. Our success relies on the
confidence that our stakeholders have in us –
trust that is ultimately safeguarded by laws
and regulations.
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Our Code of Conduct defines the high-level
principles that guide our business, how we
treat our clients and the conduct expected
from our employees. Doing the right thing is
the essence of our Code of Conduct. All our
onboarding employees are required to
complete internal training in the Code of
Conduct and thereafter once a year
participate in the ongoing trainings on Code of
Conduct and internal rules to ensure proper
awareness and knowledge of the ethical
principles.
Avaron Whistleblowing Policy ensures that
all of our stakeholders, including customers,
partners, affected communities as well as
our own employees have the right to speak
up and always feel safe in doing so if they
have concerns about suspected misconduct
such as breaches of human rights, or
irregularities such as fraudulent,
inappropriate, dishonest, illegal or negligent
activity or behaviour in our operations,
products or services. This includes any action
that constitutes a violation of laws or
regulations, or of Avaron internal policies,
instructions or guidelines.
Amid Covid-19 pandemic we took a cautious
approach from day one to protect our people
and mitigate risk to our operational
capabilities. Our Risk Management
Committee has actively monitored the
situation and set guidelines to depending on
the virus situation. Apart from a few key
investment team members and trading desk
most of our employees have been working
from home during peak periods of the
pandemic from March to mid-May last year
and from December till February this year,
and contacts have been reduced to a
minimum. Most of our employees have had
the flexibility to work from home already
before the pandemic, which made the
transition once pandemic hit seamless. We
are glad to report that all our employees
have stayed healthy in the midst of Covid-19
pandemic and all our systems have worked
flawlessly, and our collective effort has
ensured that Avaron continues to service the
clients at the highest level.
At the end of 2020 our team comprised 18
professionals. The average tenure of our staff
was 7.3 years, with male and female average
tenure almost equal. On the Board level and
in most formal committees Avaron has equal
gender representation among Executive and
Non-Executive members.
Staff numbers 2015 2016 2017 2018 2019 2020
Full time employees 14.5 15.0 16.2 18.8 19.1 18.9
% of female 44% 43% 35% 35% 39% 33%
% of male 56% 57% 65% 65% 61% 67% Turnover 7% 13% 25% 0% 10% 16%
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COMMUNITY
Community engagement at Avaron is about
creating positive change through employee
volunteering. We encourage our staff to take
an active role in the community for the benefit
of both our business and society. In this we
put emphasis on education and youth
development, especially building financial
skills and promoting entrepreneurship. In the
age of digitalisation, financial exclusion is an
increasing problem for many people. Thus,
building financial literacy from early age and
understanding modern day digital tools in
finance contribute to the financial well-being
in life and business.
Promoting entrepreneurial mindset is
equally as important for us as entrepreneurs
play an important role in society in terms of
creating growth, innovation and jobs.
Avaron, being an employee-owned boutique,
itself is a good example of how
entrepreneurship can create value to the
society.
Since 2014 our staff has been participating in
the non-profit organisation (NPO) Back to
School as guest teachers on the topics related
to finance, economics, and setting up and
running a business. NPO Back to School has
the objective to strengthen the cooperation
between Estonian schools and the rest of the
society by inviting guest teachers to primary
and high schools to carry out lessons and
share their experience. Also, our investment
team members regularly give guest lectures
on investment related topics in the School of
Economics and Business Administration of the
University of Tartu.
Besides focusing on financial education
promoting physical activity among youth is
equally important pillar of our community
strategy. Mens sana in corpore sano. Recent
studies show that only 16% of Estonian
students aged 11-15 engage in the
recommended amount of exercise (at least 60
minutes of moderate to vigorous activity per
day). This implies significant health risks for
many as the habits and behavioural patterns
developed when growing up tend to prevail
also in adulthood. During 2017-24 Avaron
backs the foundation Youth to Olympics that
is dedicated to supporting 18 to 25 year old
Estonian athletes in their pursuit of
excellence. During the seven years Avaron
contributes €44,000 to the foundation. Youth
to Olympics provides long-term support to
prospective young Estonian athletes that have
the potential to become ambassadors of
active lifestyle for the whole Estonian society
and youth in particular. Precondition for a
young athlete to receive a grant from the
foundation is a commitment to promote
physical activity via social media channels and
by organizing at least two face-to-face events
annually to better engage with youth. We
believe that such leading by example
approach is an effective way of engaging more
children in different sports activities. Avaron
Partner Valdur Jaht is the founder of the Youth
to Olympics foundation.
During 2020 Christmas we continued with
the tradition to donate money to
foundations that improve the Estonian
school system and education instead of
sending out Christmas cards and gifts to our
clients and business partners.
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Last year we donated €3,000 to the
foundation Kiusamisvaba Kool that is a
licenced partner organization of KiVa, a
research- and evidence-based anti-bullying
program that has been developed in the
University of Turku, Finland, with funding
from the Finnish Ministry of Education and
Culture. KiVa is being used around the world
and it is the world’s most studied anti-bullying
program. As of now ca. 20% of Estonian
schools have enrolled to the program.
In previous years we have supported NPO
Back to School and foundation Noored Kooli
(Youth to School) with a similar amount. With
our support Back to School program financed
the production of nine investment related e-
lessons for school children that are now up
on the program’s Youtube channel for public
viewing. Noored Kooli (Youth to School)
foundation reforms the Estonian education
system by creating new young and motivated
future education leaders. Each year the
foundation selects 25 bright young people to
its leadership training after which they are
sent around Estonia to practice as school
teachers for two years with the aim to bring
new views, skills and inspiration to Estonian
schools and pupils. In 14 years the foundation
has raised seven new school masters, brought
250 new young people to the educational
system, and more importantly has inspired
around 20,000 pupils around Estonia to make
better future choices.
ENVIRONMENT
We acknowledge and aim to measure our
environmental impacts and take action to
improve wherever possible. As an office-
based business our direct environmental
impact is relatively limited. We have identified
four main impact areas from our operations:
energy consumption, travel, paper usage and
waste management. We are committed to
reducing our ecological footprint through
cultivating sustainable business culture
optimization of our working practices.
Annual electricity and paper consumption are
tracked since 2014 and it has helped us to
optimize our consumption. To reduce our
energy consumption, we have undertaken
work to ensure all lights, computers and other
equipment are powered off when not in use
during extended periods of time, including at
night and at weekends. Our meeting rooms
are equipped with audio-visual and
teleconferencing solutions and employees are
encouraged to make use of these, reducing
travel where appropriate. We have a non-
print policy in our offices and use 100%
recycled paper across our print solutions if
printing is needed. Whenever possible we
take advantage of electronic sales
presentation possibilities. In waste
management used paper, carton, plastic and
plastic bottles are collected for recycling. We
regularly engage with our employees to
encourage energy saving and recycling
behaviour.
In 2020 our environmental metrics were
notably affected by pandemic induced
limitation of travel restrictions and work from
home needs, so the improvement seen is
unsustainable. Our greenhouse gas (GHG)
footprint (Scope 2) from energy consumption
in 2020 was 12.3 tCO2e (2019: 15.1 tCO2e)
based on the emission factor of electricity sold
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in Estonia (assumed equal for both years given
lack of data for 2020). Scope 2 emissions per
FTE stood at 1.09 tCO2e, down 18% compared
to 2019.
Another important source of GHG emissions
in our operations stems from travel (Scope 3),
which we are tracking since mid-2016.
Emission factors used to calculate the
footprint are 0.09612 kgCO2e per km for pan
European flights (short-haul international),
0.20369 kgCO2e per km for taxi, 0.10312
kgCO2e per km for bus, and 0.03694 kgCO2e
per km for train transport. In 2019 our
business travels reached 14 thousand
kilometres (down 90% compared to 2019) of
which 96% were pan European flights. Our
carbon footprint from business travel in 2019
was 1.3 tCO2e (2019: 13.4 tCO2e) or 0.07
tCO2e per FTE (2018: 0.7 tCO2e). Given the
nature of Avaron’s business that entails
regular on-site meetings with company
managements and investor visits we have not
set any targets related to reducing travel
related carbon footprint. Also, we do not
calculate nor monitor the full Scope 3
emissions due to relative immateriality of
other sources besides business travel.
2014 2015 2016 2017 2018 2019 2020
Paper usage, # of sheets 22,257 17,548 14,652 17,319 15,211 11,687 4,694
YoY change, % -21% -17% 18% -12% -23% -60%
Electricity consumption, kWh 17,954 18,187 18,341 19,875 20,939 19,921 16,232
Per FTE, kWh 1,254 1,223 1,229 1,117 1,042 857
YoY change, % 7% -3% 1% -9% -7% -18%
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RESPONSIBLE INVESTING
Since 2011 Avaron follows responsible
investment (RI) practices and is a signatory of
UN Principles for Responsible Investment
(UNPRI). As an institutional investor, Avaron
has a duty to act in the best long-term
interests of its beneficiaries. In this fiduciary
role, we believe that environmental, social
and corporate governance (ESG) issues can
affect the performance of investment
portfolios to varying degrees across
companies, sectors, regions, asset classes and
over time. Given our main aim of generating
alpha to our clients via stock picking it is
important to have ESG analysis integrated
into our investment process. When making
investment decisions our in-depth knowledge
of listed companies is considered as a key
ingredient in delivering strong returns to
clients. Our investment team has been
following vast majority of our current listed
equity universe for more than a decade, which
serves as an important strength in assessing
the companies’ future potential. In order to
have an extensive knowledge base of the
companies in our universe we have taken a
strategic decision not to outsource ESG
analysis to third party providers but rather
build ESG know-how in-house by adding ESG
specific layer within our research process.
In Avaron we believe that the stock returns
are primarily driven by the underlying
fundamental potential of companies, while
ESG issues may add to or subtract from it.
Thus, the ESG layer in our investment process
serves as a risk management tool to detect
possible important risks related to ESG.
While the ESG factors considered mainly aim
to reduce investment risk, Avaron also
recognizes that applying these principles may
better align investors with the broader
objectives of society. Improved ESG practices
should help to create an environment of
higher standards of business conduct,
increased market efficiency, sustainable
environmental management, and thus
ultimately a more cohesive and fairer
society. Even though such indirect benefits
may not contribute immediately to Avaron’s
investment performance, these should over
time translate into higher and more
consistent overall returns.
INTEGRATION
In Avaron we seek to integrate the
consideration and thoughtful management of
ESG issues into the investment process by
undertaking ESG analysis on all prospective
and existing investments. Within our
investment process the ESG analysis is
carried out as part of the qualitative
company analysis. Our ESG integration
comprises two layers to ensure that relevant
issues are consistently taken into account
when making investment decisions:
1. In order to avoid financing companies
that are engaged in activities with
clear negative impact on people and
environment we apply exclusion
principles.
2. In-depth analysis of ESG criteria using
an internally developed ESG Score that
is a part of our company quality
analysis and enables to assess the ESG
performance of companies in our
investment universe.
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Exclusion is used as a tool to ensure no
investments are made into activities that
have a clear negative impact on people or the
environment. It is applied outright for
involvement in certain sectors or after non-
successful engagement process to address
discovered infringements of United Nation
Global Compact (UNGC) or poor corporate
governance practices.
As of end 2020 our internal coverage list
included 279 (compared to 277 in 2019)
companies. Based on exclusion principles we
had 71 companies in our restricted list
reflecting the direct impact of RI Policy
implementation (2019: 61). This figure does
not include companies that are restricted due
applicable international or national sanctions
but includes sector-based exclusions
alongside with exclusions based on poor ESG
practices.
Exclusions based on type
Environmental 14 Social 6 Governance 51
Excluded companies by country
Russia 29 Turkey 25 Poland 8 Greece 3 Hungary 2 Czech Republic 2 Romania 1 Croatia 1
The rise in restricted list over the course of
2020 was driven by increased governance-
based exclusions in Turkey.
During the year we saw Turkish retail buying
driven parabolic stock price jumps among
many micro-cap companies, which thereafter
traded above our minimum market cap level
of €100M. However, the governance and
management access of such companies tend
to be extremely poor. At the end of 2019 we
had 13 companies from Turkey in the
restricted list, while at the end of 2020 it had
risen to 25.
End-2018 we implemented our internally
developed ESG analysis tool called ESG Score
instead of a generic UNGC based check with
an aim to get a quantifiable outcome for
measuring the ESG performance of
companies in our coverage universe. ESG
Score assesses companies’ ESG profile
comprising 90+ aspects across the three
letters. All of these are individually assessed
and assigned a score on a 1 to 5 scale, higher
score indicating better performance.
The E rating comprises different environ-
mental aspects with a focus on climate
change including carbon footprint and its
reduction policy, eco-efficiency and resource
efficiency and waste management. The S
rating comprises social and supply chain
related aspects including human rights,
labour rights and conditions, health and
safety, treatment of customers and
community, diversity, data privacy and cyber
security. The G rating evaluates corporate
governance related aspects including board
composition and independence, transparency
and accountability, shareholder rights,
business ethics, anti-bribery and corruption
measures, and governance related to
sustainable management.
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In the final ESG Score the three letters have
equal weights and the rating is adjusted for
ESG related controversies (negative) and
other specific issues (positive or negative),
which are not reflected in the scorecard but
are deemed important to be taken into
account when assessing the overall profile of
the company. These adjustments are taken
into account when having occurred over the
past 5 years. As an example of Avaron
Emerging European Fund the average ESG
score at the end of 2020 stood at 3.33 (+2.2%
yoy) compared to 3.26 in the end of 2019
(2018: 3.20). Controversy adjustment factor
accounted for 0.06 reduction in the average
ESG score. Without it the portfolio’s rating
would have been 1.9% higher. Part of the
positive change over the year can be
attributed to the rise in ESG quality of the
portfolio due to the changes made. However,
improved ESG performance and disclosure
among regional companies has been visible
and also contributed to the rise in the Fund’s
average ESG score. Best ranking names in the
portfolio were Hungarian Magyar Telekom
and Turkish car manufacturer Tofas with ESG
scores of 4.01. Lowest ranking name remains
Czech energy producer CEZ with 2.56 given its
high environmental risk profile.
Looking at the subcomponent level the ratings
improved across all three but most notably of
E and S. Average E rating of Fund portfolio
companies improved 4.9% yoy to 3.18
(+12.2% vs. end-2018), while average S rating
was up 5.7% yoy at 3.56 (+14.0% vs- end-
2018). G rating that used to be the highest
compared to E and S when we implemented
the ESG score has been more stable though
also improving. End-2020 G rating of Fund
portfolio companies was up 3.3% yoy at 3.48
(+2.5% vs. end-2018). We are especially
happy to see the improvement in regards to
environmental issues, since our region seems
to lag on this front given that many
companies lack climate change and resource
efficiency driven corporate policies and
related practices. This is something we have
engaged upon with our portfolio companies,
raising their awareness and requesting
improvements.
ESG score in investment process: Coca-Cola Hellenic Bottling Company (Greece) In late October 2020 we launched a position in Coca-Cola Hellenic Bottling Company (HBC). HBC bottles and sells different beverages in 28 countries with a regional focus on Emerging Europe, while being present also in select Western European countries (e.g. Ireland, Italy) and Nigeria. The company offers a broad portfolio of consumer-leading brands in sparkling, juice, water, sport, energy, plant-based, ready-to-drink tea, coffee, adult sparkling, snacks and premium spirits categories. At the time of entry, we had 18% upside to our fair value target of the company however evaluating the company’s quality, ESG score and liquidity metrics in combination with the target price we decided to make an investment. Although the upside was lower compared to the portfolio average of around 50%+ at that time, HBC stood out with its ESG score that was more than 25% above the portfolio average. We were willing to accept below portfolio average upside in exchange for a quality business and exposure to exemplary sustainability endeavors that the company is known for both in the region as well as globally. HBC has the highest ratings in respected third-party ESG rankings sustainability metrics, including MSCI ESG, FTSE4GOOD and CDP Climate & Water.
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ESG Score enables us to assess various ESG
related risks and opportunities, rank
companies in our investment universe and
guides our investment decision making
process alongside with the company Quality
Score, an in-house tool to gauge the overall
quality of the company from management
team and business model perspective. Via
ESG Score the ESG considerations are
embedded into the analysis process of each
individual company and the rating is
assessed against the upside to our fair value
target of the company when considering an
investment. We do not make any exclusions
based purely on the low ESG rating but it
enables to detect potential issues to engage
upon. ESG Score ratings are subject to a full
review once per annum carried out by the
Investment Managers and Analysts.
On annual basis we measure how ESG
approach has impacted the risk adjusted
performance of Avaron Emerging Europe
Fund by comparing 1, 3 and 5-year volatility of
equally weighted portfolio of excluded
companies to Avaron Emerging Europe Fund
and its benchmark. Over the years it has
become evident that the returns of excluded
companies are significantly more volatile and
event driven compared to the performance of
Avaron Emerging Europe Fund.
Volatility
1-year 3-year 5-year
Avaron Emerging Europe Fund 23% 15% 13%
MSCI EFM Europe + CIS ex Russia 29% 21% 19%
ESG exclusion list ex Russia 34% 30% 30%
ESG exclusion list cum Russia 31% 24% 25%
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ACTIVE OWNERSHIP
Engagement One way Avaron manages and protects the
value of its clients’ investments is via being an
active owner, exercising the shareholder
rights and engaging with managements of the
listed companies. We take an active approach
in communicating our ESG views to
companies and seeking improvements
where there are deficiencies in performance,
or a company has infringed appropriate
standards, or to push for adequate
disclosure. Engagements may be reactive or
proactive. Reactive engagements are
company specific and are triggered by a
negative ESG event (e.g. norm infringements),
while proactive engagements are preventive
in nature and target improvement of ESG
practices. Proactive engagements can be also
theme specific and undertaken across a group
of companies.
Should our ESG analysis with the ESG Score
uncover undesirable practices, or in reaction
to a specific ESG related events, reactive
engagement actions are undertaken to obtain
within a predetermined timeframe specific
and measurable changes on the part of the
issuers. Engagement is always the preferable
option over exclusion in order to thrive
towards better ESG awareness and policies.
A dialogue with the company is maintained
over an extended period if necessary.
Escalation and means of the engagement
activities are decided upon by the investment
team and depend on the specifics of the issue
at hand and the company. Actions may
include communications through the
company’s brokers, direct engagement with
the management board or joint intervention
with other shareholders, and where
appropriate, voting against board proposals.
Controversy adjustment: Krka (Slovenia) In January 2020 local investigative journalism portal in Romania reported that according to inside information received from the local subsidiary of our portfolio company Krka (pharmaceuticals producer), the company had for more than a decade fraudulently incentivized local doctors, so that they would prescribe Krka’s products. We decided to engage with the company directly and inquire about the scope of the alleged bribery case and weather any patients/customers were put at risk. On January 17th the company representatives informed that they had launched an extensive internal investigation concerning the claims and that no health risks were caused by the products mentioned in the claims. On January 30th Krka reported that the internal investigation had ceased six days prior and no unlawful activities were determined. Furthermore, the company once more confirmed that there was no systemic bribery scheme orchestrated by the controlling company in Slovenia, however it cannot be ruled out that some of the local Romanian employees, on their own initiative, could have acted fraudulently. Krka has replaced the local country manager to improve compliance to group bylaws and code of conduct.
Until now we are unaware of any concrete legal measures taken by the local authorities in Romania, however internally we decided to lower Krka’s ESG score via controversy adjustment until we have full confirmation that the company had not acted illegally. It resulted in a 0.1 (2.9%) drop in rating to 3.38. We did not to make any adjustments in the position size related to the incident.
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Meetings with company executive and non-
executive board members are one of the key
ingredients of our investment process.
Besides the upside to our internal target
prices the portfolio construction is also driven
by companies’ quality for which we have
developed specific rating tools – Quality Score
and ESG Score. Such qualitative assessment
can only be done by combining publicly
available information with meetings with
company representatives. During these
meetings we have also the opportunity to
bring forward our concerns on ESG issues and
ask for proper further corrective actions from
the company. Due to the pandemic in 2020 we
were very much resorted to communication
via digital channels alongside with the rest of
the industry.
Our ESG Score also provides a basis for
proactive engagements enabling to detect
areas where companies could improve
existing practices. Based on the ratings data
for our portfolio companies over the past two
years we have detected that integrating
climate change issues into corporate strategy
and related disclosure is one major area
where improvements should be sought. In this
respect we are glad to report that the
situation has started to improve in an
accelerated manner. At the end of 2020 39%
of Avaron Emerging Europe Fund holdings
reported climate change data in a uniform
manner to CDP and another 7% disclosed in a
comparable manner in its own reports. This
compares to only 17% of holdings disclosing
similar quality data a year earlier. Only 24% of
current holdings do not report any data on
carbon emissions at the moment.
Our aim has been to start reporting the
carbon footprint of our portfolios, which has
been so far hindered by the shortcomings in
disclosure. We hope that over the course of
2021 there will be further improvements in
climate change disclosure by Emerging Europe
companies. We target to publish portfolio
footprints for our own funds by the end of
2021 using third-party service providers to
model the missing data. Nevertheless, one of
our engagement priorities remains to
encourage carbon reporting in the region via
collaborative and individual engagements.
In 2020 we individually engaged with 16
portfolio companies on different ESG topics
and in two cases reactively related to
discovered controversies. Besides that we
participated in 2020 Carbon Disclosure Project
(CDP) Non-Discloser Campaign as lead
investors, engaging with 19 portfolio
companies.
# of meetings 2014 2015 2016 2017 2018 2019 2020
1on1 meetings 85 109 127 154 144 116 16
1on1 calls 17 17 9 20 30 16 50
Group meetings 24 72 27 22 23 15 0
Quarterly group calls 320 315 304 362 435 577 745
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Engagements in 2020
Company Subject Type
ALIOR BANK SA Climate change CDP campaign
ARCELIK AS E, S topics Individual
ARENA HOSPITALITY GROUP DD Climate change Individual
BANCA TRANSILVANIA SA E, G topics Individual BANK HANDLOWY W WARSZAWIE SA Climate change CDP campaign
BANK PEKAO SA Climate change CDP campaign
BIM BIRLESIK MAGAZALAR AS Climate change, forests, water CDP campaign
CEZ AS Water CDP campaign
CYFROWY POLSAT SA E, G topics Individual
DETSKY MIR PJSC E, S, G Individual
ERSTE GROUP BANK AG Climate change CDP campaign
IMMOFINANZ AG Climate change CDP campaign
GLOBALTRANS INVESTMENT PLC E, S topics Individual
HACI OMER SABANCI HOLDING AS E topics Individual
JUMBO SA Climate change CDP campaign
KORDSA TEKNIK TEKSTIL AS Forests CDP campaign
KRKA Controversy Individual
MAGNIT PJSC Climate change, forests, water CDP campaign
MAVI GIYIM SANAYI VE TICARET AS E, S topics Individual
MOSCOW EXCHANGE MICEX-RTS PJ S topics Individual
PKO BANK POLSKI SA Climate change CDP campaign
POLSKI KONCERN NAFTOWY ORLEN Climate change, water CDP campaign
POWSZECHNY ZAKLAD UBEZPIECZE Climate change CDP campaign
RICHTER GEDEON NYRT Climate change, water CDP campaign
SPHERA FRANCHISE GROUP SA E, S topics Individual
TALLINNA SADAM AS Climate change CDP campaign
TAV HAVALIMANLARI HOLDING AS S topics Individual
TITAN CEMENT INTERNATIONAL T Controversy, climate change, water Individual, CDP campaign
TUPRAS-TURKIYE PETROL RAFINE E, S, G topics, climate change, water Individual, CDP campaign
TURK TRAKTOR VE ZIRAAT MAKIN S topics, climate change, water Individual, CDP campaign
WARSAW STOCK EXCHANGE Climate Change CDP campaign
WIRTUALNA POLSKA HOLDING SA E, G topics Individual
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Voting A key part of being an active owner of listed
equities is using voting rights in an informed
way at company meetings, including but not
limited to shareholder resolutions on ESG
performance issues. Key principles of how we
exercise our voting rights have been set in
Avaron’s Voting Policy.
Starting from 2018 we have committed to
systematically exercise our voting rights on all
shareholder meetings. Voting rights in Avaron
are exercised internally i.e. our investment
team reviews the agendas of shareholder
meetings of the companies we are invested in.
Voting proposals are put forth by the Analysts
that cover the companies, approved by
Investment Managers and then forwarded to
our global custodian or directly sent to the
companies.
In 2020 we voted in 92% shareholders’
meetings of the companies we own in the
portfolios for which we hold the discretion to
exercise voting rights. This compares to 89%
and 85% participation rate in 2019 and 2018,
respectively. On 1% of agenda points we
voted against the management proposals and
on 5% we abstained. According to our Voting
Policy we communicate the reasoning behind
“Against” votes to the companies. Starting
from 2019 we are disclosing all our voting
details for our publicly sellable funds, which
are available in the Responsible Investment
section on our homepage.
Leading collaborative engagements: 2020 CDP Non-Discloser Campaign In 2020 for the third consecutive year we took part in the CDP Non-Discloser Campaign to encourage companies in our investment universe to improve their sustainability disclosure via CDP platform. Once again we took the lead investor role in engaging with a number of our portfolio companies. While in the recent years the focal point of the engagements led by us had been climate change, then in 2020 we also engaged with several companies on deforestation and water topics. We sent out official letters to the management and investor relations teams of 19 companies we hold in our portfolios and in most cases followed up via direct face-to-face communication or e-mail to explain the reasons behind our request.
Almost all of the companies we connected with acknowledged the need for quality sustainability disclosure and the threat of facing potentially higher capital cost in the future should they not choose to disclose. Dialogues with these select companies reflected the overall situation in Emerging Europe related to sustainability reporting – there is no clear uniform standard for reporting, thus issuers, especially smaller ones have been hesitant to invest resources into developing the accounting systems. Climate change remains the main focus, while awareness on deforestation and water related data disclosure is starting to rise. On climate change we engaged with 17 companies out of 19 and it resulted in 3 of submitting their emissions reports to CDP. On deforestation we engaged with 3 companies but without immediate success. On water management we engaged with 8 companies resulting in one of them submitting water disclosure report to CDP.
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Voting activity 2014 2015 2016 2017 2018 2019 2020
Meetings voted 8 20 13 16 67 69 60
Resolutions 65 210 94 158 656 641 665
For 54 183 91 119 578 598 593
Against 11 17 2 19 55 12 7
Abstained 0 10 1 20 23 31 35
COLLABORATION AND INDUSTRY INVOLVEMENT
Since 2011 Avaron is a signatory of UN
Principles for Responsible Investment (UNPRI)
that enables us to stay up to date on industry
developments, offers a chance to implement
new best practices in the industry and
collaborate with other institutional investors
and asset owners. We recognize that in many
instances joint action by institutional
investors has the potential to be more
effective than acting alone. Thus, every year
we participate or support select collaborative
initiatives that overlap with our beliefs or
needs. One of the primary areas we are
active in is related to climate change and
carbon reporting. In 2020 we did not join any
new collaborations, but continued with our
participation in the following ones:
i. Climate Action 100+ that is an investor
initiative launched in December 2017 to
engage with 167 global companies that
have significant greenhouse gas
emissions or are critical to the net-zero
emissions transition and to meeting the
objectives of the Paris Agreement. As of
2020 signatory assets under management
totalled $52 trillion. Since 2018 we hold a
supporting role in the collaboration as
there are a few companies in the focus list
from our investment universe. According
to the 2020 progress 43% of targeted
companies have set a net zero by 2050
target or ambition of it in some form.
However, only 10% of focus companies
have set net-zero targets that explicitly
cover the companies’ most material
Scope 3 emissions. Around half of the
companies have set a short-term (to
2025) emissions reduction target, and
38% have set medium-term target (2026
to 2035) but these targets do not often
cover both the companies’ operational
Scope 1 and 2 as well as the most material
Scope 3 emissions.
ii. PRI-coordinated engagement on climate
change transition for oil and gas that was
launched in March 2018 and came to a
close October 2020. It built on research
by Carbon Tracker that illustrates the
company-level risks associated with
unneeded capital expenditure and
targeted 25 global oil and gas companies.
The engagement was designed to
complement and reinforce the goals of
Climate Action 100+. Although targeted
companies increasingly recognise the
need to address climate change,
integration is lacking. None of the
companies targeted are on track to align
their full value-chain emissions with or
lower climate pathway by 2050. We held
a supporting role in the collaboration.
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iii. Carbon Disclosure Project (CDP) Non-
Discloser Campaign is aimed at increasing
corporate transparency on climate
change, deforestation and water security.
The campaign focuses on companies that
had never responded or had not
responded to the CDP questionnaire in
recent years.
Besides climate change related collaborations
we remain supporters of the Tobacco-Free
Finance Pledge which we signed in 2018 as it
aligns our long-term approach of limited
financing of tobacco companies. The aim of
the pledge is to raise awareness of the issue of
lending to, investing in and insuring tobacco
companies among financial institutions and to
encourage the adoption of tobacco-free
finance policies.
We continue to support the CDP as a
signatory. CDP is one of the largest investor
collaborations globally with combined $110
trillion in assets, aiming to improve climate
change, water usage and deforestation
related disclosure, and risk management of
publicly traded companies. We plan to take
part in the 2021 Non- Discloser Campaign
targeting companies in our investment
universe as it directly supports our near-term
objective towards carbon reporting of our
portfolios.
GOVERNANCE AND REPORTING
Avaron Responsible Investment Committee
has oversight of, and responsibility for, all
responsible investment related issues
including but not limited to development of
relevant policies and steering policy
implementation. The Committee is made up
of senior staff members and is chaired by
Executive Board Member and co-CIO Valdur
Jaht. The Committee and its Chair have
ultimate responsibility to ensure efficiency,
compliance and ownership of responsible
investment practices in Avaron. Current list of
Committee members is:
Name Role
Valdur Jaht Co-CIO, Chair of the Committee
Peter Priisalm Co-CIO Kristel Kivinurm-Priisalm CEO/COO
Rain Leesi Investment Manager, Head of Research
Reino Pent Senior Analyst, Responsible Investment Specialist
Ingrid Kõrgema Compliance Officer
Avaron discloses annually on responsible
investment issues via UNPRI Reporting
Framework and a stand-alone Sustainability
Report. On quarterly basis we disclose on
responsible investment related activities to
our clients via our newsletter.
UNPRI Reporting Framework provides
Transparency and Assessment Reports.
Transparency Report shows signatory’s
responses to the Reporting Framework and is
made publicly available on the PRI website.
Assessment Report demonstrates how a
signatory has progressed in its
implementation of the principles year-on-year
and relative to peers, and is not by default
public. However, at Avaron we have decided
to make our Assessment reports public. We
are proud of our continued progress that is
evidenced by above the median ratings in
2020 UNPRI Assessment Report:
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CONTACT INFORMATION
Valdur Jaht
Avaron Asset Management
Partner, co-CIO, Chairman of Responsible Investment Committee
Phone: +372 6644203
E-mail: [email protected]
www.avaron.com
Reino Pent
Avaron Asset Management
Senior Analyst and Responsible Investment Specialist
Phone: +372 6644204
E-mail: [email protected]
www.avaron.com