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: valdur@avaron.com

www.avaron.com

Reino Pent

Avaron Asset Management

Senior Analyst and Responsible Investment Specialist

Phone: +372 6644204

E-mail: reino@avaron.com

www.avaron.com