Luminor investicijų valdymas UAB | Updated on 2024-12-31, version No.2

This document presents information on how sustainability risks¹ are integrated in the investment process of pension funds managed by Luminor investicijų valdymas (hereinafter referred to as we, and/or us).

Luminor Group Sustainability Policy sets out Luminor Group commitment to ensure that its companies operate in a responsible, sustainable and caring manner. To achieve this, aspects based on sustainable impact are also included in our activities, we support this approach and operate within the framework of this business concept in order to contribute to the achievement of the Luminor Group goals in the sustainable development area.

In view of the above, we take sustainability risks into account in our activities, assessing their impact both at the company level and in terms of the value of the assets of pension funds. We have carried out a sustainability risk impact assessment, where the impact of sustainability risks on the Company's operations was identified and assessed in the short, medium and long term.

The assessment of the materiality of the sustainability risks of the assets of the pension funds allows us to conclude that sustainability risks may exist for our pension funds, but at the moment these are not material. On the other hand, at the company level, we believe that, although insignificant, the impact of sustainability risks can be most manifested through the value of pension fund assets on our long‑term business model and solvency risks, as well as through compliance risks.

To mitigate the impact of sustainability risks, we have created an investment process that, depending on the investment strategy of a specific pension fund, uses both exclusion and inclusion methods in the process of selecting financial instruments. To apply these methods, we classify investments into two groups: direct investments and investment funds (excluding alternative investment funds).

Exclusion. Companies are excluded from our direct investments if they are:

• involved in the production of or trade of any product or activity deemed illegal under national laws or regulations, or international conventions and agreements, or are subject to international bans;
• sanctioned by the UN, EU, United Kingdom HM Treasury, United States OFAC, national regulations of Estonia, Latvia and Lithuania;
• where it is suspected that financial crime and other illicit activities are happening (such as human trafficking, smuggling, extortion, wildlife trafficking, illegal distribution of arms and munitions, proliferation of weapons of mass destruction, narcotics, corruption, tax evasion) or acting without the required license in the jurisdiction in which they or Luminor operates in;
• related to the financing of terrorism (e.g. foreign fighters, activities in war zones, fundraising through crowd‑financing platforms for purposes which could be suspected as related to the financing of terrorism activities, etc.);
• related to production of weapons which through normal use violate basic humanitarian principles;
• related to vaping and/or tobacco or related to the production of pornography.

Furthermore, we exclude entities from our future direct investments and financing universe if they are engaged in the following environmentally relevant activities:

• establishing new capacity for coal‑fired power generation and/or thermal coal mining, and/or extraction of oil and oil shale.
• Production of or trade in ozone depleting substances, as listed in Montreal Protocol on Substances that Deplete the Ozone Layer and includes aerosols, refrigerants, foam blowing agents, solvents, and fire protection agents.
• Production or use of or trade in persistent organic pollutants, as per the Stockholm Convention on Persistent Organic Pollutants.
• Trade in wildlife or production of or trade in wildlife products regulated under The Convention on International Trade in Endangered
• Species of Wild Fauna and Flora.
• Transboundary movements of waste prohibited under public international law².

Regarding investment in investment funds we invest only in those funds, which are managed by investment managers who have signed United Nations Principles for Responsible Investment (UN PRI). This means that these managers regularly review the available sustainability data, use it in the investment decision‑making process, as well as implement sustainability‑related engagement measures with companies in which the funds they manage invest. This ensures transparency and monitoring of sustainability data and risks of investment funds.

Inclusion. When considering an investment in both direct financial instruments and investment funds among other factors related to the investment in question, we also consider principal adverse impacts related to climate and human rights policy, as well as the classification of the investment fund under SFDR³.

We regularly monitor the financial instruments in our pension fund portfolios and verify their compliance with the above exclusion and inclusion criteria, using external data providers. If a particular financial instrument is found to no longer meet the exclusion or inclusion criteria mentioned above, we replace that instrument with the one that meets.

We have created a company organizational structure that ensures full integration of sustainability risks into the investment process, including identifying responsible employees in the Investment Management and Risk Management units.

Assessment of the likely impact of sustainability risks on the return of investments

We believe that the occurrence of adverse climate, human rights or governance events or other conditions may have a negative impact on the long‑term value of investments, therefore integrating sustainability risks into the investment process helps to reduce the impact of sustainability risks on the returns of pension funds.

The common position of professional investors is that integrating sustainability risks into the investment process contributes to a positive impact on society and reduces long‑term risks⁴.

We do not have an unambiguous theory, model or empirical data available to allow us to accurately assess the potential impact of sustainability risks on the return of pension funds. Empirical studies^{5 6} do not provide unambiguous conclusions – some studies confirm the positive impact on investment results, some studies confirm the negative impact on investment results, depending on the asset class (e.g. stocks, bonds and investment funds) and the research period.

1An environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment.
²Reference documents: Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal; Regulation (EC) No 1013/2006 of 14 June 2006 on shipments of waste; and Decision C(2001)107/Final of the OECD Council concerning the revision of Decision C(92)39/Final on the control of transboundary movements of wastes destined for recovery operations.
³Sustainable Finance Disclosure Regulation, Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector.
⁴EDHEC-Risk Institute. (2021). The EDHEC European ETF, Smart Beta and Factor Investing Survey 2021.
⁵Kräussl, R., Oladiran, T., & Stefanova, D. (2024). A review on ESG investing: Investors’ expectations, beliefs and perceptions. Journal of Economic Surveys, 38, 476–502
⁶EDHEC-Risk Climate Impact Institute. Does ESG Investing Improve Risk‑Adjusted Performance?