Our RI process covers all direct equity investments, but differs for the investments based on our stock-picking model and for the investments based on our quantitative model.
In our stock-picking model the investment decisions are based on our in-house analysis. In this model we do not track any indices and our portfolios are quite concentrated – tracking error is not a limiting factor in our investment process and active shares for our portfolios are high. We are a long-term investor (our typical investment horizon spans over several years) and our aim is the best possible risk-adjusted return for our clients over long-term. Therefore, it is logical for us to fully integrate ESG analysis into our in-house company analysis and investment process. What does integration mean to us? We conduct ESG analysis as an integrated part of our investment analysis on all our targeted companies. The ESG analysis and investment analysis are conducted simultaneously by the responsible portfolio manager. For the ESG analysis we have predefined a set of questions and ESG issues that need to be looked into. These questions and issues were updated in 2016. Based on the ESG analysis we give each company an ESG score that ranges from excellent to passable. In scoring we also take into account specific features of the sectors and weigh these accordingly. The company specific scores are reviewed regularly and the distributions of the scores are published in our monthly Fund fact sheets or reported to clients on a quarterly basis. During the second half of 2016 we reviewed our ESG scores for all our investments as part of the updating of our ESG analysis framework. Risks identified in the ESG analysis are also taken into account in the company valuation for instance in the company discount rate and/or in the company risk premium. In our stock-picking model we do not outright exclude any sectors or companies from our investment universe based on ESG criteria. Also, being an Asset Manager (vs Asset Owner) with numerous clients with differing objectives, we do not exclude companies or sectors on ethical grounds. However, in client specific portfolios we can take into account e.g. clients’ own exclusion criteria. An important part of our investment and ESG analysis are regular meetings with the companies that we invest in. In the meetings with the company management we take the opportunity to address relevant company specific ESG issues. Those companies that have received a low score in our ESG analysis are actively contacted and encouraged to improve their actions in corporate responsibility and sustainability. If companies do not improve their sustainability performance within a reasonable timeframe we actively begin lowering the weight of the investment in the portfolio or sell the whole stake. In 2016 we also introduced a third party ESG database for our portfolio managers as a tool to provide support in the analysis. Mainly the database is used for better transparency on identifying the company-specific risks.
Our aim is not to invest only in the best-in-class companies. When we analyse a company, we identify the strengths and opportunities that development of a company's ESG activities can offer to its future financial performance. We also identify and assess weaknesses and threats arising from poor ESG management that influence the risk relating to the investment. We also actively encourage companies to improve their ESG performance.
In the equity investments that are based on our quantitative model we integrate RI in the investment process by using the third party ESG database. The ESG ratings given by the third party are utilized as one parameter of the total of five parameters in our quantitative model.