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Valtion Eläkerahasto

PRI reporting framework 2017

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ESG incorporation in actively managed fixed income

Implementation processes

FI 04. Incorporation strategies applied

04.1. Indicate 1) Which ESG incorporation strategy and/or combination of strategies you apply to your actively managed fixed income investments; and 2) The proportion (+/- 5%) of your total actively managed fixed income investments each strategy applies to.

SSA
0 Screening alone
0 Thematic alone
0 Integration alone
100 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%

04.2. Describe your reasons for choosing a particular ESG incorporation strategy and how combinations of strategies are used.

VER’s ESG criteria

In its investment activities, VER focuses on ESG criteria that are consistent with its investment objectives and in respect of which VER is in a position to implement and monitor the criteria, given the resources available. Key criteria:

1. Respect for the PRI and promotion of ESG goals;

2. Respect for universal international standards;

3. Transparency of ESG issues in all asset classes.

Implementation of responsible investing

The methods used in responsible investing may vary in terms of the adopted approach because there is no universally applicable definition of ESG in the investment industry; instead, each player perceives it differently placing the emphasis on different priorities. The methods used by VER to pursue responsible investing are governed by the following considerations with due allowance for the asset class involved: 

1. Integration of ESG issues in the decision-making process;

2. Direct monitoring of ESG performance – active ownership;

3. Indirect monitoring of ESG performance – passive ownership;

4. Active participation in meetings of shareholders;

5. Exercise of influence;

6. Compliance monitoring;

7. Exits

 

04.3. Additional information [Optional].


FI 05. ESG issues and issuer research

05.1. Indicate which ESG factors you systematically research as part of your analysis on issuers.

Select all that apply
SSA
Environmental data
Social data
Governance data

05.2. Indicate what format your ESG information comes in and where you typically source it

Indicate who provides this information  

Indicate who provides this information  

Indicate who provides this information  

Indicate who provides this information  

Indicate who provides this information  

05.3. Provide a brief description of the ESG information used, highlighting any differences in sources of information across your ESG incorporation strategies.

Basically, the principles of responsible investing apply to VER’s entire investment portfolio. As described, the opportunities for compliance monitoring and influencing the behaviour of portfolio companies vary according to asset class and may be relatively limited particularly in the case of indirect investments.

VER’s portfolio managers document the ESG issues related to investment decisions and monitoring in accordance with standing instructions.[1]The ESG compliance of VER’s direct investments is assessed annually by an independent party with regard to norm violations and production of controversial weapons.[2] 

VER has retained the services of a third-party  to determine the combined carbon footprint of all directly held portfolio companies.

[1]More detailed guidelines are issued by VER’s Management Team.

[2] Global Compact and Ottawa Landmine Convention.

05.4. Additional information. [Optional]


FI 06. Processes to ensure analysis is robust

06.1. Indicate how you ensure that your ESG research process is robust:

06.2. Describe how your ESG information or analysis is shared among your investment team.

          Key criteria: Respect for the PRI and promotion of ESG goals,  Respect for universal international standards; Transparency of ESG issues in all asset classes.
        

06.3. Additional information. [Optional]


(A) Implementation: Screening

FI 07. Types of screening applied

07.1. Indicate the type of screening you conduct.

Select all that apply
SSA
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

07.2. Describe your approach to screening for internally managed active fixed income

Screening implies a specific obligation to respect and comply with international conventions. For VER, this means the UN Global Compact principles[1] and related international regulations concerning human rights, rights at work, environment and anti-corruption. Additionally, VER seeks to refrain from investing in industries that may involve questionable aspects in terms of social responsibility, such as arms, alcohol, tobacco, gambling and adult entertainment.

[1] The Universal Declaration of Human Rights, The International Labour Organisation’s Declaration of Fundamental Principles and Rights at Work, The Rio Declaration of Environment and Development and The United Nations Convention Against Corruption.

07.3. Additional information. [Optional]


FI 08. Negative screening - overview and rationale

08.1. Indicate why you conduct negative screening.

SSA

SSA

08.2. Describe your approach to ESG-based negative screening of issuers from your investable universe.

VER seeks to refrain from investing in industries that may involve questionable aspects in terms of social responsibility, such as arms, alcohol, tobacco, gambling and adult entertainment.

 

 

08.3. Additional information. [Optional]


FI 09. Examples of ESG factors in screening process

09.1. Provide examples of how ESG factors are included in your screening criteria.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Environmental responsibility involves a number of elements. Over the past few years, measurement of the carbon footprint and awareness, reporting and efforts to reduce it have been adopted as a standard by pension funds, something that VER also needs to do.

Social responsibility implies a specific obligation to respect and comply with international conventions. For VER, this means the UN Global Compact principles2 and related international regulations concerning human rights, rights at work, environment and anti-corruption. Additionally, VER seeks to refrain from investing in industries that may involve questionable aspects in terms of social responsibility, such as arms, alcohol, tobacco, gambling and adult entertainment.

For companies that VER invests in, this means, amongst others, compliance with sound corporate governance principles and respect for the rule of law, not only in environmental and social issues, but also in financial contexts such as corporate law, competition law and taxation. VER does not approve of illegal activities. Even activities that are technically within the law may be at variance with the requirements imposed by VER for good governance, if the activities clearly conflict with the spirit of the relevant regulations, for example in the field of corporate law or taxation.

09.2. Additional information.


FI 10. Screening - ensuring criteria are met

10.1. Indicate which systems your organisation has to ensure that fund screening criteria are not breached in fixed income investments.

Type of screening
Checks
Negative/exclusionary screening?
Norms-based screening

10.2. Additional information. [Optional]


(C) Implementation: Integration

FI 14. Integration overview

14.1. Describe your approach to integrating ESG into traditional financial analysis.

Portfolio managers consider ESG issues as part of the overall evaluation of the prospective investment before making the decision. In certain cases, the most opportune time for influencing the asset manager’s and target fund’s principles of operation is the moment when the investment is made.

ESG issues are discussed at meetings between VER’s portfolio managers and fund asset managers even after the investment is made. If any of the companies in the fund’s portfolio fails to meet the ESG standards applied by VER or if its ESG performance raises questions, VER initiates talks with the asset manager or takes other action to influence the fund’s operations. VER may also exit the fund if its portfolio companies fail to satisfy VER’s ESG standards. However, quick exits from private equity, real estate, infrastructure and private credit funds are not usually possible.

14.2. Describe how your ESG integration approach is adapted to each of the different types of fixed income you invest in.

SSA

VER’s portfolio managers monitor and discuss ESG issues at meetings with the portfolio companies even after the investment is made. If the company fails to meet the ESG standards applied by VER or if its performance raises questions, VER initiates talks with the company or takes other action to influence its behaviour. The primary objective is to improve ESG performance, normally a better alternative than exit, both in terms of promoting responsible action and earning a better return on the investment.

The last option available to VER is divestment if the portfolio company fails to meet VER’s ESG criteria

14.3. Additional information [OPTIONAL]


FI 15. Integration - ESG information in investment processes

15.1. Indicate how ESG information is typically used as part of your investment process.

Select all that apply
SSA
ESG analysis is integrated into fundamental analysis
ESG analysis is integrated into security weighting decisions
ESG analysis is integrated into portfolio construction decisions
ESG analysis is a standard part of internal credit ratings or assessment
ESG analysis for issuers is a standard agenda item at investment committee meetings
ESG analysis is regularly featured in internal research notes or similar
ESG analysis is a standard feature of ongoing portfolio monitoring
ESG analysis features in all internal issuer summaries or similar documents
Other, specify

15.2. Additional information [OPTIONAL]


FI 16. Integration - E,S and G issues reviewed

16.1. Indicate the extent to which ESG issues are reviewed in your integration process.

Environment
Social
Governance
SSA

Environmental

Social

Governance

16.2. Please provide more detail on how you review E, S and G factors in your integration process.

SSA

Environmental and social responsibility and good governance are evolving concepts open to interpretation.  From VER’s point of view, the key points are as follows:

Environmental responsibility involves a number of elements. Traditionally, environmental responsibility is understood in terms of protecting the immediate environment from pollution and decay. More recently, the focus has shifted to issues related to climate change and, in particular, the carbon footprint.  Over the past few years, measurement of the carbon footprint and awareness, reporting and efforts to reduce it have been adopted as a standard by pension funds, something that VER also needs to do.

Social responsibility implies a specific obligation to respect and comply with international conventions. For VER, this means the UN Global Compact principles[1] and related international regulations concerning human rights, rights at work, environment and anti-corruption. Additionally, VER seeks to refrain from investing in industries that may involve questionable aspects in terms of social responsibility, such as arms, alcohol, tobacco, gambling and adult entertainment.

Governance calls for transparency and a rational and sustainable organisation of activities. For companies that VER invests in, this means, amongst others, compliance with sound corporate governance principles and respect for the rule of law, not only in environmental and social issues, but also in financial contexts such as corporate law, competition law and taxation. VER does not approve of illegal activities. Even activities that are technically within the law may be at variance with the requirements imposed by VER for good governance, if the activities clearly conflict with the spirit of the relevant regulations, for example in the field of corporate law or taxation.

 

[1] The Universal Declaration of Human Rights, The International Labour Organisation’s Declaration of Fundamental Principles and Rights at Work, The Rio Declaration of Environment and Development and The United Nations Convention Against Corruption.

16.3. Additional information.[OPTIONAL]


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