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APG Asset Management

PRI reporting framework 2018

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ESG incorporation in actively managed fixed income

Implementation processes

FI 01. Incorporation strategies applied

01.1. 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%
Corporate (financial)
0 Screening alone
0 Thematic alone
0 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
100 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (non-financial)
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%
Securitised
0 Screening alone
0 Thematic alone
0 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
100 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%

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

One of APG's investment beliefs is that the risk-return profile can be improved by factoring in non-financial elements in the investment process. To APG Asset Management Responsible Investment is a way to improve the investment portfolio's risk-return profile while simultaneously contributing to sustainable development. In order to enable this APG focuses on companies' financial performance as well as the way in which companies deal with the theme of sustainability and how the Executives of the companies deal with their shareholders. The best way to achieve this goal is to incorporate ESG as an integral part of our investment processes.

01.3. Additional information [Optional].

For corporates in capital markets, a so-called Inclusion Policy has been developed to enable us to meaningfully and systematically identify companies that are considered to be leading or lagging on ESG. In order to assess a company’s ESG performance APG developed its own framework whereby we review practices and policies related to the UNGC themes. Companies’ performance is assed in comparison with their peers, while still requiring them to meet industry specific normative ESG expectations. Where companies are considered lagging behind, we can only invest if we believe that they can be influenced through engagement to improve. The phased implementation of this policy has started in 2017. Every investment choice has to explicitly balance risk, return, costs and ESG so that our portfolio becomes more responsible and sustainable.

In addition to a strong focus on integration, APG has minimum standards and an exclusion policy built into its investment processes. On behalf of our clients we exclude companies that are involved in the production, sales and/or distribution of anti-personnel landmines, cluster munitions, chemical and biological weapons, and nuclear weapons made in violation of the Nuclear Non-Proliferation Treaty. APG also expects companies to operate in line with the UN Global Compact principles and, in its Responsible Investment Policy, APG also states that it may exclude companies that fail to act in accordance with the principles of the UN Global Compact and show no signs of changing their practices. In addition to the exclusion policy on corporates, we exclude sovereign bonds issued by countries that are subject to an arms embargo by the UN Security Council.

The exclusion policy was last evaluated in 2015 and on a semi-annual basis we determine the latest exclusion list of companies. Per January 2018 we exclude 19 companies that are directly, or through ownership, involved in production of anti-personnel landmines, cluster munitions or nuclear weapons in violation of the NPT, we exclude 3 companies that we consider to be in violation of the UN Global Compact principles. 10 countries currently feature on the exclusion list for sovereign bonds.


FI 02. ESG issues and issuer research

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

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
Environmental data
Social data
Governance data

02.2. 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  

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

See 02.4

02.4. Additional information. [Optional]

The majority of acquired ESG information is company related, including ESG ratings and scores, analysis of policies and performance on specific issues, news and controversies related to ESG issues, and broker analyses of ESG issues. Part of this information is made available to portfolio managers via a centralized knowledge management system (KMS) in which we track our engagement with companies as well as other relevant research, financial and ESG information. For more in-depth analysis, more detailed reports are used.

We procure specialist research that establishes how companies perform against specific standards (e.g. UNGC principles) or verifies the involvement with controversial weapons (cluster munitions). The latter forms the basis for our exclusion policy. If we deem companies to potentially be in breach of the UNGC principles, we start an intensive engagement program that could ultimately result in exclusion if the company does not show sufficient progress over a period of time.

We also acquire ESG research at a country level that provides insight into the risks of investing in sovereign debt and corporates in specific countries, due to the absence of environmental legislation and processes that protect basic human rights or the lack of an institutional governance framework that would protect property rights. This information is used by some investment teams in their country allocation models. In our EMD portfolio we integrate various ESG factors into our investment decisions (including rule of law and corruption) that enables us to better assess risks in a country.


FI 03. Processes to ensure analysis is robust

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

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

03.3. Additional information. [Optional]

ESG related information is made available to portfolio managers via a centralized knowledge management system (KMS) in which we track our engagement with companies as well as other relevant research, financial and ESG information. For more in-depth analysis, more detailed reports are used.


(A) Implementation: Screening

FI 04. Types of screening applied

04.1. Indicate the type of screening you conduct.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

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

One of APG's investment beliefs is that the risk-return profile can be improved by factoring in non-financial elements in the investment process. To APG Asset Management Responsible Investment is a way to improve the investment portfolio's risk-return profile while simultaneously contributing to sustainable development. In order to enable this APG focuses on companies' financial performance as well as the way in which companies deal with the theme of sustainability and how the Executives of the companies deal with their shareholders. The best way to achieve this goal is to incorporate ESG as an integral part of our investment processes.

04.3. Additional information. [Optional]

For corporates in capital markets, a so-called Inclusion Policy has been developed to enable us to meaningfully and systematically identify companies that are considered to be leading or lagging on ESG. In order to assess a company’s ESG performance APG developed its own framework whereby we review practices and policies related to the UNGC themes. Companies’ performance is assed in comparison with their peers, while still requiring them to meet industry specific normative ESG expectations. Where companies are considered lagging behind, we can only invest if we believe that they can be influenced through engagement to improve. The phased implementation of this policy has started in 2017. Every investment choice has to explicitly balance risk, return, costs and ESG so that our portfolio becomes more responsible and sustainable.

In addition to a strong focus on integration, APG has minimum standards and an exclusion policy built into its investment processes. On behalf of our clients we exclude companies that are involved in the production, sales and/or distribution of anti-personnel landmines, cluster munitions, chemical and biological weapons, and nuclear weapons made in violation of the Nuclear Non-Proliferation Treaty. APG also expects companies to operate in line with the UN Global Compact principles and, in its Responsible Investment Policy, APG also states that it may exclude companies that fail to act in accordance with the principles of the UN Global Compact and show no signs of changing their practices. In addition to the exclusion policy on corporates, we exclude sovereign bonds issued by countries that are subject to an arms embargo by the UN Security Council.

The exclusion policy was last evaluated in 2015 and on a semi-annual basis we determine the latest exclusion list of companies. Per January 2018 we exclude 19 companies that are directly, or through ownership, involved in production of anti-personnel landmines, cluster munitions or nuclear weapons in violation of the NPT, we exclude 3 companies that we consider to be in violation of the UN Global Compact principles. 10 countries currently feature on the exclusion list for sovereign bonds.


FI 05. Negative screening - overview and rationale

05.1. Indicate why you conduct negative screening.

SSA

SSA

Corporate (financial)

Corporate (fin)

Corporate (non-financial)

Corporate (non-fin)

Securitised

Securitised

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

APG has minimum standards and an exclusion policy built into its investment processes. On behalf of our clients we exclude companies that are involved in the production, sales and/or distribution of anti-personnel landmines, cluster munitions, chemical and biological weapons, and nuclear weapons made in violation of the Nuclear Non-Proliferation Treaty. APG also expects companies to operate in line with the UN Global Compact principles and, in its Responsible Investment Policy, APG also states that it may exclude companies that fail to act in accordance with the principles of the UN Global Compact and show no signs of changing their practices. In addition to the exclusion policy on corporates, we exclude sovereign bonds issued by countries that are subject to an arms embargo by the UN Security Council.

05.3. Additional information. [Optional]

The exclusion policy was last evaluated in 2015 and on a semi-annual basis we determine the latest exclusion list of companies. Per January 2018 we exclude 19 companies that are directly, or through ownership, involved in production of anti-personnel landmines, cluster munitions or nuclear weapons in violation of the NPT, we exclude 3 companies that we consider to be in violation of the UN Global Compact principles. 10 countries currently feature on the exclusion list for sovereign bonds


FI 06. Examples of ESG factors in screening process

06.1. 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

All portfolios are screened to exclude companies which are considered to be operating in breach of the UN Global Compact principles or which are producing weapons types that are excluded by the exclusion policy. As a result, we have initiated engagement on the back of a UN Global Compact breach with one company from the Fixed Income portfolio.

06.2. Additional information.


FI 07. Screening - ensuring criteria are met

07.1. 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

07.2. Additional information. [Optional]


(B) Implementation: Thematic

FI 08. Thematic investing - overview

08.1. Indicate what proportion of your thematic investments are:

6 %
1 %
1 %

08.2. Describe your organisation’s approach to thematic fixed income investing

Across all asset classes we have investments that contribute to the United Nations Sustainable Development Goals, which we call Sustainable Development Investments (SDI). Above we provide a break-down of our exposure in green/social/sustainable bonds, of which the majority (80%) is green, 9% is social and 11% is sustainable.

A full overview of our SDI exposure can be found in our Responsible Investment report.

08.3. Additional information [OPTIONAL]

Above percentages are calculated by dividing green/social/sustainable bonds investments over our thematic exposure (i.e. investments that contribute to the UN SDGs)


FI 09. Thematic investing - themed bond processes

09.1. Indicate whether you encourage transparency and disclosure relating to the issuance of themed bonds as per the Green Bonds Principles, Social Bond Principles, or Sustainability Bond Guidelines..

09.2. Describe the actions you take when issuers do not disburse bond proceeds as described in the offering documents.

We regularly meet with issuers to monitor and discuss past and new (green) bond issuance. 

09.3. Additional information. [Optional]


FI 10. Thematic investing - assessing impact

10.1. Indicate how you assess the environmental or social impact of your thematic investments

          We regularly examine reports from issuers on the green and social impacts resulting from the assessments, this is done on a case-by-case basis.
        

10.2. Additional information. [Optional]


(C) Implementation: Integration

FI 11. Integration overview

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

We take ESG issues into account in our investment processes by:

  • Making ESG research and analysis available systematically through various ESG tools.
  • Including the key ESG ratings compared to peers in the investment case.
  • Having portfolio managers and analysts assess the ESG risks and determine how these may affect companies' performance and/or risk profiles and required premiums.
  • Having material ESG issues discussed at credit investment committees.

In addition to this we also screen entire portfolios against compliance with the UN Global Compact principles, apply an exclusion policy companies involved in the manufacture of controversial weapons, and engage with companies.

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

SSA

We fully integrate ESG within SSA. Although the focus for sovereigns in mostly exclusion based, we do integrate ESG factors into our decision making. For government related and agencies we integrate ESG factors of the issuer, and actively engage with issuers on issuance of green bonds, In our EMD portfolio we integrate various ESG factors into our investment decisions (including rule of law and corruption) that enables us to better assess risks in a country.

Corporate (non-financial)

Within corporates ESG is integrated through our Inclusion Policy. We also actively invest in Green Bonds and consider the available ESG information when selecting certain investments and carry out joint engagements with equity where we both have a position in a company. The exclusion policy is also applicable for fixed income investments.

11.3. Additional information [OPTIONAL]


FI 12. Integration - ESG information in investment processes

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

Select all that apply
SSA
Corporate (non-financial)
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

12.2. Additional information [OPTIONAL]


FI 13. Integration - E,S and G issues reviewed

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

Environment
Social
Governance
SSA

Environmental

Social

Governance

Corporate (non-financial)

Environmental

Social

Governance

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

SSA

The emerging market debt team has deepened ESG integration in its investment process over the past years. The team uses the ESG Country risk tool that APG has developed together with research providers. The emerging market debt team has done an analysis on the data of the ESG Country Risk tool to assess the relationship between the risk premium of a country and the ESG scoring. The team has selected indicators deemed relevant for this relationship as these factors drive growth potential or are an indicator of social (in)stability. These selected ESG indicators are integrated in the in-house build score card for assessing risks and opportunities of the investments. Most of the indicators that the team adopted are governance and social indicators such as rule of law, government effectiveness, corruption perception, equality, education and the standard of living. Next to the ESG integration in the investment process through the Scorecard model, the team implements the Sovereign Bonds Exclusion list. Going forward, EMD will deepen the responsible profile of our clients portfolio, and search for potential new investment opportunities in sustainable development investments and ESG integration will take place in all phases of the investment management process.

Corporate (non-financial)

We take ESG issues into account in our Corporate Bond Investment processes by:

  • Making ESG research and analysis available systematically through the Knowledge Management System (KMS).
  • Including the key ESG ratings compared to peers in the investment case.
  • Having portfolio managers and analysts assess the ESG risks and determine how these may affect companies' performance and/or risk profiles and required premiums.
  • Having material ESG issues discussed at credit investment committees.

In addition to this we also screen entire portfolios against compliance with the UN Global Compact principles, apply an exclusion policy companies involved in the manufacture of controversial weapons, and engage with companies.

13.3. Additional information.[OPTIONAL]

We use an ESG country risk tool that is complementary to the other country risk research efforts led by APG's Economics and Financial Markets team, Global Emerging Markets team, and Financial Risk team. The tool is based on public sources generating detailed information for over 165 countries on 31 Environmental, Social and Governance criteria. Having the possibility to scrutinise and apply different weights to criteria and categories, portfolio managers can adjust the scoring according to their views and perform in-depth analysis on the underlying information. The methodology takes into account APG's exclusion policy on countries subject to an arms embargo by the UN Security Council in whose bonds we cannot invest.


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