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Nykredit Realkredit Group

PRI reporting framework 2018

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You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income

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
100 Screening + integration strategies
0 Thematic + integration strategies
0 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
100 Screening + integration strategies
0 Thematic + integration strategies
0 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.

The most advanced ESG-integration approach is used for SSA. This involves using ratings and internally produced evaluation based on input from numerous governmental organisation and NGO's. This is used to termine if the SSA should be excluded, but is also used in dialogue with external manager, who have their own analytical tool to integrate ESG in the investment decision.

For financial and non-financial corporates the ESG-data is mainly used for risk-surveilance and analysis. The research and procedures capture a number of ESG-elements, but Nykredit has yet to launch a systemtic approach to use ESG data as part of the valuation of a specific company. Nykredit is working on a model for this. These corporate bond portfolios all have ESG-ratings above their benchmarks.

The securitised bond are the most challenging in this context. The issuers are screened and rated. As there are only few Danish issuers of these, this is not challenging. The bond rating companies are working on incorporating ESG, and naturally this rating plays a vital role in our proces. The credit rating procedures of the individual issuers are also analyzed and used together with the ESG-rating. 

01.3. Additional information [Optional].

The really challenging part is integrating ESG in the securitised bonds. The big issue is the proceeds/ loans pooled and financed by the issued bond. Most of these finance a variety elements - housing and small businesses - in the Danish society. Most frequently we use the Danish society as a proxy for the ESG-aspects of the bond. However this is does not satisfy us and thus we are in dialogue with the two largest issuers on the possibilities better data insights to the ESG loan characteristica behind the 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.

The main source of ESG-data is our dataprovider MSCI ESG-research. Nykredit uses Bloomberg for carbon foot printing. This is supplemented by sell side research and data from NGO's.

For corporates the approach is quite similar to our approach to listed equities. The data is used for quarterly screens and ESG-risk assessments. And the data is used by the PM's, however not as systematically as on listed equities.

For SSA the data is sourced from OECD, UN and a number of NGO's to construction in-house custom made screen and ratingapproach used for the analysis of the SSA. The approach has a high emphasis on political freedoms and democratic procedures.

The securitized bonds have a number of sources. The issuers are rated, but Nykredit also uses the credit approach. The bond rating agencies play a vital role. Nykredit is in dialogue with the two largest issuers to get better data from the underlying loans/proceeds behind the issued bonds.

 

02.4. Additional information. [Optional]


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]

All funds are screened and rated each quarter. This is part of the ongoing dialogue between the CIO, PM and ESG-teams. Biannually the CIO, PM and ESG-teams discuss each portfolio.

All data are up dated weekly to the PM's systems. 

Nykredit uses a critical approach to all the data and does own analysis as part of assurance. All data providers are reevaluated every three years, where the quality of data is compared to peers. 


(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

All funds are screened quarterly against norms breaches. The Nykredit exclusion list, which consists of companies in breach with conventions on weapons as well as breaches og Global Compact principles, which engagement has not been able to change, also applies.

Two fund, a HY and an IG, also excludes fossil fuels and controversial companies i.e. alcohol, tobacco and breaches of international norms.

Nykredit will engage which any company in a portfolio that breaches a norm. 

Nykredit has set up systems that block any issuance from the excluded companies. The negative screening list are up dated weekly. The system is set up identifying the issuer and so also excluding new issuance. Benchmarks are also screened as a precautionary measure.

SSA is also screened quarterly and the exclusion list is revisited ongoing and at least evaluated biannually.

04.3. Additional information. [Optional]


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.

The SSA approach screens out the sanctioned countries eventhough the bonds might not be mentioned directly. The screen also excludes countries with a low and decreasing ESG-performance. A country could have a low rating, but it would need to have a positive outlook og positive ESG-performance to past few years.

The HY and IG funds exclude fossil fuels. These are innovated from direct customer demand. Some of the customers wants to exclude fossil fuels from a risk perspective, while others find fossil fuel investments in conflict with the defined goals of their organisations. 

05.3. Additional information. [Optional]


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

Venezuela SSA is excluded, because of the deteriorating basic political freedoms and negative democratic development.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Wells Fargo is excluded from some funds because of the several cases of fradulent behavior towards customers and investors.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Ecolab is excluded because of its revenues deriving from servicing fossil fuel companies.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Nutrien is excluded for breaches of international norms through its continued sourcing of phosphate rock from occupied Western Sahara, without the consent of the Sahwhari people as described in the agreement between Marocco and the Polisario/ UN.

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]


(C) Implementation: Integration

FI 11. Integration overview

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

Nykredit believes that companies caring about their customers, employees and rest of society are more profitable. A company who decides to be part of the solution rather than the problem will have reduced their risk and improved opportunities all other things being equal.

When applied to bonds the improved risk assesment is at the forefront, but the future should capture the opportunity part as well.

 

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

SSA

The SSA issuer focussing on improved education, reduction of corruption og freedom of speech could be a be good opportunity. 

Corporate (financial)

The strong governance of the financial corporate issuance is a strong way to reduce risk. Access to finance could be an opportunity. And risk assesment related to the TCFD will soon be a must.

Corporate (non-financial)

The corporate issuer deeply rooted in the oil industri and with a strong balance sheet has huge risks related to green transition. 

Securitised

Whereas the issuer of securitised bonds with a very strong credit policy and a loan book a high porportion of ecological farmers and climate friendly housing might have reduced risks compared to traditional analysis.

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 (financial)
Corporate (non-financial)
Securitised
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 (financial)

Environmental

Social

Governance

Corporate (non-financial)

Environmental

Social

Governance

Securitised

Environmental

Social

Governance

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

SSA

The E is focused on a combination of reliance on fossil fuels/fossil fuel production, polution and biodiversity. This is captured in some of the rating methodology, but also more in detail on the specific country.

The S is basic developmental meterics as education, unemployment rates, crime and health as well as demographics.

The G is democratic governance, basic freedoms and human rights. Another very important G-KPI is anti corruption.

Corporate (financial)

Governance is at the hearth of this analysis. And this is governance in a very broad sense. From board level to procedures. All are exposed to potential customer covered by international sanction, but some more than others. This is just one more example to highlight to importance of good governance in an industry deeply effected by malpractise and the resulting fines. Part of this metric is also finansial stability.

The S is related to financial product safety and access to finance. Privacy and human capital are very important as well.

Financing environmental impact is the natural E. Could be combined with aspects og green bonds.

Corporate (non-financial)

The E, S and G depends of the specific sector the issuers are doing business in. However the G is naturally very important.

Securitised

The governance of issuer is equally as important here as with financial coporates. So is the part it plays in the finansial stability. Access to finance and financing environmental impact could be a signal towards the use of proceeds. More interesting is however to look into what the proceeds themselves are financing and naturally the credit policy.

13.3. Additional information.[OPTIONAL]


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