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NN Investment Partners

PRI reporting framework 2019

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You are in Direct - Listed Equity Incorporation » ESG incorporation in actively managed listed equities » Implementation processes

Implementation processes

LEI 01. Percentage of each incorporation strategy

01.1. Indicate (1) which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities and (2) the breakdown of your actively managed listed equities by strategy or combination of strategies (+/- 5%)

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied
100 %
Total actively managed listed equities 105%

01.2. Describe your organisation’s approach to incorporation and the reasons for choosing the particular ESG incorporation strategy/strategies.

NN IP uses ESG integration across all of its equity assets under management as we strongly believe that incorporation of ESG factors can enhance the risk-return profile of our investments. We also apply negative screening (excluding certain type of business activities such as production and trade of controversial weapons and arms) based on our ethical, societal and business values. We offer specialised Sustainable funds (combining ESG integration and engagement combined with extended positive and negative screening criteria) and tailor-made Responsible Investment solutions to those clients that opt for comprehensive ESG integration.

NN IP introduced a new Impact Equity Investing strategy in 2016, intended to generate a measurable social and environmental impact alongside a financial return. In this thematic investment strategy we use a proprietary database to map an investable universe of stocks on their positive impact exposure. A strongly focused and thematic portfolio of stocks is constructed, based on NN IP's ESG screening and integration approach. We engage with all holdings in the global equity impact portfolio on their impact and related KPIs. We provide companies customized feedback on their impact reporting; and encourage them to report more relevant metrics. Moreover, we share new ideas and best practices.

01.3. If assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]

NN IP's objective when managing clients' assets is to enhance long term value. We believe that social, environmental, legal and ethical aspects of business activities have a material impact on company performance. The relevance of ESG factors is consistently used by NN IP by active ownership, excluding certain types of business activities, and by integrating ESG factors in the investment processes. Using both external data providers and in-house proprietary analysis all -mainstream- analysts include ESG aspects in their investment cases. ESG factors are a key aspect of our decisions as to whether or not to invest in companies. Being an active manager we initiate in-depth discussions with companies about controversies and/or gaps in their strategy and policies that are material to their business and used as input for our voting practices. Acting holistically drives thorough ESG integration.

 


LEI 02. Type of ESG information used in investment decision

02.1. Indicate what ESG information you use in your ESG incorporation strategies and who provides this information.

Type of ESG information

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 

Indicate who provides this information 

          Academic ESG Research and insights
        

Indicate who provides this information 

02.2. Indicate if you incentivise brokers to provide ESG research.

02.3. Describe how you incentivise brokers.

The incorporation of ESG research is an important factor in our discussion with brokers whereby it is requested from brokers to have integrated ESG research. As a consequence of the introduction of MiFiD II, NNIP decided to finance the costs of broker research through its own P&L. We went through an intensive selection process based on overall service and specialized contributions. The importance of ESG qualifications has clearly increased in line with our own business strategy and ambitions. We have a deep relationship with several sell-side brokerage firms that provide focussed ESG analysis.

02.4. Additional information.[Optional]

NN IP uses data of various independent external (ESG) data/research providers, amongst others: Sustainalytics, MSCI, ISS, Bloomberg, Refinitiv. In addition, we have a deep relationship with several sell-side brokerage firms that provide focussed ESG analysis. NN IP analyses the data and insights in-house and incorporate it in the investment analysis and decision making process where it applies its proprietary/in-house methodology, supported by academic insights. We have a multi-year academic research cooperation with the European Center for Corporate Engagement (ECCE), part of the Maastricht University Business School, The Netherlands and a cooperation with Yale University. Through this cooperation we have] researched the materiality of ESG factors for investment returns in global developed and emerging equity markets. Clients and stakeholders have responded very positively to our continued initiative for improved visiblity on the attribution of integrating ESG factors for portfolio performance.


LEI 03. Information from engagement and/or voting used in investment decision-making

03.1. Indicate if your organisation has a process through which information derived from ESG engagement and/or (proxy) voting activities is made available for use in investment decision-making.

03.2. Additional information. [Optional]

We believe that key to integrating ESG factors into the investment analysis is to determine how impactful material ESG factors are to the company's competitive positioning and to its value creation process.

Based on our engagements with companies, any concerns about a company's ESG principles and practices and the management’s receptiveness to our engagement efforts are highlighted and can impact the analysts' investment recommendation. The implemented engagement database in 2016 keeps track of our company engagement activities and is used and accessible for all investment staff.

NN IP’s dedicated proxy voting committee is tasked with voting on client assets and a separate proxy voting committee responsible for voting on proprietary assets. The committee members have regular discussions with in-house analysts and PMs about potential issues that may trigger a vote against or in favour on specific agenda items. In case our vote is against or in favour on one or more controversial AGM agenda items may have a material impact on either our shareholder position or company's business model, this can possibly be reflected in the investment case.

All votes are publicly disclosed on the NN IP website: https://www.nnip.com/corporate/INT/en/About-us/Responsible-investing/Corporate-governance.htm


(A) Implementation: Screening

LEI 04. Types of screening applied

04.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

NN IP follows NN’s exclusion list, which includes the involvement in the following activities/products: controversial weapons, arms trade with entities that are subject to arms embargoes, tobacco production

Screened by

Description

NNIP uses input from Sustainalytics, MSCI, Refinitiv, Bloomberg, ISS and various other ESG data providers, as well as its own analysts, to determine how a company fares on ESG parameters within its sector. This leads to best-in-class companies receiving a high score on the analysts’ scorecards and a corresponding investment recommendation of the analysts towards portfolio managers. NNIP also offers Global and European Sustainable funds as well as an Impact fund, which follow strict positive screening criteria.

Screened by

Description

NN IP follows NN’s exclusion list, which includes the involvement in the following controversial conducts: companies that severely and systematically violate the UNGC principles and/or the OECD Guidelines. NNIP also uses Sustainalytics controversy categorisations as input for its own Controversy Council to determine whether a company’s conduct violates our norms. If so, we engage with the company and unsuccessful engagement can lead to divestment.

04.2. Describe how you notify clients and/or beneficiaries when changes are made to your screening criteria.

Changes to our list of criteria that we apply negative exclusions to (NN Restriction List) are announced via press releases. Furthermore, our Framework Policy is updated accordingly. Our fund prospectuses and contracts of mandates refer to this Framework Policy. Moreover, clients are also made aware of changes in the conversations with our relationship managers or other representatives of NNIP (i.e. portfolio managers, client portfolio managers). In addition, NNIP’s presentations are updated accordingly and used for clients. As we make changes on the subject after in-depth and well thought-through deliberations, we also seek media attention regarding the changes and use channels like our website to widely publicise them.


LEI 05. Processes to ensure screening is based on robust analysis

05.1. Indicate which processes your organisation uses to ensure screening is based on robust analysis.

          We partner with Yale University and the European Centre for Corporate Engagement (ECCE) at Maastricht University to find academically robust ESG input
        

05.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your ESG screening strategy.

05.3. Indicate how frequently third party ESG ratings are updated for screening purposes.

05.4. Indicate how frequently you review internal research that builds your ESG screens.

05.5. Additional information. [Optional]

At NN IP, we consider it of great benefits to have access to a broad range of relevant ESG data providers. We source ESG information from several data providers, for example, Sustainalytics, MSCI, ISS, Refinitiv and Bloomberg, amongst others. These provide a solid starting position for our screening.

We analyse the available data and incorporate it into our investment analysis and decision-making process (including screening and engagement). This is performed by the investment teams themselves supported by an in-house Responsible Investment team, which acts as a knowledge centre  to all asset strategies across NN IP and consists of 4 professionals (as per December 2018). Potential restrictions applicable to our eligible investment universe are being regularly discussed and decided on in the ESG Committee which is chaired by our the CIO.

Furthermore, NN IP stays close to relevant academic research that helps us to better understand ESG risks and opportunities and thereby create better outcomes for our clients. To that end, we started a cooperation in 2014 with the European Center for Corporate Engagement (ECCE), part of the Maastricht University Business School, The Netherlands. As a focus of this partnership, ECCE conducts research on the materiality of ESG factors for investment returns in equity markets. We likewise have an academic cooperation with Yale University on the subject of ESG in equity investment portfolios.

In addition, NN IP is encouraging companies to publish integrated annual reports, combining financial and (non-financial) ESG information and metrics in a clear, consistent format that elaborates on opportunity and risk aspects of these data with regards to their strategy, operations and results.


LEI 06. Processes to ensure fund criteria are not breached

06.1. Indicate which processes your organisation uses to ensure fund criteria are not breached.

          KPMG for annual report of NN Group and due diligence of auditors/ employees of our (external) clients and prospects.
        

06.2. If breaches of fund screening criteria are identified - describe the process followed to correct those breaches.

In the unlikely event of a breach, the Restriction Monitoring System will report this and the breach will be investigated. Necessary actions will then be taken to rectify the breach and bring the portfolio back within the restrictions. The classification of the breach is such that it is either an active breach or a passive breach (also dependent on data updates and market movements). Resolution of breaches need to be in line with the relevant client guidelines and restrictions and this is actively monitored, and logged.

06.3. Additional information.[Optional]


(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the ESG factors you systematically research as part of your investment analysis and the proportion of actively managed listed equity portfolios that is impacted by this analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]

At NN IP, we systematically and fully integrate ESG criteria in our investment-decision making process. At the heart, ESG analysis is conducted by our in-house team of equity analysts. We start with raw ESG data as an input from data vendors such as Bloomberg, ISS, MSCI, Refinitiv and Sustainalytics. This feeds into our proprietary ESG assessment framework capturing a company's relative ESG performance. In addition, we make extensive use of sell-side ESG and thematic research from both a topic and industry angle.

 


LEI 09. Processes to ensure integration is based on robust analysis

09.1. Indicate which processes your organisation uses to ensure ESG integration is based on a robust analysis.

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

09.5. Describe how ESG information is held and used by your portfolio managers.

09.6. Additional information.[Optional]

At NNIP, detailed ESG information is readily available throughout the organisation. Our analyst systematically incorporate ESG factors in their research processes on companies, and are taking continuous steps to further increase their knowledge. In this there is close cooperation with the Responsible Investment team, acting as a knowledge hub within our organisation. To ensure quality and consistency, we have a committee reviewing the investment cases, amongst others, based on how the analyst has incorporated ESG factors (which is a key-performance indicator for the analysts), thereby ensuring a systematic use. We actively participate in knowledge-sharing events to further accelerate ESG integration at our firm and share best-practices with the wider investment community.


LEI 10. Aspects of analysis ESG information is integrated into

New selection options have been added to this indicator. Please review your prefilled responses carefully.

10.1. Indicate which aspects of investment analysis you integrate material ESG information into.

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

          thematic issues resulting from international conferences such as Climate COP Paris
        

Proportion of actively managed listed equity exposed to investment analysis

10.2. Indicate which methods are part of your process to integrate ESG information into fair value/fundamental analysis and/or portfolio construction.

          SWOT analysis, sensitivity analysis
        

10.3. Describe how you integrate ESG information into portfolio weighting.

We apply ESG information both from a top-down as well as a bottom-up perspective.

Top-down: we assess how material ESG trends and general longer-term trends are providing risks and opportunities in terms of financial and non-financial performance (themes such as changing climate, rising urbanization, emerging middle class, ageing population, health and wellbeing, rising cyber dependency, and SDGs).

Bottom-up: in our bottom-up analysis - which is typically conducted by our in-house team of dedicated equity analysts - we analyse the absolute and relative ESG performance of companies and whether we believe the market is underestimating or overestimating ESG risks and/or opportunities. We focus on the material, longer-term issues to the value creation of investee companies.

Four steps are important in this:

Identify the material issues

Assess the performance on the material issues

Integrate the material issues into the financial analysis

Have an active dialogue with the companies in which we are invested.

Based on these different viewpoints, our portfolio weighting differs from our benchmark as we apply and integrate ESG information to strengthen our conviction. The central question for us is: how sustainable is a company's value creation longer term?

Controversies: we specifically eliminate companies with the highest ESG controversies.

10.4. Describe the methods you have used to adjust the income forecast / valuation tool

The way ESG information is integrated within the forecasts and valuation of the equity analysis process is twofold. In case we consider the ESG factors to have a visible impact on actual company cashflows (in terms of magnitude and timing), we will adjust our financial value drivers (e.g. revenues, margins, capex) accordingly. In case we consider the ESG factors as mainly impacting the risk profile of the company (in terms of risk to cashflow generation and/or risks towards company and/or management perception), but without a clear indication of magnitude and timing, we will adjust the cost of capital for the company to incorporate the associated risks.

10.5. Describe how you apply sensitivity and/or scenario analysis to security valuations.

in case of companies or sectors where certain ESG aspects can materially drive the valuation and in case there is considerable uncertainty surrounding the most likely (regulatory) trajectory of these ESG aspects the financial analysis will incorporate different scenarios to account for the most likely, the worst case and best case scenario. Alternatively a sensitivity analysis can be done to vary the different ESG inputs and see what the implications would be for the margins, sales or valuation of the company. Examples of scenario analysis we have used in the past is for example the trajectory of CO2 regulation for car companies and the supply chain of auto companies, modelling different scenarios for penetration of electric vehicles, hybrids and combustion engines and the effects on the supply chain.

10.6. Additional information. [OPTIONAL]


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