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NN Investment Partners

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You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income » (C) Implementation: Integration

(C) Implementation: Integration

FI 10. Integration overview

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

As an integral part of our research process, ESG analysis is carried out by NN IP's mainstream analysts. Analysts have access to several independent ESG databases, including Sustainalytics, ISS, Bloomberg, Refinitiv and others. This includes information on how each company scores on different ESG factors compared to its sector average and if there are any structural issues or controversies from ESG perspective. ESG factors covered include, amongst others, environmental damage and climate change, bribery and corruption, human rights, health and safety and corporate governance. These data are also used for our dedicated Sustainable funds. The analysts incorporate the results of their analysis into fixed income research templates, called score cards, ensuring they have looked at all material aspects. This process is quite similar to the ESG integration process on the equity side, but with more emphasis being put on the downward risks. Portfolio managers at NN IP take the score cards into account when making investment decisions. NN IP also has a partnership with Climate Bond Initiative which provides access to their database on the green bond market.

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

SSA

We consider the biggest ESG risks to be in the Emerging Markets space, in particular in regards to governance and human rights concerns. Our EMD investment process includes ESG integration, where our focus is primarily on the Governance factor. We measure Governance in our proprietary sovereign risk model, through a quantitative assessment of inter alia institutional quality and competitiveness. We believe a well-functioning government as well as a competitive legislative framework assist in allowing companies and individuals to invest and grow, and support in earning foreign exchange. Our research shows that institutional quality (e.g. Governance) matters on a 3-5 year horizon. Data do, in our view, not always capture, the incremental improvement (deterioration) in governance performance that can occur. The newly elected president in Pakistan, for example, might (by only looking at historical data) be punished for the policies of his predecessors, while we believe that he has the intention and support to achieve positive change going forward. We therefore do not rely solely on the quantitative data that our Sovereign Country Credit Model produces, our analysts and portfolio managers always add a qualitative opinion to that. We incorporate Governance because we believe it is leading in defining the state of ESG and has the most predicative power when it comes to spread levels.

Corporate (financial)

ESG research is conducted in-house by our credit analyst teams, who explicitly score companies on their performance on Environmental, Social and Governance factors as part of their research process. The result of our in-house credit analysis, including the assessment of the company's performance on ESG factors, is documented into a company score card for each issuer under coverage. Our in-house ESG specialists support the ESG analysis conducted by our credit analyst teams.

Corporate (non-financial)

ESG research is conducted in-house by our credit analyst teams, who explicitly score companies on their performance on Environmental, Social and Governance factors as part of their research process. The result of our in-house credit analysis, including the assessment of the company's performance on ESG factors, is documented into a company score card for each issuer under coverage. Our in-house RI specialists support and guide this effort.

10.3. Additional information [OPTIONAL]

NN IP has partnered with ECCE (European Centre for Corporate Engagement, linked to University of Maastricht) and conducted research of the link between ESG and performance. We published white papers on the materiality of ESG factors on the performance of equities. The main outcome of this extensive work on equities was that scores momentum and controversy levels were the most relevant factors. NN IP and ECCE are now strengthening their collaboration to span research on credit issuers as well. This academic research is used to gain new insights related to the link between ESG factors and the financial performance of issuers.


FI 11. Integration - ESG information in investment processes

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

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
ESG analysis is integrated into fundamental analysis
ESG analysis is used to adjust the internal credit assessments of issuers.
ESG analysis is used to adjust forecasted financials and future cash flow estimates.
ESG analysis impacts the ranking of an issuer relative to a chosen peer group.
An issuer's ESG bond spreads and its relative value versus its sector peers are analysed to find out if all risks are priced in.
The impact of ESG analysis on bonds of an issuer with different durations/maturities are analysed.
Sensitivity analysis and scenario analysis are applied to valuation models to compare the difference between base-case and ESG-integrated security valuation.
ESG analysis is integrated into portfolio weighting decisions.
Companies, sectors, countries and currency and monitored for changes in ESG exposure and for breaches of risk limits.
The ESG profile of portfolios is examined for securities with high ESG risks and assessed relative to the ESG profile of a benchmark.
Other, specify

11.2. Additional information [OPTIONAL]


FI 12. Integration - E,S and G issues reviewed

12.1. 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

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

SSA

ESG research is carried out by the investment analysts who, depending on the portfolio, use Sustainalytics or the EMD governance scorecard for sovereign issuers. This information gives the analyst great insights to determine how each sovereign issuer scores on different factors. The results of these scores are incorporated in investment process.

Corporate (financial)

ESG research is carried out by the investment analysts who use Sustainalytics, information provided by the company, Bloomberg, and other sources. This information gives the analyst a framework to determine how each company scores on different ESG factors. The results of this research are incorporated in each score card. Key in this process is to determine how material the underlying issues are.

Corporate (non-financial)

ESG research is carried out by the investment analysts who use Sustainalytics, information provided by the company, Bloomberg, and other sources. This information gives the analyst a framework to determine how each company scores on different ESG factors. The results of this research are incorporated in each score card. Key in this process is to determine how material the underlying issues are.

12.3. Additional information.[OPTIONAL]


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