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PRI reporting framework 2019

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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.

SSA (EMD): All countries we invest in are analyzed bottom-up. We take into account Environmental (for example the effect of Climate Change on the country), Social (for example poverty indicators, education, healthcare, inequality) and Governance (for example corruption, rule of law, government effectiveness etc). In order to analyze the countries we use different data sources as well as visit the country in order to build a complete picture. We dedicate a specific part of our country report to ESG analysis. Concerns/opportunities on ESG can result in an underweight, neutral or overweight recommendation. Last year we had an UW on Mozambique on concerns about governance, Mozambique decided to default on their debt. Databases we use take into account data that covers E, S and/or G, like United Nations Human Development Index, World Bank Worldwide Governance Index, Heritage Index of Economic Freedom, World Bank Ease of Doing Business Index, World Bank Dependency Ratio, MSCI environmental data.

Within Corporates (Fin and non-Fins), we fully integrate ESG in our bottom-up credit analysis (100% of our investable universe) as these can translate into higher credit risk by weakening a company's business profile and/or financial profile. Furthermore, we conduct a separate ESG analysis on a sector level (or more top-down) for “high profile” or ESG sensitive sectors and arrive at a ranking for subsectors/groups of companies based on our ESG risk assessment. Each sector analyst assesses the key ESG risks which are separately reported in the credit analysis and weighed in the investment recommendation (UW, Neutral or OW). Apart from using external research providers, company data, our own ESG score card, analysts also consult the internal Responsible Investment & Governance team if more information is required regarding companies we actively engage with, with regard to specific themes (Climate, Tax principles, Social eg) or to flag our worries regarding a specific company.

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

SSA

All countries we invest in are analyzed bottom-up. We take into account Environmental (for example the effect of Climate Change on the country), Social (for example poverty indicators, eduction, healthcare, inequality) and Governance (for example corruption, rule of law, government effectiveness etc). In order to analyze the countries we use different data sources as well as visit the country in order to build a complete picture. We dedicate a specific part of our country report to ESG analysis. Concerns/opportunities on ESG can result in an underweight, neutral or overweight recommendation. Last year we had an UW on Mozambique on concerns about governance, Mozambique decided to default on their debt. Databases we use take into account data that covers E, S and/or G, like United Nations Human Development Index, World Bank Worldwide Governance Index, Heritage Index of Economic Freedom, World Bank Ease of Doing Business Index, World Bank Dependency Ratio, MSCI environmental data.

 

Corporate (non-financial)

In Corporates (Fin and Non Fins), the weight/importance of certain ESG factors may vary by sector and/or company depending on our risk assessment on the company's credit quality. One sector where ESG risks are much more explicit (and could potentially be a risk for the existence of the company) is the utilities sector. Therefore the weight/importance of ESG factors should be much higher versus various other sectors. We take the ESG factors/weights and scores from MSCI as a starting point, but prioritize, add or exclude ESG factors and/or scores. Examples of Environmental issues comprise carbon intensity (total value chain approach, thus including suppliers as well), Water & Energy efficiency, Recycling, Renewable energy use (utilities, responsible sourcing (palm oil, agriculture); Examples of Social factors include privacy & Data protection, Product Safety and accessibility, Responsible marketing, Nutritional benefits, Process/Production Safety (Production related sectors like Healthcare, Food & Beverage, Industrials, Chemicals, Oil&Gas. It comprises the occurance of Injuries, risk of contamination, HACCP certificate, recalls). Labor standards can be particularly an issue in Retail, Personal & Household goods; Examples of Governance factors (all sectors) comprise data disclosure and transparency, shareholder structure, Controversies/Fraud, consistency with regard to strategy.

10.3. Additional information [OPTIONAL]


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 (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]

Corporates (Fin and non-Fins) and SSA: ESG factors are explicitly discussed and assessed in our bottom-up fundamental analysis. If we see more risk on a longer horizon, we express this by limiting exposure to shorter duration. Furthermore, if we become less comfortable about certain ESG risks, we actively engage with our RI team and/or the company involved. ESG, climate risk and Green Bonds are recurring themes in our team meetings as well. Green Bonds are preferred over regular bonds when the risk/return trade off is equal or better. For SSA: sensitivity and scenario analyses are applied, however the specific impact on valuation is not fully attributable. 


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 (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

SSA: The ESG opinion on E, S and G from different ESG Indicators will determine our investable universe. Within the investable universe further ESG analysis is systematically used as input for investment decisions.

Corporate (non-financial)

Corporates (Fin and non-Fin): E, S and G are standard elements of our analysis of corporates and is updated regularly, we use it as input into our investment decision.We also distinguish specific ESG trends on a sector basis which is used as input for issuer specific analysis. When material ESG issues arise, a more in depth view is developed. Our inhouse ESG analyst regularly researches ESG issues and risks and obtains raw data to fully understand the ESG performance of different issuers.

12.3. Additional information.[OPTIONAL]


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