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AP3

PRI reporting framework 2019

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ESG incorporation in actively managed fixed income

Implementation processes

FI 01. Incorporation strategies applied

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
15 Thematic alone
0 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
85 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%

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

 

The credit  portfolio is small, AuM less than 10 bn SEK end 2018.

Green Bonds are part of the overall FI portfolio. Green bond MV 16.5 bn SEK end 2018

The ESG/sustainability screening done relates to issuers the same screening results apply for both equity and fixed income, corporate bonds. Exclusions embrace all financial instruments issued by the companies/issuers  in question.

AP3 also measure/analyse  the carbon footprint for the Credit portfolio (FI Corporate (EV method) and also the Green Bond Impact.

The portfolio managers integrate sustainability issues (risk and opportunities) in their Analytics and  investment decisions when it is relevant and material and should be able to explain their decisions.

For example, the investment process ahead an investment in credit can include both screening, can make the manager aware of potential issues, the questions raised are then discussed and evaluated both with the issuer, the company itself,  in meetings and with sale side analysts and others. In the cases where there is  limited information on the issuer, the manager has to turn directly to the company/issuer  and then evaluate the information given to questions regarding ESG issues.

01.3. Additional information [Optional].

 

AP3  Green Bond portfolio, AuM ca SEK 16.5 bn. This portfolio holds green bonds issued by SSA, municipalities and corporates. when a company issue a green bond AP3 has specific routines and requirements based on Green Bonds Principles (GBP) in place that should be met. The managers are free to buy any  bond but it will not be tagged as a Green Bond unless the criteria and requirements are met.


FI 02. ESG issues and issuer research (Private)


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]

AP3 has no formal investment committees but the investment staff, the PMs are expected to bring up ESG information on issuers in the investment process and decisions.

When there are uncertainties the issuer is approached to explain and make clear. Nowadays it happens quite often that the issuers are ahead of what the research show and a strongly growing number of issuers have good coverage and documentation on ESG issues.

ESG Information is available to all PMs via MSCI ESG Manager and Bloomberg accesses


(A) Implementation: Screening

FI 04. Types of screening applied

04.1. Indicate the type of screening you conduct.

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

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

As mentioned earlier, screening is a part of the investment process, to establish a starting point for the analysis and also to narrow down  the number of issuers/companies to further analyze. The screening might indicate weak/strong areas with the issuer to be brought up in discussions with the issuer, sell-side and internal ESG specialist.

If the company is non listed the process will look a bit different and the search for ESG data and information relies more on company, sell-side and ESG specialist input. Media can also contribute. In thoses cases extar time is put on potential ESG issues in the issuer analysis.

 

For example

ESG questions to issuer and other stakeholders

Car retailer/service

Enviromental policy

  1. reduction of  the environmental stress
  2. CO2 reduction program
  3. EV use
  4. energy efficiency
  5. recycling

Construction and property management

ESG policies  (environment, social, governance)

  1. environmental friendly techniqueand materials
  2. Social responsibility and inclusion, a conscious work to improve the social situation an dovet time teh value of the properties
  3. good governance

 

 

04.3. Additional information. [Optional]


FI 05. Examples of ESG factors in screening process (Private)


FI 06. Screening - ensuring criteria are met

06.1. 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?
Positive/best-in-class screening

06.2. Additional information. [Optional]


(B) Implementation: Thematic

FI 07. Thematic investing - overview (Private)


FI 08. Thematic investing - themed bond processes

08.1. 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..

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

We have not as yet experienced such a situation but if there is a breach the bond could be reclassified to be an ordinary bond in the portfolio. The managers mandate covers both ordinary and green bonds,so the bond could be reclassified if it is still considered giving a attractive yield.

08.3. Additional information. [Optional]


FI 09. Thematic investing - assessing impact

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

09.2. Additional information. [Optional]

Trucost analyses AP3 Green bond portfolio and measures the carbon emission impact.


(C) Implementation: Integration

FI 10. Integration overview

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

The incorporation strategies must be realistic and relevant for the mandate/strategy in question.

The relevant and material ESG  issues with regard to the company, sector, geographical market, and the mandate/strategy the PM has must be seen in a context and analyzed.  The gathering of data and information will most likely come from different sources  and the investment decision will depend on the reliability of the data, the PM's insight and knowledge  and also degree of risk aversion and the perception of what is already priced in.

As many ESG factors not have a market price, the PM will have to evaluate the impact a factor might have and over what time horizon.

It is each active managers responsibility to analyze the bonds in the specific portfolio with respect to sustainability risks/opportunities and be prepared to explain the positions. Again the relevance and materiality will differ for different mandates, different strategies and different investment horizons.

Bond portfolio managers also participate in the advisory group on Sustainability where ESG issues are presented and discussed in order to best address the issues.

 The  Fund's managers have an ongoing discussion about questions that are raised; e.g.. governance issues, CO2 emissions, energy efficiency matters, HR etc.

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

Corporate (financial)

The basic concept/process  is the same, There will be differences with regard to what issues are material and relevant, the  mandate and strategy.

Corporate (non-financial)

The basic concept/process  is the same, There will be differences with regard to what issues are material and relevant, the  mandate and 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
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
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.

Corporate (financial)

Relevant and material issues are taken into consideration and analyzed to what extent they may influence the value and return of the asset/investment. The FI managers have the same tools and information about possible sustainability issues as the equity managers. Each manager analyses the risk/return profile of the investment and sustainability is one among several risks to be assessed.

The incorporation strategies must be realistic and relevant for the mandate/strategy in question.

The relevant and material ESG  issues with regard to the company, sector, geographical market, and the mandate/strategy the PM has must be set in a context and analyzed.  The gathering of data and information will most likely come from different sources  and the investment decision will depend on the reliability of the data, the PM's insight and knowledge  and also degree of risk aversion and the perception of what is already priced in.

As many ESG factors not have a market price, the PM will have to evaluate the impact a factor might have and over what time horizon.

It is each active PM's responsibility to analyze the bonds in the specific portfolio with respect to sustainability risks/opportunities and be prepared to explain the positions. Again the relevance and materiality will differ for different mandates, different strategies and different investment horizons.

Bond portfolio managers also participate in the advisory group on Sustainability where ESG issues are presented and discussed in order to best address the issues.

 The  Fund's managers have an ongoing discussion about questions that are raised; e.g... governance issues, CO2 emissions, energy efficiency matters, HR etc.

Corporate (non-financial)

Relevant and material issues are taken into consideration and analyzed to what extent they may influence the value and return of the asset/investment. The FI managers have the same tools and information about possible sustainability issues as the equity managers. Each manager analyses the risk/return profile of the investment and sustainability is one among several risks to be assessed.

The incorporation strategies must be realistic and relevant for the mandate/strategy in question.

The relevant and material ESG  issues with regard to the company, sector, geographical market, and the mandate/strategy the PM has must be set in a context and analyzed.  The gathering of data and information will most likely come from different sources  and the investment decision will depend on the reliability of the data, the PM's insight and knowledge  and also degree of risk aversion and the perception of what is already priced in.

As many ESG factors not have a market price, the PM will have to evaluate the impact a factor might have and over what time horizon.

It is each active PM's responsibility to analyze the bonds in the specific portfolio with respect to sustainability risks/opportunities and be prepared to explain the positions. Again the relevance and materiality will differ for different mandates, different strategies and different investment horizons.

Bond portfolio managers also participate in the advisory group on Sustainability where ESG issues are presented and discussed in order to best address the issues.

 The  Fund's managers have an ongoing discussion about questions that are raised; e.g... governance issues, CO2 emissions, energy efficiency matters, HR etc.

12.3. Additional information.[OPTIONAL]


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