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Nomura Asset Management Co., Ltd.

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.

As global fixed income and credit investors, our strategies cover a wide range of markets, regions, sectors, and credit quality. Accordingly there is no one-size fits all approach to integrating ESG analysis, so investment teams themselves determine how best to implement ESG factors through their own investment process. However certain commonalities exist across strategies, in particular the recognition that Governance factors are a material risk for bond investors especially in emerging markets and lower credit quality corporates, and that Environmental and Climate factors are increasingly relevant to credit selection in certain industries. Recently we developed various comprehensive measures of ESG risk, quality, and performance specifically for corporate and sovereign fixed-income investment strategies, which are shared for use across teams and strategies as an additional layer of analysis. Some strategies use these quantitative data for assessing performance on material ESG factors for security selection, portfolio construction, and portfolio monitoring, while other strategies combine quantitative and qualitative ESG analysis when assessing individual credits and issuers. We also hold investment group-wide presentations to deepen understanding and awareness of emerging ESG factors such as carbon emissions risk and measurement, with a focus on how these factors can manifest in credit risk and pricing.

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


In the SSA space, ESG integration is primarily applied in emerging market debt strategies, with a focus on quantitative data and analysis. For certain strategies, we use a proprietary sovereign ESG scoring system that identifies a range of ESG factors material to sovereign credit spreads via their observed and expected impact on potential GDP growth, and use quantitative survey data aggregated and weighted by expected degree of impact (Low to High) as well as time to impact (Medium term to Very Long Term) to generate comprehensive ESG Sovereign Scores for each country over time. Based on in-house analysis of the relationship between various factors of Sovereign ESG quality and portfolio risk and returns, we use both the level and rate of change of ESG quality as a factor when determining country allocations, security weights, portfolio construction, as well as for ongoing ESG risk identification and monitoring.

Governance factors, such as the downside and upside risk from corruption, regulatory quality, strategic governance, and capacity for successful execution of structural reforms currently makes up the bulk of our model as such factors have typically shown the largest and most immediate impact on market perceptions of credit risk and quality. However, assessments of Environmental and Social risk factors such as Energy Efficiency and Security, and measures of Human capital and Demographic risk etc are also included in the model, with flexibility to increase in weight as the materiality of such ESG risks to market pricing is expected to shift over time.

Corporate (non-financial)

Corporate credit investment strategies have traditionally assessed qualitative indicators of governance risk, as these factors have always been considered relevant for anticipating price changes in the asset class. In developed markets especially, involvement in controversies often leads to volatility, so to the degree possible, pro-active and re-active assessments of this risk are embedded in the process. In Emerging Market credits particularly in Asia where transparency, creditor rights, and fundamental data accuracy risks are more prevalent, cross checking a range of sources including management meetings and site visits in cases where regulatory compliance is material, is integral to our non-financial credit investment. Related to governance, data transparency and disclosure are also considered in the investment process, as we observe that firms with the ability and willingness to voluntarily report on ESG factors and risk disclosure often show leadership in other areas (such as financial metrics) as well.

Increasingly, Environmental factors are recognized and systematically assessed where material to credit quality of the firm. Especially in power utility and natural resource extractive industries in EM Asia, where the potential for environmental damage that both depletes natural capital and presents a risk to the sustainability of operations.

In certain strategies, investment teams use an in-house developed quantitative ESG framework to systematically assess corporate credits on a comprehensive range of industry sector-specific material ESG factors and sustainability issues. For clarity of purpose and transparency, only sustainability issues with clear links to financial and credit risk with material downside potential are included as data inputs to the model. The resulting ESG scores are used for security selection and portfolio construction, portfolio risk analysis, and to systematically target credits for in-depth qualitative ESG follow-up analysis by analysts.

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 (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.





Corporate (non-financial)




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


ESG factors for SSA investment strategies are primarily focused on certain Emerging Market debt and fixed income strategies, where credit quality is lower and risks especially from governance are more pronounced than in developed markets. Our ESG approach in these strategies is data-driven and systematic. We have developed a proprietary Sovereign ESG scoring system covering over 150 countries that integrates quantitative assessments of over fifty Environmental, Social, and Governance factors that are in our view material to long term potential GDP growth, which links back to credit and market risk premia. Weights for the country score components are assigned indirectly based on our assessment of the individual ESG factor’s expected magnitude of the impact on growth (Low, Medium, High) and expected time to impact on growth (Medium term, Long Term, Very Long Term). This way, the factors that are only expected to become material to market pricing far out in the future (such as certain environmental and social factors) can be systematically considered with appropriate weights in the model, and with the flexibility to increase over time. The outright level and momentum of Sovereign ESG scores are used for country and security selection, portfolio weighting and construction, and ESG risk monitoring. Performance of individual components such as Corruption, Regulatory Quality, Rule of Law, Inequality, and Energy Security etc can also be isolated and analyzed across countries and time to identify trends that may manifest in market perceptions of credit quality. While we do not seek to “optimize” the overall model based on historical market performance data, we do back test the relationship between our ESG model outputs and portfolio performance.

Corporate (non-financial)

Environmental factors are systematically researched and reviewed at the issuer-specific level for non-financial corporate credit investments, particularly within the natural resource extraction industry. Analysis of the power generation mix of power utility corporates with particular sensitivity to coal-based generation is performed across strategies.

Social factors are occasionally researched and reviewed, such as for assessing how certain industries or company policies may negatively affect public trust and perception. For developed market and particularly Japanese manufactures and retail corporates, the working conditions, labor relations, and compliance with standards and regulations domestically and in foreign operations is a feature of the credit analysis.

Governance factors are systematically researched and reviewed, for example in assessing the composition of company boards for independence, determining layers of ownership and government involvement as it relates to protecting investor rights and transparency, identifying "key person risk" and systematic regulatory compliance, etc.

Certain Corporate Non-Financial investment strategies also use an in-house developed corporate ESG scoring framework to systematically assess companies on a range of industry-specific, credit-material, and downside risk-based sustainability issues. Raw ESG scores as data for a range of ESG risk factors are sourced from a third party research provider, then aggregated into Corporate Credit ESG scores based on a weighting formula of industry-specific materiality developed in-house. For example, scores for electric utilities have a high weighting to Environmental factors and include Emissions and Water use, while Banks scores are entirely composed of Social and Governance factors like Green financing, Stranded Asset Risk, Data security, and Product Safety/Use-Phase Impact on society. Specific factor weights are determined by a formula based on our determination of corporate credit materiality for each industry. We believe that the use of systematic, quantitative ESG analysis provides a consistent and objective point of reference for assessing companies from a credit investor perspective, and is an efficient means of identifying areas of risk for further qualitative ESG analysis by credit analysts. We use this data for security selection and pricing analysis (ie to determine whether ESG risks are fully reflected in market spreads), portfolio construction and ESG risk monitoring.

12.3. Additional information.[OPTIONAL]