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Nexxus

PRI reporting framework 2020

You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income

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.
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.

Nexxus is an alternative asset manager which through its mezzanine debt and private equity funds, provides flexible capital solutions to mid-sized companies with growth potential in Mexico, Spain and Portugal.

Nexxus Mezzanine Fund is a multi-industry, diversified fund that can offer strategic financing solutions, often not available, to mid-size companies in Mexico. NMF looks to provide custom made structures, to support their growth and temporally liquidity needs that enable midsized companies to transition into an institutional business model.

Nexxus applies a combination of screening and ESG integration strategies to its debt financing. The reasons to choose this ESG combination strategy are threefold:

  • Fiduciary duty, understanding that ESG considerations are at the heart of Nexxus Mezzanine Fund investors’ strategy.
  • Our understanding that the combination of both ESG strategies contributes to a better risk management; and
  • Through the mezzanine financing, Nexxus has a real opportunity to influence the adoption of ESG considerations within its Borrowers, and from a wider perspective, in Mexico’s mid-sized companies market

01.3. Additional information [Optional].

We act as responsible investors in our day-to-day, integrating ESG factors in each of the phases of our financing process.

  • Pre-Financing: exclusions list.
  • Evaluation: major ESG risks analyzed.
  • First Credit Committee: ESG considerations.
  • Due Diligence: Deep dive analysis of ESG risks
  • Credit Committee Approval: ESG risks consideration
  • Documentation: ESG reporting obligations included in the Loan Agreement
  • Credit monitoring: borrower report of ESG risks and ESG issues discussed at our yearly Portfolio Review until amortisation.

During the pre-financing phase we apply a negative screening to potential borrowers prior to analyse a financing transaction and we rule out financing companies that participate in any of the following businesses or activities:

  • Illegal economic activities: production, marketing or other activity, which is illegal under the laws or regulations of the jurisdiction of origin;
  • Tobacco and distilled alcoholic beverages - the production and trade of tobacco and distilled alcoholic beverages and related products;
  • Production and trade of weapons and ammunition: the financing of the production and trade of weapons and ammunition of any kind, including chemical weapons and the mining, processing and/or sale of uranium for weapons purposes
  • Casinos: the financing of casinos and equivalent undertakings.
  • Restrictions in the information technology sector: research, development or technical applications related to electronic data programs or solutions specifically aimed at internet gambling and online casinos
  • Life sciences sector: where support is given to the funding of research, development or technical applications related to; (i) human cloning for research or therapeutic purposes; or (ii) genetically modified organisms (GMOs)
  • Dams that do not comply with the World Commission on Dams (WCD Framework)
  • Mining or trade in rough diamonds not certified by the Kimberley Process;
  • Artisanal mining (mining using rustic tools usually unregulated)
  • Manufacture, storage and transport of Persistent Organic Pollutants (as defined in the Stockholm Convention) and of certain hazardous industrial chemicals and pesticides (as defined in the Rotterdam Convention)
  • Nuclear energy-related activities that do not meet the standards outlined by the International Atomic Energy Agency;
  • Illegal logging and subsequent marketing of timber and related forest products; and
  • Energy sector activities or projects within or adjacent to UNESCO World Heritage sites

FI 02. ESG issues and issuer research

02.1. Indicate which ESG factors you systematically research as part of your analysis on issuers.

Select all that apply
Corporate (non-financial)
Environmental data
Social data
Governance data

02.2. Indicate what format your ESG information comes in and where you typically source it

Indicate who provides this information  

Indicate who provides this information  

specify description

          We conduct Borrower ESG due diligence prior to the Credit Committee approval. ESG DD findings are discussed in the Credit Committee.
        

Indicate who provides this information  

Indicate who provides this information  

Indicate who provides this information  

02.3. Provide a brief description of the ESG information used, highlighting any differences in sources of information across your ESG incorporation strategies.

The main source of ESG information used is the ESG due diligence. The ESG due diligence is performed internally and covers at the following items:

(i) Analysis of the adequacy of the borrower according to the exclusions and restrictions defined in Nexxus’ ESG policy.

(ii) High-level analysis of the geographies and sectors in which the company operates from an ESG perspective.

(iii) Specific analysis of the company to assess ESG risks and opportunities.

The ESG Due Diligence process ensures that the following aspects are covered when analysing new financing opportunities:

  1. Respect of workers’ human rights
  2. Maintain safe and healthy work conditions for employees and contractors
  3. Prudent and responsible environmental management of operations, ensuring an efficient use of natural resources as well as mitigation of environmental risks and issues
  4. Maintain high standards of business integrity, avoid corruption in any of its forms and complying with laws and regulation applicable against bribery, fraud and money laundering
  5. Apply a good business management establishing clear responsibilities, procedures and controls and applying best corporate governance practices
  6. Follow as a standard an inclusion and diversity policy

02.4. Additional information. [Optional]

The results of the Due Diligence are included in a report of conclusions that details the most relevant issues from an ESG perspective of the borrower. Those conclusions are presented to the Credit Committee to inform the financing decision.


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]

It is important clarify that we manage private debt and our financing process is similar to the investment process of our private equity management arm. It has the following phases:

  1. Pre-Financing: exclusions list.
  2. Evaluation: major ESG risks analysed.
  3. First Credit Committee: ESG considerations.
  4. Due Diligence: Deep dive analysis of ESG risks
  5. Credit Committee Approval: ESG risks consideration 
  6. Credit monitoring: borrower report of ESG risks.

(A) Implementation: Screening

FI 04. Types of screening applied

04.1. Indicate the type of screening you conduct.

Select all that apply
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

During the pre-financing phase we apply a negative screening to potential borrowers prior to analize a financing transaction and we rule out financing companies that participate in sectors or activities that are contrary to our principles (and our investors') and involve high reputational risk.

04.3. Additional information. [Optional]

We rule out financing companies that participate in any of the following businesses or activities:

  • Illegal economic activities: production, marketing or other activity, which is illegal under the laws or regulations of the jurisdiction of origin;
  • Tobacco and distilled alcoholic beverages - the production and trade of tobacco and distilled alcoholic beverages and related products;
  • Production and trade of weapons and ammunition: the financing of the production and trade of weapons and ammunition of any kind, including chemical weapons and the mining, processing and/or sale of uranium for weapons purposes
  • Casinos: the financing of casinos and equivalent undertakings.
  • Restrictions in the information technology sector: research, development or technical applications related to electronic data programs or solutions specifically aimed at internet gambling and online casinos.
  • Life sciences sector: where support is given to the funding of research, development or technical applications related to; (i) human cloning for research or therapeutic purposes; or (ii) genetically modified organisms (GMOs)
  • Dams that do not comply with the World Commission on Dams (WCD Framework).
  • Mining or trade in rough diamonds not certified by the Kimberley Process.
  • Artisanal mining (mining using rustic tools usually unregulated).
  • Manufacture, storage and transport of Persistent Organic Pollutants (as defined in the Stockholm Convention) and of certain hazardous industrial chemicals and pesticides (as defined in the Rotterdam Convention).
  • Nuclear energy-related activities that do not meet the standards outlined by the International Atomic Energy Agency.
  • Illegal logging and subsequent marketing of timber and related forest products.
  • Energy sector activities or projects within or adjacent to UNESCO World Heritage sites.

 


FI 05. Examples of ESG factors in screening process

05.1. Provide examples of how ESG factors are included in your screening criteria.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

During the pre-financing phase we apply a negative screening to potential borrowers prior to analyse a financing transaction and we rule out financing companies that participate in sectors or activities that are contrary to our principles (and our investors') and involve high reputational risk.

As a result, we do not have companies in the portfolio that participate in any of the following businesses or activities:

  • Illegal economic activities: production, marketing or other activity, which is illegal under the laws or regulations of the jurisdiction of origin;
  • Tobacco and distilled alcoholic beverages - the production and trade of tobacco and distilled alcoholic beverages and related products;
  • Production and trade of weapons and ammunition: the financing of the production and trade of weapons and ammunition of any kind, including chemical weapons and the mining, processing and/or sale of uranium for weapons purposes
  • Casinos: the financing of casinos and equivalent undertakings.
  • Restrictions in the information technology sector: research, development or technical applications related to electronic data programs or solutions specifically aimed at internet gambling and online casinos.
  • Life sciences sector: where support is given to the funding of research, development or technical applications related to; (i) human cloning for research or therapeutic purposes; or (ii) genetically modified organisms (GMOs)
  • Dams that do not comply with the World Commission on Dams (WCD Framework).
  • Mining or trade in rough diamonds not certified by the Kimberley Process.
  • Artisanal mining (mining using rustic tools usually unregulated).
  • Manufacture, storage and transport of Persistent Organic Pollutants (as defined in the Stockholm Convention) and of certain hazardous industrial chemicals and pesticides (as defined in the Rotterdam Convention).
  • Nuclear energy-related activities that do not meet the standards outlined by the International Atomic Energy Agency.
  • Illegal logging and subsequent marketing of timber and related forest products.
  • Energy sector activities or projects within or adjacent to UNESCO World Heritage sites.

 

05.2. Additional information.


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

06.2. Additional information. [Optional]

As responsible investors in our day-to-day, we integrate ESG factors in each of the phases of our financing process and emphasize two phases:

- perform an ESG Due Diligence to ensure that the Borrower meets our screening criteria and

- undertake a yearly Portfolio Review based on the ESG information provided by the Borrower to ascertain that it continues to meet our screening criteria throughout the life of the mezzanine loan.


(C) Implementation: Integration

FI 10. Integration overview

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

We act as responsible investors in our day to day, integrating ESG factors in each of the phases of our financing process:

  • Pre - Financing: we have decided to exclude from our financing universe a number of activities that are contrary to our principles and involve high reputational risk.
  • Evaluation: those companies that meet our financing criteria are subject to a preliminary analysis process by the financing team that includes major ESG risks and opportunities.
  • First Credit Committee and Approval of the Due Diligence Budget by the Borrower.
  • Due Diligence: includes a specific ESG due diligence performed internally in order to identify short and long-term ESG risks and opportunities. The results of the analysis are included in a report of conclusions and recommendations containing details of the most relevant issues from an ESG perspective.
  • Credit Committee Approval: once the transaction team is satisfied with the results of the due diligence analysis, the relevant team will prepare the Credit Paper and submit it to the Credit Committee for final approval of the transaction. The Credit Paper includes at least a specific section devoted to the main ESG risks and opportunities identified in the Due Diligence phase.
  • In the debt financing processes, the compliance with Nexxus Responsible Investment Policy is included as a Borrower obligation, within the Loan Agreement and other transaction documents. Likewise, the Loan Agreement includes specific provisions in the Information Undertakings clauses.
  • Full amortisation / maturity: Nexxus’ objective is to be able to prove at amortisation or maturity that we have contributed to the creation of a more sustainable company, from a social and environmental point of view.

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

Corporate (non-financial)

We follow the same integration approach in every private debt transaction. Due to our investment strategy (private debt), we do not use comparables within the fixed income market.

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 in Additional Information

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 (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 (non-financial)

The ESG due diligence analysis is performed internally and covers at least the following items:

(i) Analysis of the adequacy of the borrower to the exclusions and restrictions defined in this policy;

(ii) High level analysis of the geographies and sectors in which the company operates, allowing the identification of the main ESG risks and opportunities determined by the location and general characteristics of the activity it carries out; and

(iii) Specific analysis of the company to assess its ESG risks and opportunities.

The ESG Due Diligence process ensures that the following aspects are covered when analysing new financing opportunities:

Social:

Respect of workers’ human rights
Maintain safe and healthy work conditions for employees and contractors

Environmental:

Prudent and responsible environmental management of operations, ensuring an efficient use of natural resources as well as mitigation of environmental risks and issues

Governance:

Maintain high standards of business integrity, avoid corruption in any of its forms and complying with laws and regulation applicable against bribery, fraud and money laundering
Apply a good business management establishing clear responsibilities, procedures and controls and applying best corporate governance practices
Follow as a standard an inclusion and diversity policy

The results of the analysis are included in a report of conclusions and recommendations that contains details of the most relevant issues from an ESG perspective for making a financing decision. These conclusions inform the credit report that is analysed in the Credit Committee prior to take any financing decision.

12.3. Additional information.[OPTIONAL]


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