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Ninety One

PRI reporting framework 2020

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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.

We have incorporated ESG-related factors in our investment process since the inception of our Fixed Income capability. The details have naturally evolved as the asset class has matured and as ESG data has become more readily available.

ESG issues are embedded in all investment decisions, as the Fixed Income team considers a range of factors. Our fixed income strategies are split across Emerging Market sovereign, Emerging Market credit and Developed Market credit – with each obtaining their own approaches to ESG integration as outlined in the following questions.

Broadly, ESG is integrated into our fixed income investment process as follows:

Fundamental analysis

  • Our bottom-up, scorecard-based approach is designed to reward countries with sustainable socioeconomic policies and discriminate against those that don’t
  • Weekly scoring of socio-political dynamics for each country in our universe by the regional specialist – flagging ESG issues and showing anticipated direction of the country on ESG related issues
  • ESG scores feed directly into our sustainability analysis for hard currency sovereign bonds
  • Our EM corporate investment process incorporates an explicit view on ESG factors as part of a dedicated ESG specific scorecard. This is designed to identify and quantify the key ESG risk factors that could have a material credit impact on any company.

Portfolio construction

  • External ESG ratings are considered
  • Increasingly looking at overall ESG scores at the portfolio level
  • Experienced at tailoring investment solutions to client-specific ESG restrictions

Engagement

  • We raise questions on ESG factors with policymakers and company management where appropriate
  • Supported by in-house ESG research team that conduct regular investment trips, meet companies and participate in global debate at an NGO level

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

SSA

We run an eight-factor ESG momentum scorecard that ensures we cover all the key elements of ESG, including 16 of the 17 SDGs. This scorecard provides a framework for our assessment of ESG policies and implementation, and their relevance to the long-run prospects for an economy, which in turn can influence asset returns. The scorecard factors are:

  • Governance: institutional capacity, economic policy
  • Social policy: Build environment, human capital, inclusive growth
  • Environmental policy: climate action, resource strategy, land and water management

ESG is integrated into our standard investment process through the ESG impact score. The ESG impact score is complemented by a political risk score that captures near-term governance shifts (which can potentially impact longer-term ESG trends).

Both these scores feed into all our investment scorecards – currencies, local rates and sovereign credit. Thus, all other things equal, markets with improving ESG scores will be higher up the scorecard rankings than those that are deteriorating.

Corporate (financial)

EM Corporate

ESG Scorecard - Part one

We analyse around 100 scoring criteria which allows us to score over 50 factors in the scorecard. We use a variety of information sources to populate the scores, including company meetings, Bloomberg, rating agency reports, company reports, reports from specialist ratings agencies such as MSCI ESG and RepRisk rating reports, alongside proprietary information. We also use proprietary information obtained from our own ESG surveys which ask companies in our investment universe for detailed information on ESG issues. Scores are allocated from 0-100 with 50 being neutral and 100 the highest score.

These can be attributed into the following key considerations:

  • For Environment:

Climate change: carbon emission management and reduction targets and initiatives, current carbon emissions and historical trend.
Impact on natural capital: management strategies, overuse of natural resources such as land and water, protection for areas of biodiversity.
Pollution and waste: environmental management strategies, recycling initiatives, waste produced, toxic emissions, reduction targets.

  • For Social:     

Human capital: relationships with employees and unions, training programmes, health and safety, diversity and discrimination.
Stakeholder contribution: relationships with the community and suppliers.
Product Liability – anti-competitive practices and regulatory issues concerning customer relations and products.

  • For Governance:

Corruption risk: exposure to corruption risk, whistle blowing programmes, anti-fraud, -bribery and -corruption policies and practices.
Regulatory risk: tax transparency and payments as well as compliance with international standards.
Corporate governance: board structure and independence, audit committee, accounting policies and any prior investigations.

ESG Scorecard – Part 2

Part two is quantification of those risk factors into a potential credit impact score that combines potential ratings impact with a time sensitivity of the impact. This second score is determined by the analyst taking the key ESG risk factors and considering the potential financial implication and timeframes behind that impact. We review the ESG scorecards at least annually and ad hoc where material events have occurred. The ESG scorecard ensures transparency and a common language to assess risks and opportunities across the coverage universe. It also allows companies to be ranked on different factors or overall scores. The ESG team participates in reviews to give added insight and an independent perspective.

Our ESG framework feeds into our fundamental scores in our main scorecard but  it only reflects structural views. The overall assessment of fundamentals must also consider the importance of macroeconomic environment/cyclicality on fundamental health as this can amplify or dampen the effect of structural issues. Therefore, we also record minutes of where ESG has been a driver of change in fundamental scores alongside our main scorecard. The fundamental scorecard also includes the value score which is then referenced to the credit impact score to check we agree that what is priced in for downgrades is commensurate with our expectation of credit impact. If this is not the case, we note why other factors such as cyclical factors should create a misalignment.

 

Developed Market Corporate

Our integration strategy includes the evaluation of key ESG trends from both a top-down industry perspective, as well as a bottom-up company-specific perspective. Across the ESG spectrum we consider the following:

Environmental

  • climate change
  • natural capital
  • pollution and waste

Social

  • product liability
  • human capital
  • stakeholder opposition
  • Governance
  • corporate governance
  • corporate behaviour
  • governance regulatory risk

This ESG integration process occurs in two stages:

We focus on the macro, industry, and regulatory backdrop and assess the social and environmental factors likely to affect the company in question. When evaluating the ESG factors from a top-down industry perspective, it is evident that certain ESG considerations are more relevant for some industries than others. As a result, our top-down ESG factor assessment is tailored to each industry, making it as relevant as possible.
We focus on company specific actions related to these top-down considerations, as well as a company specific corporate governance analysis. From a bottom-up company-specific perspective, the sector analyst assesses whether or not the company is in a good position to mitigate these top-down considerations or risks.

As part of the assessment we have developed a scoring methodology whereby each company is assessed, and scored, on each of these ESG sub-factors. Our top-down scores range from 0 to -3, with 0 being indicative of the ESG consideration being immaterial, and -3 being indicative of the risk potentially having a material impact on the average company in that industry. Our bottom-up scores range from -3 to 3 where a positive score can be used to fully offset the negative top-down score in cases where the credit analyst believes the company has taken very strong measures to offset the industry risk as well as in cases where due to the specialised nature of the business, the industry factor is not relevant for that particular company. The results from the scoring of these individual sub-factors are then combined to generate a total ESG score which is calculated by equally weighting each of the different E, S and G factors.

For all prospective investments, the assessment and scoring of these different E, S and G factors is fully integrated into our fundamental analysis process.  Since the outcome of the ESG analysis may lead to an adjustment in terms of the risk/return metrics on which the investment is initially evaluated, the analyst will include the estimated earnings or cash-flow impact in the financial model.

For all current investments, these scores are maintained on our sector specific ESG scorecards, allowing easy comparison between different companies within the same sectors. Any changes in ESG scores for any of the above-mentioned factors can then result in a change in the relative ranking of the company within the ESG sector scorecard, and will prompt a discussion regarding what has driven such changes and whether any portfolio adjustment is required. The final output from the ESG scorecards is included within our fundamental sector scorecards, which form part of our continuous monitoring process.

 

Corporate (non-financial)

EM Corporate

ESG Scorecard - Part one

We analyse around 100 scoring criteria which allows us to score over 50 factors in the scorecard. We use a variety of information sources to populate the scores, including company meetings, Bloomberg, rating agency reports, company reports, reports from specialist ratings agencies such as MSCI ESG and RepRisk rating reports, alongside proprietary information. We also use proprietary information obtained from our own ESG surveys which ask companies in our investment universe for detailed information on ESG issues. Scores are allocated from 0-100 with 50 being neutral and 100 the highest score.

These can be attributed into the following key considerations:

  • For Environment:

Climate change: carbon emission management and reduction targets and initiatives, current carbon emissions and historical trend.
Impact on natural capital: management strategies, overuse of natural resources such as land and water, protection for areas of biodiversity.
Pollution and waste: environmental management strategies, recycling initiatives, waste produced, toxic emissions, reduction targets.

  • For Social:     

Human capital: relationships with employees and unions, training programmes, health and safety, diversity and discrimination.
Stakeholder contribution: relationships with the community and suppliers.
Product Liability – anti-competitive practices and regulatory issues concerning customer relations and products.

  • For Governance:

Corruption risk: exposure to corruption risk, whistle blowing programmes, anti-fraud, -bribery and -corruption policies and practices.
Regulatory risk: tax transparency and payments as well as compliance with international standards.
Corporate governance: board structure and independence, audit committee, accounting policies and any prior investigations.

ESG Scorecard – Part 2

Part two is quantification of those risk factors into a potential credit impact score that combines potential ratings impact with a time sensitivity of the impact. This second score is determined by the analyst taking the key ESG risk factors and considering the potential financial implication and timeframes behind that impact. We review the ESG scorecards at least annually and ad hoc where material events have occurred. The ESG scorecard ensures transparency and a common language to assess risks and opportunities across the coverage universe. It also allows companies to be ranked on different factors or overall scores. The ESG team participates in reviews to give added insight and an independent perspective.

Our ESG framework feeds into our fundamental scores in our main scorecard but  it only reflects structural views. The overall assessment of fundamentals must also consider the importance of macroeconomic environment/cyclicality on fundamental health as this can amplify or dampen the effect of structural issues. Therefore, we also record minutes of where ESG has been a driver of change in fundamental scores alongside our main scorecard. The fundamental scorecard also includes the value score which is then referenced to the credit impact score to check we agree that what is priced in for downgrades is commensurate with our expectation of credit impact. If this is not the case, we note why other factors such as cyclical factors should create a misalignment.

 

Developed Market Corporate

Our integration strategy includes the evaluation of key ESG trends from both a top-down industry perspective, as well as a bottom-up company-specific perspective. Across the ESG spectrum we consider the following:

Environmental

  • climate change
  • natural capital
  • pollution and waste

Social

  • product liability
  • human capital
  • stakeholder opposition

Governance

  • corporate governance
  • corporate behaviour
  • governance regulatory risk

This ESG integration process occurs in two stages:

We focus on the macro, industry, and regulatory backdrop and assess the social and environmental factors likely to affect the company in question. When evaluating the ESG factors from a top-down industry perspective, it is evident that certain ESG considerations are more relevant for some industries than others. As a result, our top-down ESG factor assessment is tailored to each industry, making it as relevant as possible.
We focus on company specific actions related to these top-down considerations, as well as a company specific corporate governance analysis. From a bottom-up company-specific perspective, the sector analyst assesses whether or not the company is in a good position to mitigate these top-down considerations or risks.

As part of the assessment we have developed a scoring methodology whereby each company is assessed, and scored, on each of these ESG sub-factors. Our top-down scores range from 0 to -3, with 0 being indicative of the ESG consideration being immaterial, and -3 being indicative of the risk potentially having a material impact on the average company in that industry. Our bottom-up scores range from -3 to 3 where a positive score can be used to fully offset the negative top-down score in cases where the credit analyst believes the company has taken very strong measures to offset the industry risk as well as in cases where due to the specialised nature of the business, the industry factor is not relevant for that particular company. The results from the scoring of these individual sub-factors are then combined to generate a total ESG score which is calculated by equally weighting each of the different E, S and G factors.

For all prospective investments, the assessment and scoring of these different E, S and G factors is fully integrated into our fundamental analysis process.  Since the outcome of the ESG analysis may lead to an adjustment in terms of the risk/return metrics on which the investment is initially evaluated, the analyst will include the estimated earnings or cash-flow impact in the financial model.

For all current investments, these scores are maintained on our sector specific ESG scorecards, allowing easy comparison between different companies within the same sectors. Any changes in ESG scores for any of the above-mentioned factors can then result in a change in the relative ranking of the company within the ESG sector scorecard, and will prompt a discussion regarding what has driven such changes and whether any portfolio adjustment is required. The final output from the ESG scorecards is included within our fundamental sector scorecards, which form part of our continuous monitoring process.

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 (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 in Additional Information

11.2. Additional information [OPTIONAL]

As ESG scores feature in all our scorecards it featues a key part of our analysis and are reviewed on a weekly basis as part of our investment scorecard reviews. 


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

We run an eight-factor ESG momentum scorecard that ensures we cover all the key elements of ESG, including 16 of the 17 SDGs. This scorecard provides a framework for our assessment of ESG policies and implementation, and their relevance to the long-run prospects for an economy, which in turn can influence asset returns. The scorecard factors are:

  • Governance: institutional capacity, economic policy
  • Social policy: Build environment, human capital, inclusive growth
  • Environmental policy climate action, resource strategy, land and water management

ESG is integrated into our standard investment process through the ESG impact score. The ESG impact score is complemented by a political risk score that captures near-term governance shifts (which can potentially impact longer-term ESG trends).

Both these scores feed into all our investment scorecards – currencies, local rates and sovereign credit. Thus, all other things equal, markets with improving ESG scores will be higher up the scorecard rankings than those that are deteriorating.

Corporate (financial)

 

EM Corporate

ESG Scorecard - Part one

We analyse around 100 scoring criteria which allows us to score over 50 factors in the scorecard. We use a variety of information sources to populate the scores, including company meetings, Bloomberg, rating agency reports, company reports, reports from specialist ratings agencies such as MSCI ESG and RepRisk rating reports, alongside proprietary information. We also use proprietary information obtained from our own ESG surveys which ask companies in our investment universe for detailed information on ESG issues. Scores are allocated from 0-100 with 50 being neutral and 100 the highest score.

These can be attributed into the following key considerations:

  • For Environment:

Climate change: carbon emission management and reduction targets and initiatives, current carbon emissions and historical trend.
Impact on natural capital: management strategies, overuse of natural resources such as land and water, protection for areas of biodiversity.
Pollution and waste: environmental management strategies, recycling initiatives, waste produced, toxic emissions, reduction targets.

  • For Social:     

Human capital: relationships with employees and unions, training programmes, health and safety, diversity and discrimination.
Stakeholder contribution: relationships with the community and suppliers.
Product Liability – anti-competitive practices and regulatory issues concerning customer relations and products.

  • For Governance:

Corruption risk: exposure to corruption risk, whistle blowing programmes, anti-fraud, -bribery and -corruption policies and practices.
Regulatory risk: tax transparency and payments as well as compliance with international standards.
Corporate governance: board structure and independence, audit committee, accounting policies and any prior investigations.

 

ESG Scorecard – Part 2

Part two is quantification of those risk factors into a potential credit impact score that combines potential ratings impact with a time sensitivity of the impact. This second score is determined by the analyst taking the key ESG risk factors and considering the potential financial implication and timeframes behind that impact. We review the ESG scorecards at least annually and ad hoc where material events have occurred. The ESG scorecard ensures transparency and a common language to assess risks and opportunities across the coverage universe. It also allows companies to be ranked on different factors or overall scores. The ESG team participates in reviews to give added insight and an independent perspective.

Our ESG framework feeds into our fundamental scores in our main scorecard but  it only reflects structural views. The overall assessment of fundamentals must also consider the importance of macroeconomic environment/cyclicality on fundamental health as this can amplify or dampen the effect of structural issues. Therefore, we also record minutes of where ESG has been a driver of change in fundamental scores alongside our main scorecard. The fundamental scorecard also includes the value score which is then referenced to the credit impact score to check we agree that what is priced in for downgrades is commensurate with our expectation of credit impact. If this is not the case, we note why other factors such as cyclical factors should create a misalignment.

 

Developed Market Corporate

Our integration strategy includes the evaluation of key ESG trends from both a top-down industry perspective, as well as a bottom-up company-specific perspective. Across the ESG spectrum we consider the following:

Environmental

  • climate change
  • natural capital
  • pollution and waste

Social

  • product liability
  • human capital
  • stakeholder opposition

Governance

  • corporate governance
  • corporate behaviour
  • governance regulatory risk

This ESG integration process occurs in two stages:

We focus on the macro, industry, and regulatory backdrop and assess the social and environmental factors likely to affect the company in question. When evaluating the ESG factors from a top-down industry perspective, it is evident that certain ESG considerations are more relevant for some industries than others. As a result, our top-down ESG factor assessment is tailored to each industry, making it as relevant as possible.
We focus on company specific actions related to these top-down considerations, as well as a company specific corporate governance analysis. From a bottom-up company-specific perspective, the sector analyst assesses whether or not the company is in a good position to mitigate these top-down considerations or risks.

As part of the assessment we have developed a scoring methodology whereby each company is assessed, and scored, on each of these ESG sub-factors. Our top-down scores range from 0 to -3, with 0 being indicative of the ESG consideration being immaterial, and -3 being indicative of the risk potentially having a material impact on the average company in that industry. Our bottom-up scores range from -3 to 3 where a positive score can be used to fully offset the negative top-down score in cases where the credit analyst believes the company has taken very strong measures to offset the industry risk as well as in cases where due to the specialised nature of the business, the industry factor is not relevant for that particular company. The results from the scoring of these individual sub-factors are then combined to generate a total ESG score which is calculated by equally weighting each of the different E, S and G factors.

For all prospective investments, the assessment and scoring of these different E, S and G factors is fully integrated into our fundamental analysis process.  Since the outcome of the ESG analysis may lead to an adjustment in terms of the risk/return metrics on which the investment is initially evaluated, the analyst will include the estimated earnings or cash-flow impact in the financial model.

For all current investments, these scores are maintained on our sector specific ESG scorecards, allowing easy comparison between different companies within the same sectors. Any changes in ESG scores for any of the above-mentioned factors can then result in a change in the relative ranking of the company within the ESG sector scorecard, and will prompt a discussion regarding what has driven such changes and whether any portfolio adjustment is required. The final output from the ESG scorecards is included within our fundamental sector scorecards, which form part of our continuous monitoring process.

Corporate (non-financial)

EM Corporate

ESG Scorecard - Part one

We analyse around 100 scoring criteria which allows us to score over 50 factors in the scorecard. We use a variety of information sources to populate the scores, including company meetings, Bloomberg, rating agency reports, company reports, reports from specialist ratings agencies such as MSCI ESG and RepRisk rating reports, alongside proprietary information. We also use proprietary information obtained from our own ESG surveys which ask companies in our investment universe for detailed information on ESG issues. Scores are allocated from 0-100 with 50 being neutral and 100 the highest score.

These can be attributed into the following key considerations:

  • For Environment:

Climate change: carbon emission management and reduction targets and initiatives, current carbon emissions and historical trend.
Impact on natural capital: management strategies, overuse of natural resources such as land and water, protection for areas of biodiversity.
Pollution and waste: environmental management strategies, recycling initiatives, waste produced, toxic emissions, reduction targets.

  • For Social:     

Human capital: relationships with employees and unions, training programmes, health and safety, diversity and discrimination.
Stakeholder contribution: relationships with the community and suppliers.
Product Liability – anti-competitive practices and regulatory issues concerning customer relations and products.

  • For Governance:

Corruption risk: exposure to corruption risk, whistle blowing programmes, anti-fraud, -bribery and -corruption policies and practices.
Regulatory risk: tax transparency and payments as well as compliance with international standards.
Corporate governance: board structure and independence, audit committee, accounting policies and any prior investigations.

 

ESG Scorecard – Part 2

Part two is quantification of those risk factors into a potential credit impact score that combines potential ratings impact with a time sensitivity of the impact. This second score is determined by the analyst taking the key ESG risk factors and considering the potential financial implication and timeframes behind that impact. We review the ESG scorecards at least annually and ad hoc where material events have occurred. The ESG scorecard ensures transparency and a common language to assess risks and opportunities across the coverage universe. It also allows companies to be ranked on different factors or overall scores. The ESG team participates in reviews to give added insight and an independent perspective.

Our ESG framework feeds into our fundamental scores in our main scorecard but  it only reflects structural views. The overall assessment of fundamentals must also consider the importance of macroeconomic environment/cyclicality on fundamental health as this can amplify or dampen the effect of structural issues. Therefore, we also record minutes of where ESG has been a driver of change in fundamental scores alongside our main scorecard. The fundamental scorecard also includes the value score which is then referenced to the credit impact score to check we agree that what is priced in for downgrades is commensurate with our expectation of credit impact. If this is not the case, we note why other factors such as cyclical factors should create a misalignment.

 

Developed Market Corporate

Our integration strategy includes the evaluation of key ESG trends from both a top-down industry perspective, as well as a bottom-up company-specific perspective. Across the ESG spectrum we consider the following:

Environmental

  • climate change
  • natural capital
  • pollution and waste

Social

  • product liability
  • human capital
  • stakeholder opposition

Governance

  • corporate governance
  • corporate behaviour
  • governance regulatory risk

This ESG integration process occurs in two stages:

We focus on the macro, industry, and regulatory backdrop and assess the social and environmental factors likely to affect the company in question. When evaluating the ESG factors from a top-down industry perspective, it is evident that certain ESG considerations are more relevant for some industries than others. As a result, our top-down ESG factor assessment is tailored to each industry, making it as relevant as possible.
We focus on company specific actions related to these top-down considerations, as well as a company specific corporate governance analysis. From a bottom-up company-specific perspective, the sector analyst assesses whether or not the company is in a good position to mitigate these top-down considerations or risks.

As part of the assessment we have developed a scoring methodology whereby each company is assessed, and scored, on each of these ESG sub-factors. Our top-down scores range from 0 to -3, with 0 being indicative of the ESG consideration being immaterial, and -3 being indicative of the risk potentially having a material impact on the average company in that industry. Our bottom-up scores range from -3 to 3 where a positive score can be used to fully offset the negative top-down score in cases where the credit analyst believes the company has taken very strong measures to offset the industry risk as well as in cases where due to the specialised nature of the business, the industry factor is not relevant for that particular company. The results from the scoring of these individual sub-factors are then combined to generate a total ESG score which is calculated by equally weighting each of the different E, S and G factors.

For all prospective investments, the assessment and scoring of these different E, S and G factors is fully integrated into our fundamental analysis process.  Since the outcome of the ESG analysis may lead to an adjustment in terms of the risk/return metrics on which the investment is initially evaluated, the analyst will include the estimated earnings or cash-flow impact in the financial model.

For all current investments, these scores are maintained on our sector specific ESG scorecards, allowing easy comparison between different companies within the same sectors. Any changes in ESG scores for any of the above-mentioned factors can then result in a change in the relative ranking of the company within the ESG sector scorecard, and will prompt a discussion regarding what has driven such changes and whether any portfolio adjustment is required. The final output from the ESG scorecards is included within our fundamental sector scorecards, which form part of our continuous monitoring process.

12.3. Additional information.[OPTIONAL]


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