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Lombard Odier

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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.

For our active internally managed strategies, we have developed a proprietary approach designed to assess which issuers are well-positioned to benefit from the transition to a sustainable economy based on these core principles:

  1. Focusing on credit quality to embed a greater degree of safety - this allows us to improve diversification and better protect portfolios during periods of volatility.
  2. Further mitigating risk by assessing extra-financial factors including environmental, social and governance (ESG) criteria.
  3. Considering the resilience of the portfolio to the physical and transition risks associated with climate change - this leads us to prioritise companies with a lower carbon intensity to reduce the carbon exposure of the portfolio, and add exposure to climate-aligned, social and sustainability bonds.

Our proprietary technology platform, which is common to all our internal portfolio management teams, is used to aggregate sustainability-information and ensure all the necessary sustainability-related information is readily available to the portfolio management teams. This information is also made available via their Bloomberg terminals. As a result sustainability is tightly coupled to our portfolio management and construction process: sustainability figures can be monitored precisely overtime and used to trigger investment decisions but also serve for reporting purposes.

For fundamental analysts, this extra financial information is not used to define hard exclusion rules but rather to ensure that our conviction is taking into account all those criteria. Ad hoc investigation work is then conducted with the possibility of additional interactions with the relevant companies.

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

SSA

The integration of ESG information into investment decisions has historically been prevalent in equities and corporate bonds. By contrast, there has been little discussion on the integration of this type of information for sovereign bonds. Given the challenges the world faces today, we believe the analysis of these risks in sovereign bonds is now essential. Although our macro criteria already incorporates some societal and political criteria, we incorporate ESG considerations into our investment process at the fundamental analysis level. Our sovereign analysts will look at the potential impact of environmental, social and governance issues on a country's ability to repay its debt. They use the UN's 17 Sustainable Developments Goals (SDGs) as a framework.

Corporate (financial)

When it comes to corporate bonds, we have developed a two-stage research and analysis process in recognition of the immediate and material risks poor business practices can present for a company's creditworthiness. This approach allows us to identify and mitigate these increasingly acute risks.

We start our assessment with a disciplined analysis of business practices taking into account:

1. ESG/CAR scoring: As described above, we use our own methodology to score companies based on 115 distinct, identifiable and credible data points to analyse whether they are aligned with best practices in terms of ESG, and whether they are making progress in transitioning to more sustainable business practices. Our portfolio management and research teams can then use this non-financial information alongside their financial analysis to assess the investment case of the company.

2. Controversies: A company's exposure to controversies in the short term is a strong signal that it is not focused on best business practices over the long term. We therefore look at companies' exposure to controversies, and the severity of those issues, as a means of managing portfolio risk.

3. Impact metrics: The transition to a low-carbon global economy has reached a tipping point, therefore, we believe it is essential to assess climate risks and decarbonize our portfolios. To that end, we want to increase the resilience of our portfolios by favouring companies with demonstrably lower carbon intensity than their peers to reduce carbon exposure. In addition, whenever possible, we also want to favour companies issuing climate-aligned bonds. This best in class approach is applied to the companies' respective sectors.

This analysis provides an outline for a quality-based portfolio tilted towards companies with better ESG/CAR scores, lower carbon intensity and with fewer controversies.

Next, our credit analysts carry out an in-depth forward-looking fundamental analysis into the sustainability of companies' business practices and business models / activities. This is a critical step, in our view, as it means our analysts can better understand the relevance of these factors for companies, identify any inconsistencies and challenge issuers directly. Our active strategies use common tools that enable the diffusion of extra-financial information provided by the ESG solutions team, for example. The team also benefits from our dedicated SIRSS team, which helps monitor and inform investment teams on top-down global issues associated with sustainability dynamics and their potential impact on sectors/industries.

We believe green, social and sustainability bonds play an important role in enabling capital-raising and investment for projects designed to increase the resilience of the global economy to climate change, and to mitigate climate risk by avoiding carbon emissions. In turn, they increase the resilience of portfolios to climate risk and help drive the investment opportunity associated with the transition to a net-zero emissions economy. As a result, we believe green, social and sustianability bonds enable us to better position portfolios for the climate transition while also creating a positive social and environmental impact.

We also believe green, social and sustainability bonds are an important financial articulation of a company’s sustainability strategy, and companies that issue these bonds are therefore likely to be better positioned as the transition to a sustainable economy continues to accelerate. 

Corporate (non-financial)

When it comes to corporate bonds, we have developed a two-stage research and analysis process in recognition of the immediate and material risks poor business practices can present for a company's creditworthiness. This approach allows us to identify and mitigate these increasingly acute risks.

We start our assessment with a disciplined analysis of business practices taking into account:

1. ESG/CAR scoring: As described above, we use our own methodology to score companies based on 115 distinct, identifiable and credible data points to analyse whether they are aligned with best practices in terms of ESG, and whether they are making progress in transitioning to more sustainable business practices. Our portfolio management and research teams can then use this non-financial information alongside their financial analysis to assess the investment case of the company.

2. Controversies: A company's exposure to controversies in the short term is a strong signal that it is not focused on best business practices over the long term. We therefore look at companies' exposure to controversies, and the severity of those issues, as a means of managing portfolio risk.

3. Impact metrics: The transition to a low-carbon global economy has reached a tipping point, therefore, we believe it is essential to assess climate risks and decarbonize our portfolios. To that end, we want to increase the resilience of our portfolios by favouring companies with demonstrably lower carbon intensity than their peers to reduce carbon exposure. In addition, whenever possible, we also want to favour companies issuing climate-aligned bonds. This best in class approach is applied to the companies' respective sectors.

This analysis provides an outline for a quality-based portfolio tilted towards companies with better ESG/CAR scores, lower carbon intensity and with fewer controversies.

Next, our credit analysts carry out an in-depth forward-looking fundamental analysis into the sustainability of companies' business practices and business models / activities. This is a critical step, in our view, as it means our analysts can better understand the relevance of these factors for companies, identify any inconsistencies and challenge issuers directly. Our active strategies use common tools that enable the diffusion of extra-financial information provided by the ESG solutions team, for example. The team also benefits from our dedicated SIRSS team, which helps monitor and inform investment teams on top-down global issues associated with sustainability dynamics and their potential impact on sectors/industries.

We believe green, social and sustainability bonds play an important role in enabling capital-raising and investment for projects designed to increase the resilience of the global economy to climate change, and to mitigate climate risk by avoiding carbon emissions. In turn, they increase the resilience of portfolios to climate risk and help drive the investment opportunity associated with the transition to a net-zero emissions economy. As a result, we believe green, social and sustianability bonds enable us to better position portfolios for the climate transition while also creating a positive social and environmental impact.

We also believe green, social and sustainability bonds are an important financial articulation of a company’s sustainability strategy, and companies that issue these bonds are therefore likely to be better positioned as the transition to a sustainable economy continues to accelerate. 

10.3. Additional information [OPTIONAL]

This information is reflective of our asset management activities.


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]

The information provided above is reflective of our asset management activities.


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

Our proprietary model has been designed for measuring governments' alignment with the Human and Environmental Rights standards and Sustainable Development Goals as defined by the United Nations .

The goals are broad and interdependent, yet each has a separate list of targets to achieve. The SDGs cover environmental, social and economic development issues including poverty, hunger, health, education, global warming, gender equality, water, sanitation, energy, urbanization, environment and social justice. There is a large amount of data publicly available that measures the contributions of governments toward the SDGs (World Bank, UN agencies, NGOs (Amnesty International, Transparency, Climate Action Tracker), research institutes (Yale University). We have selected the data of greater quality and that has been updated on a regular basis. The indicators collected are of a different nature (positive or negative, absolute or relative). All of them have been calibrated in our scoring system and rescaled between 0 and 100 points to make them more easily comparable.

We have aligned our analysis to our ESG/CAR corporate view. We want to focus on indicators of concrete results achieved by governments pursuing the SDGs, but we also want to measure their commitments and efforts on each aspect. Each indicator is tagged according to their ESG and SDG themes, and to their "CAR" materiality.

On the consciousness side, we analyse the commitments of governments through their signatures and/or ratifications of UN international treaties. For example, we follow the main international negotiation cycles on climate (e.g. UN Framework Convention on Climate Change, Kyoto protocol, Paris Agreement). On the action side, we analyse governments' regulatory quality and budget allocation (e.g. share of budget spent on education or health, investments in renewable energy sources). On the result side, we use mainly performance indices and indicators related to the SDGs (e.g. on environment, social progress, good governance, corruption etc.).

Corporate (financial)

The factors we consider for each part of the ESG evaluation include :

Environment :

  • Emission reduction
  • Natural resource reduction
  • Product innovation

Social :

  • Respect for human rights
  • Impact on communities
  • Client/Product responsibility
  • Diversity in the workplace
  • Health and safety
  • Training and career development

Governance:

  • Board of directors composition, independence, diversity, skills and knowledge base
  • Executive directors remuneration policy and yearly remuneration outcomes 
  • Non-executive directors fees' structure
  • Shareholders' rights
  • Strategy integration

Corporate (non-financial)

The factors we consider for each part of the ESG evaluation include :

Environment :

  • Emission reduction
  • Natural resource reduction
  • Product innovation

Social :

  • Respect for human rights
  • Impact on communities
  • Client/Product responsibility
  • Diversity in the workplace
  • Health and safety
  • Training and career development

Governance:

  • Board of directors composition, independence, diversity, skills and knowledge base
  • Executive directors remuneration policy and yearly remuneration outcomes 
  • Non-executive directors fees' structure
  • Shareholders' rights
  • Strategy integration

12.3. Additional information.[OPTIONAL]

The information provided above is reflective of our asset management activities.


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