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Lombard Odier

PRI reporting framework 2020

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

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
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 (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.

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:

  • 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.
  • Further mitigating risk by assessing extra-financial factors including environmental, social and governance (ESG) criteria.
  • 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.

We also have three levels of negative screening: our Group-wide exclusions on controversial weapons, essential food commodities, and any seurities sanctioned by the UN, EU, US, Switzerland or relevant local sanctions; SRI restrictions on tobacco, thermal coal and unconventional oil & gas; and additional values-based exclusions/restrictions specific to individual funds and/or clients upon request. 

Further information on our approach is outlined below.

01.3. Additional information [Optional].

Our sustainable investment framework

Lombard Odier's sustainable investment framework covers two dimensions of corporate sustainability: What businesses do (their business model and activities) and How businesses operate (their business practices). For each dimension, we focus on the most financially material issues to the sector and industry. We believe both dimensions are essential to better inform investment decisions based on in-depth, forward-looking analysis of how well companies are positioned for the transition to a sustainable economy.

Assessing the What - business model and activities: This analysis, conducted by our Sustainable Investment Research Strategy and Stewardship (SIRSS) team, combines top-down, macroeconomic analysis with bottom-up approaches to assess:

  • the exposure of different sectors/industries to risks& opportunities arising from sustainability dynamics, including climate change scenarios, the macroeconomic world view, energy and mobility forecasts, for example;
  • the susceptibility of each sector/industry to those risks& opportunities, including what business strategies exist to mitigate the risks or capture the opportunities, climate mitigation & adaptation, new innovative/disruptive technologies, and company preparedness.

Assessing the How - business practices: Our ESG Solutions team analyses 115 data points using our proprietary 'CAR' methodology (Consciousness, Action, Results), which enables us to differentiate between the 'talkers', 'doers', and 'achievers', and identify companies that are making measurable progress in the transition to more sustainable business practices. We also look at the same data points to assess alignment of business practices with the 17 UN Sustainable Development Goals. Our analysis of business practices also looks at companies' exposure to controversies, which occur when companies breach internationally accepted standards or norms as defined by the United Nations Global Compact Principles. In our view, controversies could have a major impact on a company's reputation and lead to lower market performance. Our assessment of business practices also looks at certain impact metrics, including companies' carbon and water intensity.

Given the challenges the world faces today, we believe the analysis of sustainability-related 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 in countries' ability to repay its debt. They use the UN's 17 Sustainable Developments Goals (SDGs) as a framework.

Stewardship:

Based upon the intelligence and analysis gained from our dedicated sustainability teams, we address issues that are financially material at the systemic-, sector- or company level through engagement and voting, either directly or through collaborative initiatives. We enter into a dialogue with companies to test and challenge their approach to the sustainability factors we think are most material to their prospects and will seek to influence their sustainability positioning in areas we think are weak or where there is room for improvement.

We place great importance on being active stewards with debt issuers, and believe the characteristics of corporate credit lend themselves especially well to stewardship. In particular, engaging in dialogue with companies is critical to assessing creditworthiness because it improves our understanding of the issuer’s risk profile.

When it comes to exercising our equity voting rights, we will look to form an aggregated view across our asset classes as much as possible. As such, our voting is often reflective of the engagement views and objectives of our fixed income teams.

Screening:

We have three levels of negative screening:

  • Group-wide exclusions:
    • Reflecting our Group policy on controversial investments, we systematically exclude: Companies involved in the production or distribution of controversial weapons. Lombard Odier does not invest in companies that produce, trade or store controversial weapons (anti-personnel mines, cluster weapons, biological and chemical weapons, depleted uranium, white phosphorus).
    • Financial instruments directly linked to essential food commodities. Stable food prices are a crucial component of food security for many populations at risk. As we are concerned about the potential impact of commodities investments on the volatility of essential food prices, Lombard Odier has decided to permanently exclude all financial instruments (futures, options, swaps, indices, exchange-traded funds) that invest in essential foods (wheat, rice, corn, and soybeans).
    • Securities relating to any countries, companies, entities or individuals subject to sanctions by the UN, EU, US and/or Switzerland, as well as relevant local sanctions.

  • SRI Restrictions: In addition to the above we believe certain companies and sectors are unsustainable in the long term and should be subject to exclusion in actively managed funds. Companies in the tobacco, thermal coal, and unconventional oil& gas sectors are subject to thresholds to determine whether they are excluded. These restrictions are imposed on a 'comply or explain' basis whereby a stock that falls within the threshold will be flagged to the manager. These exclusions can only be over-ridden with the approvals of the relevant CIO and are subject to regular risk review by internal committee. For active strategies, we would also normally look to exclude companies impacted by the most severe controversies from our responsible investment universe unless there are extenuating circumstances, with lower-level controversies subject to ongoing monitoring.
  • Additional exclusions / Restrictions: In some cases, our strategies may apply additional values-based exclusions or restrictions that are individual to the fund, or to individual client mandates upon request.

The above mentioned figures and information are reflective of our asset management activities. Our private banking business applies the same criteria regarding Screening for discretionary managed and advisory portfolios. 


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
SSA
Corporate (financial)
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  

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.

We use a wide range of in-house and external research techniques and sources to collect, verify, enhance and analyse large amounts of raw data at the most granular level possible. This is critical in making sure our data and analysis is truly investment relevant so we can construct portfolios that aim to capture opportunities and mitigate risks created by sustainability dynamics.

Our in-house research includes using advanced/alternative technological methodologies to collect and aggregate data from a wide range of sources including geospatial data, governmental and non-governmental organisations, international organisations, data aggregation platforms and the media, for example.

We also work with a number of external providers to access raw data, including Exiobase, Sustainalytics, Trucost and Inrate. We constantly review external providers' data given the dynamic and rapid evolution of this space. We believe it is important to maintain open and regular dialogue with our providers to ensure their data is as investment relevant as possible.

Our ESG data for countries is collected and updated by our internal dedicated sustainability teams from a wide range of sources including but not limited to: World Bank, UN Treaty Collection, International Labour Organization, Transparency International, Amnesty International, The World Factbook, World Resource Institute etc.

02.4. Additional information. [Optional]

During 2019 we developed our data and analysis capabilities significantly, adding coverage of new companies as well as the scope of sustainability issues analysed. In particular, we have been working to enhance our forward-looking dataset to improve our scenario analysis and enhance our understanding of industry/sector level exposure to material forward-looking sustainability challenges.

2019 saw the significant expansion of our active ownership capabilities, notably with the introduction of our SIRSS team. In 2019 we hired Dr Christopher Kaminker to develop a team with a specific focus on helping to identify the key macro risks and opportunities related to sustainability, as well as developing new investment strategies, and incorporating and managing the firm's processes around stewardship.

Since his arrival, Christopher has bolstered his team, which now comprises eight sustainability experts with an average of 12 years' experience across a broad variety of disciplines including investment banking, macroeconomics, lifecycle analysis, data science, stewardship and communications. The team's expertise is also broad, reflecting the complex, multi-faceted nature of sustainability challenges, including structuring sustainable financing solutions, policy, economics, climate change, circular economy, carbon pricing, and environmental engineering. In addition, the team includes two leading experts on mobility, which is a cross-cutting theme in the transition to a sustainable economy.

The above mentioned figures and information are reflective of our asset management activities.


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]

The quality and robustness of our sustainability-related data is of paramount importance to us because it enhances our ability to identify risks and opportunities. We work with huge amounts of raw data and take the governance and maintenance of our sustainability datasets and tools very seriously. We are constantly working to ensure our research and analysis is based on robust, verifiable, cutting edge data and techniques to ensure we are fully capturing the complex, multi-faceted nature of sustainability dynamics, and using this to provide actionable intelligence to our portfolio management teams.

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.

This information is reflective of our asset management activities.


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