Data for ESG factors are supplied by third-party data providers, and include more than 100 indicators across the environmental, social, and governance themes. Different data providers are used including Verisk-Maplecroft, the World Bank, the UN, and others.
Negative screening process
Purpose: Global Evolution aim to express our values as a corporation by not including countries in our investable universe if they have extremely low levels in their environmental frameworks, human rights approaches, and governance areas. Consequently, Global Evolution operates with a sovereign exclusion list for the countries that do not meet our minimum ethical criteria across the ESG areas. The ESG approach is therefore anchored in our corporate ethics related to countries' careful consideration of the environment, human rights, democracy and efficiently and fairly managed public institutions.
Process: Global Evolution operates systematically with the following processual steps for negative screening:
Selected data from Verisk-Maplecroft on the following indicators are equally weighted to form E, S, G, and ESG ratings. Global Evolution has chosen these indicators among several possible indicators in order to reflect Global Evolution's corporate ethical values related to countries' careful consideration of the environment, human rights, democracy and efficiently and fairly managed public institutions. This approach with only 5 indicators ensures a simple framework where each variable is under government control (policy variables) so the indicators used (i) reflect our corporate values; (ii) are policy variables to the government that are actionable:
E: Environmental Regulatory Framework Index
S: Freedom of Association and Collective Bargaining Index, and Women's and Girls' Rights Index
G: Democratic Governance, and Corruption.
Within our proprietary IT system's Information Center, the Verisk-Maplecroft data portal is integrated to calculate Global Evolution's ESG ratings based on the 5 variables. In step 2, the ESG rating is constructed based on the indicators chosen in Step 1.
Threshold definitions for high and low ratings are adopted from the Verisk-Maplecroft portal and their data is constructed on a 0-10 scale where:
0-2.5: extremely ESG risk
2.5-5: high ESG risk
5-7.5: medium ESG risk
7.5-10: low ESG risk
Decision rules: There are three rules for constructing our negative list:
CONDITIONALLY EXCLUDED: A country is excluded if its overall ESG rating is in extreme risk (ESG rating <2.5). However, the exclusion is conditional. Even if the ESG rating is in extreme risk, then Global Evolution reserve the right to investigate the country further for levels and dynamics of E, S, and G indicators to decide if the country should be included.
CONDITIONALLY INCLUDED: A country is included if the overall ESG rating is higher than the extreme risk level (ESG rating>2.5). However, the inclusion is conditional. If there is one or more E, S, and G indicators that is in extreme risk (indicator rating<2.5), then Global Evolution reserve the right to investigate the country further for levels and dynamics of E, S, and G indicators to decide if the country should be excluded. Furthermore Global Evolution discretely can exclude countries.
Updating frequency: The ESG ratings are set quarterly, along with data update cycle, and there may therefore be a quarterly update to the Global Evolution exclusion list.
Sovereign exclusion decision process: When ESG ratings are updated each quarter, any country that qualifies for conditional inclusion or conditional exclusion is by the Research Director proposed for approval to the CIO who is final decision maker.
Output and documentation: The output from the quarterly update includes two documents:
The sovereign exclusion list will be updated quarterly, and any changes will be explained and justified according to the decision rules in #4 above. The PowerPoint slide indicating the investable will also be updated together with the exclusion list.
positive screening process
Purpose: To inform the Global Evolution Investment management process, Global Evolution integrates ESG indicators into the valuation analysis for bonds, nominal exchange rates, and real effective exchange rates.
Process: E, S, and G indicators are integrated into valuation models alongside other macro and financial indicators to the extent they generate statistical significance and explanatory power represented by the adjusted R-squared. Other research initiatives may include ESG indicators as driving indicators for financial variables.
Output: Valuation model output includes valuation signals from the model as a whole, relying on all variables incl. ESG indicators. Output is generated weekly, and is documented through the minutes from the weekly strategy meeting.