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Global Evolution

PRI reporting framework 2020

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.

PHILOSOPHY

In partnership with our investors, we are committed to leaving a legacy of impact investing, which assists in the process of lifting nations out of poverty.

 

NEGATIVE SCREENING

Global Evolution maintains proprietary ESG ratings for all emerging and frontier market countries. Our sovereign exclusion process is based on the levels and dynamics of our ESG ratings in order to convey our corporate values for ethical and responsible investing.

 

POSITIVE SCREENING

To inform our investment process, we integrate ESG indicators into our valuation analysis for bonds, nominal exchange rates, and real effective exchange rates. E, S, and G indicators are integrated into econometric valuation models alongside other macro and financial indicators to the extent they generate statistical significance and forecasting power.

 

In addition, our proprietary ESG-adjusted sovereign credit ratings also serve to inform our investment process by providing a high-frequent outlook and rating for sovereign creditworthiness.

 

At Global Evolution, we have conducted extensive ground-breaking research into the relationship between sovereign debt investing and Environmental, Social, and Governance (ESG) indicators. We have found clear correlation between the sovereign funding costs and ESG dynamics, with governance, unsurprisingly, the most prevalent.

The quantitative valuation models effectively provide us with statistically significant valuation signals that are partly based on ESG dynamics and partly based on macroeconomic, financial, and fiscal dynamics. The models provide us with such statistically significant valuation signals, i.e. “trade ideas”, at a weekly basis which informs our investment process.
By not integrating ESG dynamics into investment decisions, investors sacrifice essential information. Our quantitative approach reveals a clear ESG historical “dividend” which is conducive for a successful investment process.

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

SSA

since we invest in one signle type of asset: givernment bonds, it is the same ESG integration approach throughout

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
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]

Estimation of high-frequent ESG indices using AI are being developed and integrated


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

12.2. Please provide more detail on how you review E, S and/or G factors in your integration process.

SSA

data

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.

12.3. Additional information.[OPTIONAL]


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