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Norwegian Government Pension Fund Norway (Norwegian Ministry of Finance and Folketrygdfondet)

PRI reporting framework 2020

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

ESG incorporation in actively managed fixed income

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
100 Integration alone
0 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.

In the fixed income portfolios, we have chosen integration as our ESG incorporation strategy because it fits best with our goal of achieving increased returns over time through responsible investment. In our view, the way an issuer handles environmental and social matters can provide an indication of credit risk. We therefore aim to integrate ESG considerations into our ongoing credit assessment procedures. We do this by making use of the ESG analyses that are available for companies that are also in the equity portfolios. For high yield issuers unlikely to be covered by ESG ratings providers, Folketrygdfondet uses an internally developed sector-based ESG framework to assess risk. These analyses are, in turn, incorporated into the credit rating we assign that issuer. We also screen 100% of the corporate issuers in our fixed income portfolios against exposure to ESG controversies. If the external service provider that carries out the normative screening alerts Folketrygdondet to an issuer involved in questionable, unethical, or unsustainable business practices, we incorporate this information into our assessment of the creditworthiness of the company in question. 

Folketrygdfondet's Nordic portfolio is subject to decisions regarding the exclusion of companies from the investment universe of the Government Pension Fund Global.

01.3. Additional information [Optional].

Folketrygdfondet's principles for responsible investment cover all asset classes. For SSA, investments are limited to sovereign bonds and municipal bonds in the Nordic market. Hence, financial risk due to issuers' management of ESG issues is minimal. We nevertheless review annually potential adjustements to our approach to ESG integration per asset class in response to changes in the underlying risk. Thus far, given the risk profile, our integration of ESG into SSA investing does not extend beyond this initial review. 


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  

02.3. Provide a brief description of the ESG information used, highlighting any differences in sources of information across your ESG incorporation strategies.

Screening: Folketrygdefondet's Nordic portfolio is subject to the decisions regarding the exclusion of companies from the investment universe of the Government Pension Fund Global.

Integration: Folketrygdfondet subscribes to an ESG controversy news service that alerts investors of potential breaches of international norms on ESG issues. If a potential breach of such norms is discovered at any of the companies or issuers in Folketrygdfondet's portfolios, we receive an alert notifying us of the incident. This information is incorporated into our evaluation of the company or issuer. Folketrygdfondet conducts its own analyses for issuers in the high-yield portfolio, based on a framework that the dedicated ESG resource and FI portfolio managers developed together. The FI portfolio managers use primarily information from the company, including both reporting and one-to-one meetings as a basis for analysis. Sell-side analyses sometimes include ESG information, for example, regarding new environmental regulations. In our experience, however, ESG integration in sell-side analyses is more common on the equity side.

02.4. Additional information. [Optional]


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.

          The FI high yield investment team conducts issuer ESG analyses, based on an internal framework developed in collaboration with the dedicated ESG resource.
        

03.3. Additional information. [Optional]

As noted in the previous section, Folketrygdfondet obtains ESG information from several sources, such that the answers to 03.1 and 03.2 are not applicable to every individual source of ESG information. 

Folketrygdfondet's internal ESG frameworks are used by the FI portfolio managers in the high yield space before investing, to identify issues that may affect creditworthiness. We would not share these internal credit assessments, although we address outstanding ESG concerns with issuers directly.

After an investment decision is made, Folketrygdfondet undertakes a new ESG assessment if warranted by a change in the issuer's circumstances. Folketrygdfondet uses an ESG controversy alert service for news articles that link an issuer to controversial activities. 

Folketrgydfondet reports regularly to investment committee meetings on ESG. However, issuer-specific ESG information would only be discussed under extraordinary circumstances as the investment committee discussions typically involve a more overarching approach to the portfolio. 


(A) Implementation: Screening

FI 04. Types of screening applied

04.1. Indicate the type of screening you conduct.

Select all that apply
Corporate (financial)
Corporate (non-financial)
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

04.2. Describe your approach to screening for internally managed active fixed income

Folketrygdefondet's Nordic portfolio is subject to Norges Bank's decisions regarding the exclusion of companies from the investment universe of the Government Pension Fund Global. An overview of companies excluded from our investment universe is available here: http://www.folketrygdfondet.no/dialog/category338.html

Folketrygdfondet also subscribes to an ESG controversy alert service that notifies subscribers of potential breaches of international norms on ESG issues. This information is incorporated into our evaluation of the company or issuer.

04.3. Additional information. [Optional]


FI 05. Examples of ESG factors in screening process

05.1. Provide examples of how ESG factors are included in your screening criteria.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Folketrygdfondet may not invest in companies that have been excluded pursuant to the Guidelines for observation and exclusion of companies from the Government Pension Fund Global.


The following companies are excluded from the investment universe of the Government Pension Fund Norway:

Swedish Match AB (19 January 2010)

 

05.2. Additional information.


FI 06. Screening - ensuring criteria are met

06.1. Indicate which systems your organisation has to ensure that fund screening criteria are not breached in fixed income investments.

Type of screening
Checks
Negative/exclusionary screening
Norms-based screening

06.2. Additional information. [Optional]

As noted in the previous responses, Folketrygdfondet is not involved in the screening process leading to Norges Bank's decisions on exclusion. Those decisions follow a comprehensive research process, as outlined in the previously provided links. The question seems to presume that Folketrygdfondet is responsible for assessing the quality of the research used to carry out this proceess. That is incorrect. Please refer to https://etikkradet.no/en/ for more information on the Council on Ethics' organizational structure.

Folketrygdfondet also uses an external service provider to screen all investments for ESG controversies.


(C) Implementation: Integration

FI 10. Integration overview

10.1. Describe your approach to integrating ESG into traditional financial analysis.

In the Norwegian and Nordic fixed income portfolios, we have chosen integration as our ESG incorporation strategy as it fits best with our goal of achieving increased returns over time through responsible investment. In our view, the way an issuer handles material ESG risks may affect creditworthiness. We therefore aim to integrate ESG considerations into our ongoing credit assessment procedures. We do this by making use of the ESG analyses that are produced in-house. These are incorporated into the credit rating we assign that issuer.

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

SSA

Folketrygdfondet's principles for responsible investment cover all asset classes. For SSA, investments are limited to sovereign bonds and municipal bonds in the Nordic market. Hence, financial risk due to issuers' management of ESG issues is minimal. We nevertheless review annually potential adjustements to our approach to ESG integration per asset class in response to changes in the underlying risk. Thus far, given the risk profile, our integration of ESG into SSA investing does not extend beyond this initial review. 

Corporate (financial)

We prioritize ESG analysis and engagement with issuers before investing, as we have the greatest influence at this stage. Folketrygdfondet's fixed income investments in the financial sector are in investment grade issuers. As a result, the risk of material ESG events is generally lower than for other sectors.

Corporate (non-financial)

A common challenge for fixed income ESG analysis is the lack of data on issuers. Folketrygdfondet's fixed income investments include small and/or unlisted companies without comprehensive reporting or analyst coverage. As a result, Folketrygdfondet uses internally developed sector-based ESG risk guides to analyze issuers for material sustainability risks. We focus primarily on the high yield sector, where the risks are determined to be greatest.

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]


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

For SSA, the various ESG factors are assessed at an overarching level in the annual assessment of Folketrygdfondet's approach to responsible investment. Should developments in the asset class ESG risk profile warrant greater scrutiny, that would be incorporated into our day-to-day investment processes.

Corporate (financial)

We review the potential significance of ESG issues and investigate them accordingly. The information derives from in-house ESG research and analysis. For the financial sector, which consists primarily of investment grade issuers, Folketrygdfondet incorporates ESG information into the investment process when likely to be material.

In addition, in order to develop a common understanding of ESG-related issues, Folketrygdfondet includes ESG-related information as a fixed agenda item for the daily morning meeting in the front office (both equity and fixed income investment teams). Folketrygdfondet's dedicated ESG resource also presents information of particular relevance to the fixed income portfolio at the fixed income team's monthly strategy meetings.

 

Corporate (non-financial)

We review the potential significance of ESG issues and investigate them accordingly. The information derives from in-house ESG research and analysis. Folketrygdfondet prioritizes ESG analysis of high yield issuers prior to investment. For investment grade issuers, Folketrygdfondet incorporates ESG information into the investment process when likely to be material.

In addition, in order to develop a common understanding of ESG-related issues, Folketrygdfondet includes ESG-related information as a fixed agenda item for the daily morning meeting in the front office (both equity and fixed income investment teams). Folketrygdfondet's dedicated ESG resource also presents information of particular relevance to the fixed income portfolio at the fixed income team's monthly strategy meetings.

12.3. Additional information.[OPTIONAL]


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