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MAKALANI MANAGEMENT COMPANY (PTY) LTD

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
5 Screening alone
0 Thematic alone
95 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)
5 Screening alone
0 Thematic alone
95 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 (non-financial)
5 Screening alone
0 Thematic alone
95 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%

01.2. Describe your reasons for choosing a particular ESG incorporation strategy and how combinations of strategies are used.

We have a screen which takes into account major global risks and/or activities such as:

  • Production or trade in ozone depleting substances
  • Drift net fishing in the marine environment using nets in excess of 2.5 kilometres in length.

(These are just two examples).  Please note these screens do not automatically lead to a decision not to invest but instead helps to flag major risks.  

Beyond this, the team has developed an ESG management systems which assess potential investors with over 150 environmental, social and governance factors to determine risks and opportunities for that particular investment.  Post investment, the team will then use this opportunity to engage with the company (or issuer), and the wider ecosystem, to improve/mitigate any ESG risks identified.  

We believe that the South African (and pan-African) opportunity set to be narrow compared to say Europe or the USA, and as such have decided to focus on an integration and engagement based approach to ESG integration.  On the other hand, an exclusion (or negative screening) based approach would drastically reduce the South African (and pan-African) fixed income opportunity set, and make efficient portfolio construction a challenge.

01.3. Additional information [Optional].


FI 02. ESG issues and issuer research (Private)


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]


(A) Implementation: Screening

FI 04. Types of screening applied

04.1. Indicate the type of screening you conduct.

Select all that apply
SSA
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

As a first step of the screening process, we reviews potential deals against applicable laws and regulations, the approved Investment Mandate or Investment Management Agreement or the Watch List (cognizant to risks from any investments in companies operating in tobacco, asbestos, ozone depleting substances etc.).  Please note that this is not a mechanical screening or exclusion process but helps the team deploys its resources in an efficient manner and does not spend time on investments that are facing severe headwinds and/or major topics of contention.  

Thereafter, the team will undertake full ESG assessment of over 150 factors which results in the team to collate data of ESG matters as per the internally devised ESG management system.  This allows the team to fully understand the ESG risks or opportunities that a particular investment presents. 

 

04.3. Additional information. [Optional]


FI 05. Examples of ESG factors in screening process (Private)


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

other description

          Our proprietary investment systems are pre-loaded with issuers that meet our investment and ESG criteria.  Integrated system but not automated.
        

06.2. Additional information. [Optional]


(C) Implementation: Integration

FI 10. Integration overview

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

Makalani’s approach to examining and managing ESG risks and potential value creation opportunities into investments made through its funds.  As such, proper ESG assessment will highlight risks (investments to avoid) as well as opportunities (investment that greater potential than what is priced in by the wider market).  Hence, ESG analysis complements traditional investment analysis when making investment or divestment decisions. 

We would never make any investment or divestment decision by only considering financial analysis or only considering ESG analysis.   

 

 

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

SSA

We assess over 150 environmental, social and governance factors in conducting our ESG analysis to identify risk and opportunities of particular investments.

For example, we consider some of the following factors as more relevant to SSA:

Environmental: Agriculture, biodiversity, energy resources and management, natural disasters, pollution etc.

Social: Demographics, education, income inequality, health levels, human rights etc.

Governance: Corruption, international relations, financial reporting, regulatory effectiveness, rule of law etc.

Corporate (financial)

We assess over 150 environmental, social and governance factors in conducting our ESG analysis to identify risk and opportunities of particular investments.

For example, we consider some of the following factors as more relevant to Corporate (Financial) securities:

Environmental: Cimate change, waste management etc.

Social: Income inequality, product responsibility etc.

Governance: Audit practices, incentive structure etc. 

Corporate (non-financial)

We assess over 150 environmental, social and governance factors in conducting our ESG analysis to identify risk and opportunities of particular investments.

For example, we consider some of the following factors as more relevant to Corporate (Non-Financial) securities:

Environmental: Supply chain, air pollution etc.

Social: Health and safety, diversity etc.

Governance: Board independence and expertise, investors rights etc. 

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

We assess over 150 environmental, social and governance factors in conducting our ESG analysis, some of which are more relevant to SSA.  This provides our team with an indication of the ESG risk or opportunity which is then used as part of the investment selection and portfolio construction processes.

Corporate (financial)

We assess over 150 environmental, social and governance factors in conducting our ESG analysis, some of which are more relevant to corporate (financial).  This provides our team with an indication of the ESG risk or opportunity which is then used as part of the investment selection and portfolio construction processes.

Corporate (non-financial)

We assess over 150 environmental, social and governance factors in conducting our ESG analysis, some of which are more relevant to corporate (non-financial).  This provides our team with an indication of the ESG risk or opportunity which is then used as part of the investment selection and portfolio construction processes.

12.3. Additional information.[OPTIONAL]

We are happy to provide you with a comprehensive list all of the ESG factors that we use to identify ESG risks and opportunities. 


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