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First Sentier Investors (including First State Investments)

PRI reporting framework 2020

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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
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%
Securitised
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.

We exclude all investments relating to tobacco, cluster munitions and sanctioned countries firm-side.

In Fixed Income we use an ESG integration method in our process of analysis and portfolio construction. We think ESG integration is the most thorough method in assessing an asset’s downside, and upside, risk thus allowing us to get a better understanding of the total risk profile of an investment opportunity.  The teams share insights through our proprietary Investment Opinion Network (ION) investment system and utilise a shared credit research team.

Our credit research analysts incorporate material ESG factors explicitly into their credit analysis. They assess ESG risk on a five point scale, from Very Low to Very High (along with an ‘Uninvestable’ category). Material ESG risk factors are a significant input in determining Internal Credit Ratings (ICR) for individual issuers. ESG considerations are often among the key reasons why ICRs differ from those of the major agencies.

Portfolio construction uses the ICR for valuation purposes and to determine portfolio weights, as such a lower ESG score, which drives down the ICR will result in a lower portfolio weight.  Portfolio managers also take into account stranding risk when assessing the desirable bond tenure for investment. 

01.3. Additional information [Optional].

Our global fixed income investment capability includes the following teams locally based in the US, Europe, Asia and Australia.

The teams cover:

- Global Fixed Income
- Emerging market Debt

- Asia Fixed Income
- Australian Fixed Income
- Short Term Investments (cash) & Global Credit
High yield
- Credit Analysis (which supports the other teams by producing our internal credit rating for corporate and financial issuers)

For the most part in this submission answers relate to the team who has the greatest focus on a particular type of security, which means answers for SAA relate to our Emerging Market Debt team, answers for securitised debt relate to our short-term investments (cash) team and corporate debt (both financial and non-financial) relate to credit analysis team. For each question we specify which teams the responses relate to. 


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)
Securitised
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  

specify description

          Direct company engagement and from company reporting
        

Indicate who provides this information  

specify description

          Independent research from universities and industry bodies that provide analysis on ESG themes like climate change, climate resilience, work place safety and modern slavery
        

Indicate who provides this information  

specify description

          Issuers also provide ESG information directly.
        

Indicate who provides this information  

Indicate who provides this information  

specify description

          Transparency International, the United Nations, World Bank, the World Energy Council and the Fund for Peace among others.
        

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

For corporate issuers, we subscribe to a number of ESG research services including Sustainalytics, MSCI governance research, and Reprisk. Raw ESG data is also available through Bloomberg. Other third party sources we have access to include:  sell side research, NGO, academic, multilateral, development organisation and government research sources. Furthermore we obtain ESG information directly from the company reports – integrated reports and sustainability report.

For SSA and Sovereigns, we use sources from Supra National bodies such as: the Corruption Perception Index (Transparency International) Human Development Index (United Nations Development Program) Ease of Doing Business (World Bank) Fragile State Index (Fund for Peace) Government Effectiveness Index (World Bank) Energy Sustainability Index (World Energy Council) among others.

The Responsible Investment team also distribute research reports and other information to investment teams, however the primary responsibility for sourcing information rests with each team.

With regard to sovereign issuers analysis by our Emerging Markets Debt and Asia Fixed Income team, we rely more heavily on freely available information provided by multilaterals such as the World Bank, IMF, UN, Transparency International etc. These organisations tend to provide us with very rich and robust datasets that allow us to compare macro ESG trends across countries.

02.4. Additional information. [Optional]

ESG has been a core principle in FSI Fixed Income’s research process.  ESG was integrated into our research process in 2008 and we are continually looking to further improve both our internal analysis and our external engagement with companies.  As such we are consistently working with our specialist RI team to better source ESG information/analysis, and organise collectively as a group to progress ESG agenda with both issuers and our clients.

Our Emerging Markets Debt and Asia Fixed Income team encourage multilaterals to support reporting on particular ESG issues by engaging where possible. For example, relaying feedback to the IMF on our desire to see more work on climate vulnerability in Article IV reports, and so on.

We will also on occasion participate in research programs run by Think Tanks and NGO’s.


FI 03. Processes to ensure analysis is robust

03.1. Indicate how you ensure that your ESG research process is robust:

specify description

          We engage with other asset teams within FSI to ensure we use best practice, and actively participate in external ESG forums for Fixed Income investors
        

03.2. Describe how your ESG information or analysis is shared among your investment team.

          Updates and/or changes to the ESG or ICR risk ratings are discussed at weekly meetings between analysts and portfolio managers.
        

03.3. Additional information. [Optional]

Material ESG risk factors are a significant input in determining Internal Credit Ratings (ICR) for individual issuers. We identify material ESG risks as part of our bottom up research process, incorporating analysis of ESG data providers. We have a proprietary  internal ESG dashboard that organises data from ESG providers to help analysts identify where ESG risk are changing and to track performance of ESG metrics over time.

With regard to sovereign issuers analysis by our Emerging Markets Debt and Asia Fixed Income team, ESG factors are critical to our bottom-up fundamental research process, and are included in every sovereign research evaluation. Sovereign analysts identify which ESG factor(s) is/are material drivers of investment performance. Given the breadth of the universe, the number of issues and materiality of each varies considerably. For this reason the analyst assessment is largely qualitative and experience based. Third party research / data are utilised where applicable. ESG scoring is integrated into our portfolio construction process, specifically as part of a position sizing discipline. 


(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)
Securitised
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

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

Group wide exclusionary screens include cluster munition and landmine manufacturers and tobacco product manufacturers. We also exclude sanctioned and very high risk countries, companies domiciled in those countries and individuals.

04.3. Additional information. [Optional]

We apply negative screening at a firm level, which applies within all fixed income portfolios.

Group wide exclusionary screens include cluster munition and landmine manufacturers and as of 2019, companies that produce cigarettes and tobacco products. We also exclude sanctioned and very high risk countries, companies domiciled in those countries and individuals.

For sanctioned and high risk countries we enforce country level restrictions based on the constituents of the Australian Department of Foreign Affairs and Trade (DFAT) Sanctioned Countries List and similar lists issued by Governments in other jurisdictions where our funds are domiciled. No investment is possible in companies domiciled in any country on the DFAT list without clearance from Investment Compliance personnel as the system controls do not allow it.

In addition our controls include screens for any potential investment from a country deemed to be 'very high risk' in relation to politically exposed persons, sanctions and ultimate beneficial ownership controls. The constituents on each system are regularly reviewed and updated.

Please also see the following link for our policy on cluster munitions and anti-personnel mines:

 https://www.firststateinvestments.com/about-us-files/140107-CFSGAM-FSI-Policy-on-cluster-munitions.pdf

Please see the following link for our policy on Tobacco Exclusion:

 https://www.firstsentierinvestors.com.au/content/dam/cfsgam/about-us-files/tobacco-exclusion-policy.pdf


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

Cluster Munitions & Land Mine manufacturers. We fully support the conventions relating to the manufacture of anti-personnel mines (Ottawa Convention) and cluster munitions (Oslo Convention). The manufacture and use of such weapons undermines the basic fundamental principles of human rights. Our broad based corporate credit universe includes corporate issuers in investment grade and high yield across developed and emerging markets. The names included for exclusion currently are: Hanwha Corporation – South Korea, Poongsan Corporation – South Korea, Elbit Systems – Israel, Anhui GreatWall Military Industry Co Ltd – China, and LIG Nex1 Co Ltd – South Korea. Although these corporates are not typical issuers in our universes, our fixed income teams have worked with investment compliance to code these companies into our pre-trade compliance system to ensure they can not be purchased in portfolios.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Tobacco manufacturers: We had always had a view that tobacco was a high ESG risk sector although as a debt investor we often felt we were compensated fairly for this risk in the short to medium term life of the securities held. However, as a firm we had made a decision in May 2019, in collaboration with the investment teams including fixed income, to exclude tobacco from our investment universe despite not being required to by clients, and indeed some clients challenged this decision. A name we have historically covered included British American Tobacco which is a large issuer in the investment grade corporate space. Although we believe this company has strong financials and provides diversification in a broader portfolio while simultaneously offering attractive relative value as a BBB rated entity, we have both divested of previous holding in funds and now screen this issuer completely from our opportunity set.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Tobacco manufacturers: We had always had a view that tobacco was a high ESG risk sector although as a debt investor we often felt we were compensated fairly for this risk in the short to medium term life of the securities held. However, as a firm we had made a decision in May 2019, in collaboration with the investment teams including fixed income, to exclude tobacco from our investment universe despite not being required to by clients, and indeed some clients challenged this decision. A name we have historically covered included Altria which is a large issuer in the investment grade corporate space. Recently there have been discussions around a merger with competitor Philip Morris which we believe would be positive for the credit profile of the combined entity. However, we previously divested of this name and do not deem either to be investible given the screen in place.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Sanctioned countries & individuals

We do not invest in sanctioned countries as well as companies domiciled in those countries. These countries currently include Cuba, Iran and North & South Sudan (none of which are actually deemed investible in the emerging market space).

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Sanctioned countries & individuals

In addition to sanction country controls, we observe the US Russian/Ukraine related issuers sanctions; limiting investments in Six major Russian banks designated under Directive 1 (Bank of Moscow, Gazprombank, Russian Agricultural Bank, Sberbank, VEB and VTB Bank), and four major Russian energy companies under Directive 2 (Novatek, Rosneft, Gazprom Neft and Transneft). While these issuers are represented in EMD indices, we screen them out of our universe due to these ongoing sanctions.

05.2. Additional information.

As noted in FI 04 these are firm wide exclusions.


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

06.2. Additional information. [Optional]

Portfolio managers are well aware of the firm wide policy. In looking at investing in a new issuer they conduct preliminary screens including the business profile and domicile of the company to ensure that the company passes our tobacco, munitions and sanctions exclusions polices. Portfolio managers also utilise the credit research team and seek preliminary internal credit ratings which will capture any issuers that may potentially be missed in the initial PM screen.

Furthermore, group wide rules and exclusions are programmed into pre-trade compliance systems as general trading rules which would prevent the acquisition of such securities. As a final check, post trade compliance checks are also conducted daily.

The criteria and list of excluded issuers are managed by the EMEA and Australasian Compliance teams, and reviewed annually by the Head of Responsible Investment.


(C) Implementation: Integration

FI 10. Integration overview

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

Our overall approach to ESG integration is described below, this applies in particular to our Credit Analysis team who are a shared research resource. Detailed information on our other fixed income teams can be found in our annual

Our overall approach to ESG integration is described below, this applies in particular to our Credit Analysis team who are a shared research resource.Our fixed income team have developed their own approach to ESG integration that complement their investment processes. All teams share investment insights, including on ESG information, through our proprietary global investment system ION.

The team believe that ESG issues have a direct impact upon an issuer's risk and therefore its probability of default. As risks turn into liabilities, they will impact costs and cash flow and, eventually affect credit ratings and debt costs. ESG issues can also impact on a sovereign's ability to generate sustainable revenues or potentially increase its future costs, affecting its ability to repay bond holders.

Our fixed income teams have an assessment process for ESG issues, which flows into their view of a particular issuer, whether through the ESG score and Internal Credit Rating (ICR) used by the Fixed Income and Credit teams or the six-factor model used by the Emerging Markets Debt and Asia Fixed Income team.

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

SSA

In Emerging Markets Debt we consider that the potential to deliver risk-adjusted returns is enhanced by the integration of ESG factors. ESG factors are an important part of bottom-up fundamental research and are included in all sovereign credit evaluations. Analysts review a common set of ESG data across all sovereigns, which enhances the objectivity and comparability of assessments. They also determine which ESG factors are market drivers for a given country, and produce a forward-looking assessment identifying where these factors are mispriced by the market. Engagement is used to support this assessment, where possible.

ESG considerations are also an integral part of portfolio construction, specifically as part of a position-sizing discipline. Here, limits to absolute and relative position sizes in portfolios are established by country, based on factors such as credit quality, volatility and liquidity, as well as a qualitative assessment of vulnerability to event risk.

Event risks refer to unexpected events with the potential to materially negatively affect bond prices – and it is our experience that such events are frequently linked to ESG factors. Examples include political succession, social revolutions and severe weather events. To assess the vulnerability of sovereigns to event risk, analysts consider the relative likelihood of them occurring (e.g. political event risks tend to be more frequent in countries 

where policy making is highly centralised), as well as the likelihood of drawdowns in response to the event. Using unexpected severe weather as an example, analysts assess potential downside by examining an economy’s diversification, looking at data such as the share of agriculture within GDP or the importance of agriculture to the balance of payments.

All else being equal, an assessment of higher drawdown vulnerability due to ESG event risks for any country leads to a stricter limit on the size of country portfolio exposure. We believe that this discipline has been a major factor in minimising drawdowns for client portfolios.

Corporate (financial)

In our experience, ESG issues can have a significant bearing on default risk. Consequently, ESG risks are identified as part of our bottom-up credit research process to help manage default risks in bond portfolios.

Analysts must identify the material ESG risks, whether said material risk stems from the E, S or G bucket, and assess how well the company manages these material ESG risks – thus arriving at their overall ESG risk assessment. We have a 5-point ESG risk scale ranging from Very Low to Very High. Along with the ESG risk determination, analysts are required to indicate if these material ESG risks are on an improving, steady or deteriorating trajectory in their research. Risk of asset stranding are also identified where applicable.

ESG risk ratings are reviewed at least annually. Analysts rely on a combination of company engagement, company reports and third party research providers to arrive at their assessment. Of the third party ESG providers, we use Sustainalytics for our Environmental (E) and Social (S) risks assessments and MSCI for Governance (G) assessment. RepRisk is utilised to pick up the number and scale of controversies for a company over a 1-3 year period.

Critically, our ESG risk assessments have an important bearing on proprietary Internal Credit Ratings (ICR) that are assigned to every credit we review, in turn influencing portfolio construction decisions. For example, if it is in the highest risk category “Very High” it has a mandatory one-notch penalty to the ICR than what it would otherwise would be.

The Co-Leads of Credit Research is responsible for ensuring the consistency and quality of the ESG inputs.

Our approach of integrating ESG analysis into the ICR has been in place since 2008.

Counterparty Reviews

We annually review and rate our counterparties on a number of factors including ESG. The counterparty review relies on external ESG service providers, analysis from our analysts, and also included a survey of our counterparties where they are not adequately covered by our external providers.

The counterparty review is provided to the counterparties and has been the source of engagement with some counterparties on their ESG performance. The reviews also determine how much and whether we will trade with different counterparties. All other things being equal, a low ESG rating will make it less likely that we will trade with a particular counterparty.

Corporate (non-financial)

For Corporate (Non-financial), the process is the same as for Corporate financial - However, our Global FI team note that special care is shown to issuer provided information (increasingly more common) and how they are addressing environmental and people practices that have been trouble areas in the past.

Securitised

The ESG integration process for Securitized products follows the same process as Corporate ESG analysis (described above), however there are specific ESG issues for Securitized products that are detailed below:

Environmental – there is a risk of geographic concentration of assets to areas which could be affected by environmental issues, e.g. weather events. Pools of assets are assessed to ensure geographic concentration to regions and hence environmental events will not unduly affect the overall financial performance of the Securitized product

Social/Sustainability – origination and servicing processes of underlying pool assets is assessed to ensure that the processes are line with regulatory requirements as well as being undertaken on an ethical basis. This requires physical visits to the offices of the originator and servicer to ensure that the processes are in compliance and are appropriate.

Governance – Various models of ownership are evident across originators of securitized products. They can include listed, unlisted, private equity, individuals, trusts, and non-domiciled entities. Some of these models may provide additional risks for the investors in Securitized products. They can include less investment in technology and staff, higher dividend payments to owners, listed companies may be encouraged by equity owners to undertake activities which could be contrary to investors in Securitized product, and short term corporate strategies which maybe contrary to the investors of Securitized products.

10.3. Additional information [OPTIONAL]

While most corporate issuers are assigned one of five tiers of ESG risk, a sixth tier exists for companies that are deemed ‘uninvestable’ from an ESG risk perspective.

An ‘uninvestable’ credit is one where we are unable to make a proper assessment of the company due to the ESG situations surrounding the company being highly uncertain. It is not to exclude companies we do not like from the investment universe, rather reflects where a proper assessment cannot be formed. The ‘uninvestable list is reviewed annually. Examples of currently excluded issuers include Adani Abbot Point Terminal and AMP.


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)
Securitised
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]

All else equal, a company with the same Internal Credit Rating (ICR) but a higher ESG risk assessment will be less attractive from a credit risk perspective and would require a higher spread premium to compensate for this assessment.

We take into account a company’s management of key material ESG risks and adjust our cash flow and gearing forecasts which impacts the ICR and valuations.


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

Securitised

Environmental

Social

Governance

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

SSA

In Emerging Markets Debt we consider that the potential to deliver risk-adjusted returns is enhanced by the integration of ESG factors. ESG factors are an important part of bottom-up fundamental research and are included in all sovereign credit evaluations. Analysts review a common set of ESG data across all sovereigns, which enhances the objectivity and comparability of assessments. They also determine which ESG factors are market drivers for a given country, and produce a forward-looking assessment identifying where these factors are mispriced by the market. Engagement is used to support this assessment, where possible.

ESG considerations are also an integral part of portfolio construction, specifically as part of a position-sizing discipline. Here, limits to absolute and relative position sizes in portfolios are established by country, based on factors such as credit quality, volatility and liquidity, as well as a qualitative assessment of vulnerability to event risk.

Event risks refer to unexpected events with the potential to materially negatively affect bond prices – and it is our experience that such events are frequently linked to ESG factors. Examples include political succession, social revolutions and severe weather events. To assess the vulnerability of sovereigns to event risk, analysts consider the relative likelihood of them occurring (e.g. political event risks tend to be more frequent in countries where policy making is highly centralised), as well as the likelihood of drawdowns in response to the event. Using unexpected severe weather as an example, analysts assess potential downside by examining an economy’s diversification, looking at data such as the share of agriculture within GDP or the importance of agriculture to the balance of payments.

All else being equal, an assessment of higher drawdown vulnerability due to ESG event risks for any country leads to a stricter limit on the size of country portfolio exposure. We believe that this discipline has been a major factor in minimising drawdowns for client portfolios.

Corporate (financial)

ESG is an important component in the credit risk assessment process and determining the credit quality.

We have a 5-point ESG risk scale – Very Low, Low, Moderate, High and Very High. The ESG risk assessment is a key input into the  Internal Credit Rating (ICR). Analysts determine the number of notches penalty or uplift to the ICR based on the ESG risk assessment. Our process stipulates mandatory uplift or penalty to the weakest and strongest risk assessment.

We look at all pillars E,S, and G. Our focus in our analysis is the material ESG risks for the company and how management’s is responding to these risks.

Our internal ESG dashboard tool, along with ESG data providers helps us to pick up issues or problem areas in each pillar. Under each pillar we make an assessment of the severity of the risk and our assessment of the adequacy of management’s response.

Controversies – frequency and severity – as captured in news flow and Reprisk helps to indicate of how well companies are managing their ESG risks and where there is slippage between policy and implementation.

We also pay particular attention to governance structures (independence of the board, pay policies, audit committees), shareholder dissents, as well as incentives (ESG forming part of executive’s KPI’ and remuneration outcomes).

ESG developments are continually monitored and assessed. A full credit review, including ESG risk assessments are conducted when our view of the risks of the credit has changed. This is done at minimum annually.

Corporate (non-financial)

ESG is an important component in the credit risk assessment process and determining the credit quality.

We have a 5-point ESG risk scale – Very Low, Low, Moderate, High and Very High. The ESG risk assessment is a key input into the  Internal Credit Rating (ICR). Analysts determine the number of notches penalty or uplift to the ICR based on the ESG risk assessment. Our process stipulates mandatory uplift or penalty to the weakest and strongest risk assessment.

We look at all pillars E,S, and G. Our focus in our analysis is the material ESG risks for the company and how management’s is responding to these risks.

Our internal ESG dashboard tool, along with ESG data providers helps us to pick up issues or problem areas in each pillar. Under each pillar we make an assessment of the severity of the risk and our assessment of the adequacy of management’s response.

Controversies – frequency and severity – as captured in news flow and Reprisk helps to indicate of how well companies are managing their ESG risks and where there is slippage between policy and implementation.

We also pay particular attention to governance structures (independence of the board, pay policies, audit committees), shareholder dissents, as well as incentives (ESG forming part of executive’s KPI’ and remuneration outcomes).

ESG developments are continually monitored and assessed. A full credit review, including ESG risk assessments are conducted when our view of the risks of the credit has changed. This is done at minimum annually.

Securitised

The ESG integration process for Securitized products for Securitized product follows the same process as Corporate ESG analysis, however there are specific ESG issues for Securitized products that are detailed below:

Environmental – there is a risk of geographic concentration of assets to areas which could be affected by environmental issues, e.g. weather events. Pools of assets are assessed to ensure geographic concentration to regions and hence environmental events will not unduly affect the overall financial performance of the Securitized product

Social/Sustainability – origination and servicing processes of underlying pool assets is assessed to ensure that the processes are line with regulatory requirements as well as being undertaken on an ethical basis. This requires physical visits to the offices of the originator and servicer to ensure that the processes are in compliance and are appropriate.

Governance – Various models of ownership are evident across originators of securitized products. They can include listed, unlisted, private equity, individuals, trusts, and non-domiciled entities. Some of these models may provide additional risks for the investors in Securitized products. They can include less investment in technology and staff, higher dividend payments to owners, listed companies may be encouraged by equity owners to undertake activities which could be contrary to investors in Securitized product, and short term corporate strategies which maybe contrary to the investors of Securitized products.

12.3. Additional information.[OPTIONAL]


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