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Ohman

PRI reporting framework 2020

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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
100 Screening alone
0 Thematic alone
0 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
90 Screening + integration strategies
10 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Securitised
100 Screening alone
0 Thematic alone
0 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.

It is our belief that ESG considerations is essential in order to be able to assess the risks which could impact an issuers creditworthiness. Hence, we have decided to take a systematic approach to ESG incorporation within fixed income through a combination of the strategies below.

Screening is applied (quarterly) to all our fixed income investments. This strategy was chosen to meet client demands, but also because we believe that certain business practices simply are misaligned with a sustainable development and therefore not eligible for investment.

Thematic strategy is applied primarily to our Green Bond fund, but all our corporate bond funds can and do invest in both green bonds and sustainability bonds. In addition to second opinion and third-party reviews, we also conduct our own assessment of the issuer’s green bond framework in order to make sure that the use of proceeds meet our sustainability criterias.

Integration strategy. All fixed income mandates are managed in-house, in close collaboration between our fixed income team and ESG-team. We have taken a systematic approach to ESG integration which is explained in more detail in section FI 10-12.

01.3. Additional information [Optional].

In terms of SSA, we only invest in Swedish sovereign bonds and Swedish municipalities, which we assess as having good governance and low ESG-risk. 


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  

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.

We use two main data providers for ESG data and research on. In addition to this, we also conduct our own issuer-specific assessment in-house - which is more qualitative in nature - to complement the quantitative rating from the ESG data provider.

We have developed sector specific ESG scorecards including the most material aspects that could affect certain issuers or industries. These scorecards have been developed by the ESG-team in collaboration with the portfolio managers, outlining how relevant each ESG variable is, its potential risk and its importance for the credit valuation. The inhouse-scorecards use ESG data from third parties as input, based on which we then build our own materiality framework and assessment. We use ESG data from different providers in order to be able to benchmark different metrics and make sure the information is reliable and robust.

Our current ESG data and research providers are Refinitiv (raw ESG company data), Sustainalytics (raw ESG company data and issuer-specific analysis) as well as sell-side research, for example from the credit rating agencies. We also use public information and industry benchmarks/rankings as input.

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.

03.3. Additional information. [Optional]

We have an ESG research log where ESG analysts add company-specific research notes, for example after company presentations and meetings. For more information on the materiality framework and ESG scorecards which we use and regularly update, see FI 10. 

The portfolio managers always have access to this log. The ESG-team send ESG-updates to relevant portfolio team when a change is made for example when a company issues a new bond. These ESG-updates includes a short comment, the company's ESG risk profile and the ESG-teams' view/outlook on this particular issuer. Through these updates the ESG-team also notify portfolio managers about the engagement process and potential changes in our assessment.

If an issuer has high ESG risk rating, and if the ESG team has a negative outlook for the specific issuer, this is discussed at regular meetings with the portfolio team and the ESG team (monthly). Depending on the outcome, we could decide to engage or divest.


(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

Screening is conducted quarterly and is provided by a third-party ESG data provider, results are reviewed by the ESG team.

Negative/exclusionary screening:

Norms-based screening. Issuers confirmed for violating international norms and conventions (ILO, UN Global Compact etc., see FI 05.1 for more examples) are not eligible for investments.
Controversial weapons. Screens out issuers involved in manufacture and production of cluster munitions, biological and chemical weapons and anti-personnel landmines.
Product-related. Screens out issuers involved in production and distribution of alcohol, tobacco, pornography and gambling. Also screens out companies involved in extraction of fossil fuels (max. 0% of company revenues allowed), as well as coal-based energy production or oil- and gas services (max. 10% of company revenues allowed).

Positive screening:

Bond issuers ESG ratings is retrieved from ESG data provider, quarterly updated and readily available in centralized portfolio data system. Underlying ESG data variables feeds into sector-specific scorecard, used for issuer assessment and selection. Screening results and specific ESG issues are discussed at regular meetings with the portfolio management team (monthly).

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

Negative/exclusionary screening:
Controversial weapons. Screens out companies involved in manufacture and production of cluster munitions, biological and chemical weapons and anti-personnel landmines.
Product-related (ethical/social factors). Screens out companies involved in production and distribution of alcohol, tobacco, pornography and gambling.
Sector-specific (environmental factors). Also screens out companies involved in extraction of fossil fuels (max. 0% of company revenues allowed), as well as coal-based energy production or oil- and gas services (max. 10% of company revenues allowed).

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Norms-based screening. Companies confirmed for violating international norms and conventions are not eligible for investments, based on UN Global Compact, OECD guidelines and ILO conventions.

Examples of environment-related conventions, human rights, labour and anti-corruption:

  •  Rio Declaration on Environment and Development
  •  The Declaration of the United Nations Conference on the Human Environment
  •  Paris Agreement
  •  The Universal Declaration of Human Rights
  •  Convention on the Rights of the Child
  •  Declaration on the Rights of Indigenous People
  •  ILO Declaration on Fundamental Principles and Rights at Work
  •  UN Convention against Corruption

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Positive screening. Bond issuers ESG ratings is retrieved from ESG data provider, quarterly updated and readily available in centralized portfolio data system. ESG factors we have included in the corporate (financial) scorecard are: climate-related risks, ESG integration, business ethics and compliance, product quality and governance, management incentives and risk & resilience. Underlying ESG data variables feeds into sector-specific scorecard, used for issuer assessment and selection.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Positive screening. Bond issuers ESG ratings is retrieved from ESG data provider, quarterly updated and readily available in centralized portfolio data system. ESG factors we have included in the corporate (non-financial) scorecard are for example: environmental governance, climate change, resource use, human rights, employee relations, CSR strategy and business ethics. Underlying ESG data variables feeds into sector-specific scorecard, used for issuer assessment and selection.

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
Positive/best-in-class screening
Norms-based screening

06.2. Additional information. [Optional]

The internal risk control function monitors on a daily basis that our fund holdings are in line with its screening criteria. Any deviations must immediately be reported to the portfolio manager, CEO and Head of Responsible investment. The portfolio managers must sell any position that are in breach of the screening criteria. Head of Responsible investment must annually report to the Board of Directors on the selection process and its compliance.


(B) Implementation: Thematic

FI 07. Thematic investing - overview

07.1. Indicate what proportion of your thematic investments are (totalling up to 100%):

90 %
10 %

07.2. Describe your organisation’s approach to thematic fixed income investing

Öhman offers one Green Bond Fund which applies a thematic strategy. Öhman Green Bond Fund invests in green bonds with a particular focus on investment grade corporate issuers. In addition to this, all of our corporate credit funds can invest in green bonds so it is not limited to one dedicated fund.

We actively seek to broaden the scope by investing more in sustainability bonds, with both a green and a social impact. For example, we have invested in one blue bond issued by the Nordic Investment Bank. 

07.3. Additional information [OPTIONAL]

We support the development of the green bond market. For example, we have engaged in the project Green Assets Wallet. The Green Assets Wallet (GAW) is the result of a consortium of leading capital market actors and technology innovators formed under the lead of Stockholm Green Digital Finance. The Wallet is a blockchain-tool that was developed to deliver efficiency and transparency to the green debt market in support of scaling the supply of, and investment in, credible green investment opportunities through validation and reporting of green impacts. Read more about the project here: https://greenassetswallet.org/


FI 08. Thematic investing - themed bond processes

08.1. Indicate whether you encourage transparency and disclosure relating to the issuance of themed bonds as per the Green Bonds Principles, Social Bond Principles, or Sustainability Bond Guidelines..

08.2. Describe the actions you take when issuers do not disburse bond proceeds as described in the offering documents.

If the issuer would not disburse bond proceeds as described in the green framework and other documents, we would engage with the issuer and potentially decide to divest.

08.3. Additional information. [Optional]


FI 09. Thematic investing - assessing impact

09.1. Indicate how you assess the environmental or social impact of your thematic investments.

09.2. Additional information. [Optional]


(C) Implementation: Integration

FI 10. Integration overview

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

It is our firm belief that ESG considerations is essential in order to be able to assess the risks and opportunities which could impact an issuers creditworthiness, both in the short- and long-term. For this reason, we have decided to take a systematic approach to ESG incorporation. During the last 1 ½ year we have been working on a more close collaboration between the fixed income team and ESG team. We have held dedicated workshops focusing on materiality at sector level, as well as discussed ESG in relation to the different characteristics which could influence our credit view (such as pricing, bond maturity and term structure). In particular, we have discussed how different time horizons for certain ESG risks could yield different investment decisions. This work has improved the overall knowledge in the fixed income team and the ESG team. Below follows a more elaborate description of our investment process.

ESG is a standard element in the credit evaluation and investment process. If we do not consider that the ESG risks would fundamentally impact the issuers credit quality or default risk, or if we believe that the bond issuer has the financial strength to mitigate the risks, these risks are not considered in the investment decision. The main goal is to identify potential downside risks, for example to avoid costly scandals that could affect an issuer's ability to repay debt.

  • PM’s inform the ESG team of potentially interesting companies and new issuances. An ESG Due Diligence is conducted to ensure that it meets our minimum requirements, if it is a new issuer which have not been assessed before. The ESG team makes a qualitative assessment of the company's ESG profile and makes a recommendation (positive / neutral / negative outlook). The ESG score from the external service provider, which is a more of a quantitative score, is thus complemented by our own qualitative assessment.
  • We regularly monitor the ESG risks of our bond holdings. The credit analysis is partly built on a four-dimensional assessment of business risk; industry analysis, competitive position, management and country risk. The ESG factors can influence all of these dimensions of the business risk. The PM can decide to notch the business risk up or down, depending on how ESG factors weigh on and impact the credit credentials. These adjustments to the business risk are documented in our internal systems. 
  • We have developed sector specific ESG scorecards including the most material aspects that could affect specific industries. These scorecards have been developed by the ESG-team in collaboration with the portfolio managers, outlining the ESG factors based on their potential risk and importance for the credit valuation. It is the PM’s ultimate responsibility to assess how these factors impacts the pricing of the bond, such as how these risks and / or opportunities may affect the company's cash flow and creditworthiness.
  • If an issuer has high ESG risk rating, and if the ESG team has a negative outlook for the specific issuer, this is discussed at regular meetings with the portfolio team and the ESG team (monthly). If we continue to have a negative view of the company's ESG profile, and do not see the necessary improvements, we can choose to divest. These regular meetings can also be dedicated to a specific sector to discuss which ESG factors we currently deem relevant to the credit assessment. We discuss individual corporates and sectors on a regular basis also to identify any material changes to their ESG profile.
  • We could decide to invest in a company with a high ESG risk, if we consider that the company has the potential to improve or if we believe that we are compensated for the risk. ESG factors are thus evaluated alongside the financial credit metrics.

The strength of our integration process is that we have a close and ongoing dialogue between the ESG team, credit analysts and portfolio managers. Together we form a view and determine the impact of ESG related issues in our bond selection process.

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

Corporate (financial)

See FI 10.1 above. We use sector specific scorecards to identify the most material ESG issues, i.e. issues that are credit relevant.

Examples of material issues which we have a particular focus on in the financial sector-scorecard: climate-related risks, ESG integration, business ethics and compliance, product quality and governance, management incentives and risk & resilience. We believe that these metrics gives a general indication of how corporate financial issuers are positioned.

The scorecard is used by the PM’s both once a year when the credit assessment of each issuer is updated, but also when evaluating a new bond issuer. Sometimes when we lack ESG data, the scorecard is used as a basis for dialogue with the issuer.

The ESG team also makes a qualitative assessment of the company's ESG profile and makes a recommendation (positive / neutral / negative outlook). The ESG data from the external service provider, which is a more of a quantitative score, is thus complemented by our own qualitative assessment.

These metrics are subject to change and are regularly reviewed. But in general we our assessment of corporate (financial) is tilted more towards governance issues.

Corporate (non-financial)

See above. As described for the financial bond issuers, we use sector specific scorecards to identify the most material ESG issues, i.e. issues that are credit relevant.

For example, we have developed scorecards for sectors to which we have a greater exposure in our portfolios such as real estate, transportation and energy & utilities.

The scorecard is used by the PM’s both once a year when the credit assessment of each issuer is updated, but also when evaluating a new bond issuer. Sometimes when we lack ESG data, the scorecard is used as a basis for dialogue with the issuer.

The ESG team also makes a qualitative assessment of the company's ESG profile and makes a recommendation (positive / neutral / negative outlook). The ESG data from the external service provider, which is a more of a quantitative score, is thus complemented by our own qualitative assessment.

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
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]

We have developed sector specific ESG scorecards including the most material aspects that could affect specific industries. These scorecards have been developed by the ESG-team in collaboration with the portfolio managers, outlining the ESG factors based on their potential risk and importance for the credit valuation. The scorecard is used by the PM’s both once a year when the credit assessment of each issuer is updated/adjusted. But it is also used by the PM when evaluating a new bond or issuer, alongside other credit-relevant metrics such as the issuer's bond spreads and term structure.

The ESG team use an ESG risk monitoring system to monitor for ESG risks in the portfolio. Changes to the ESG risk exposure and high-risk companies are regularly discussed


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
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.

Corporate (financial)

E, S and G factors and their underlying indicators are derived from different data providers, and feed into the ESG scorecard used by PM’s.

As a part of our fundamental ESG due diligence and analysis, we always cover the following standard ESG factors; environmental governance, climate change, resource use, human rights, employee relations, CSR strategy and business ethics.

Material issues covered in ESG scorecard (specific for corporate financial issuers) are climate-related risks, ESG integration, business ethics and compliance, product quality and governance, management incentives and risk culture & resilience. In terms of financial bond issuers, the ESG factor relevance is more skewed towards social and governance issues.

Corporate (non-financial)

E, S and G factors and their underlying indicators are derived from different data providers, and feed into the ESG scorecard used by PM’s.

As a part of our fundamental ESG due diligence and analysis, we always cover the following standard ESG factors; environmental governance, climate change, resource use, human rights, employee relations, CSR strategy and business ethics.

The materiality of different ESG factors depend on the particular issuer and industry.

12.3. Additional information.[OPTIONAL]


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