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AEGON Asset Management

PRI reporting framework 2020

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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.

Analysts and portfolio managers continually monitor and evaluate ESG-related information from various third-party sources, including issuer disclosures, independent research providers and consultants. Given the increasing availability of ESG-related information, the growing complexity of the issues and the increasing importance clients place on these topics, AAM has continued to invest in our fundamental research teams to ensure that we have the capacity and capability to incorporate these factors into our investment process. This enables our teams to more effectively analyze and integrate these factors in to their view of an industry, country, or individual issuer.

When identifying and integrating ESG factors, we focus on the potential economic impact ESG issues may have on the issuer’s ability and willingness to meet debt obligations. One of our primary areas of research is, and always has been, related to governance risks, such as organizational structure. In the case of corporate issuers, this manifests in management’s historical aggressiveness towards bondholders. In the case of sovereign issuers, we evaluate the strength of governmental institutions. We also assess environmental risks, such as potential costs a corporation may incur for environmental compliance or remediation of damages. For sovereign issuers, we consider topics like how droughts in agriculturally-sensitive regions may affect GDP and potentially cause civil strife. With respect to social risks, we monitor labor practices and how companies interact with and treat their employees, in order to identify risks of prolonged strikes. And at the country level, we discern how wars may affect consumption and fixed asset investment, which are inputs to our sovereign economic forecasts.

While we utilize a number of third-party sources of information to help identify areas requiring additional scrutiny, we do not believe that explicitly following third party ratings is appropriate. Simply put, if our integrated assessment implies that the market misunderstands ESG factors, we adjust our view of the risk premium required when considering the investment for client portfolios. 

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

SSA

Our approach to ESG is deeply rooted in knowing the details of each nation we examine, and the specific threats and opportunities ESG can impart on the willingness and ability of a country to pay its bond holders. Specific to sovereigns, we forecast economic growth and debt load after considering traditional economic variables, as well as ESG influences. Each country is relatively unique in culture and structure. While investors can adapt reasonably well to a given country's prevailing ESG fundamentals, we are interested in understanding ESG in a dynamic way—i.e., how well the ESG baseline scenario may absorb shocks, and subsequently, how those shocks affect the credit in question.

For SSA we use specific ratings and reports our ESG provider provides us with, together with other inputs. We also have developed our own proprietary model and ESG ratings for countries.

Corporate (financial)

All analysts have access to our ESG research platform. They use this platform to assess the companies in their sector on the material ESG issues as part of the fundamental analysis, one of the parts of our investment decision-making model. They include this information in the internal tear sheets and 'quick thoughts' they make. In total over 1,500 companies are covered. All information is stored centrally and accessible to the portfolio managers. 

Corporate (non-financial)

All analysts have access to our ESG research platform. They use this platform to assess the companies in their sector on the material ESG issues as part of the fundamental analysis, one of the part of our investment decision-making model. They include this information in the internal tear sheets and 'quick thoughts' they make. In total over 1,500 companies are covered. All information is stored centrally and accessible to the portfolio managers.

Securitised

ESG analysis, and climate change as part of it, is fully integrated in our Securitized investment process. We use a consistent approach to ESG integration by using a standard framework outlining main ESG issues for each ABS sector. We identify ESG related risk from the underlying collateral pool and from issuer/originator governance. ESG risk materiality is categorized at the security level and the ESG analysis is documented in the security’s tear sheet. The ESG materiality categorization per security is aggregated at portfolio level for reporting purposes.

All analysts have access to our ESG research platform. They use this platform to assess the companies in their sector on the material ESG issues as part of the fundamental analysis, one of the part of our investment decision-making model. They include this information in the internal tear sheets and 'quick thoughts' they make. In total over 1,500 companies are covered. All information is stored centrally and accessible to the portfolio managers.

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)
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]


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

It is a standardized item in fundamental analysis as described in detail at the previous question. Governance is the principal factor in indicating sovereign credit risk, particularly at the lower end of the ratings scale. Many sovereign defaults in the past have been directly related to institutional and political weakness, such as political instability, political unwillingness to pay debt, corruption, inadequate governance or weak budget management.

Corporate (financial)

It is a standardized item in fundamental analysis as described in detail at the previous question.

Corporate (non-financial)

It is a standardized item in fundamental analysis as described in detail at the previous question.

Securitised

ESG analysis, and climate change as part of it, is fully integrated in our Securitized investment process. We use a consistent approach to ESG integration by using a standard framework outlining main ESG issues for each ABS sector. We identify ESG related risk from the underlying collateral pool and from issuer/originator governance. ESG risk materiality is categorized at the security level and the ESG analysis is documented in the security’s tear sheet. The ESG materiality categorization per security is aggregated at portfolio level for reporting purposes.

12.3. Additional information.[OPTIONAL]


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