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APG Asset Management

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
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
100 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (financial)
0 Screening alone
0 Thematic alone
0 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
100 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (non-financial)
0 Screening alone
0 Thematic alone
0 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
100 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.

We are convinced that investors make better investment decisions if they look structurally at sustainability factors and responsible business practices as this gives them a more comprehensive picture of investment risks and opportunities.

The RI policy requires that our investment teams actively consider relevant environmental, social and governance factors alongside considerations of return, risk and cost in a portfolio context, leading to informed and well-considered investment decisions for every industry and company we are invested in.

01.3. Additional information [Optional].

Based on our belief, APG, together with our clients, has developed an industry-leading inclusion policy whereby the investment universe for capital market investments is assessed based on a proprietary methodology and categorized into leaders and laggards. Investments in laggards require engagement in order to improve their sustainability performance. Engagement is therefore one of the cornerstones of the inclusion policy. We aim to invest only in companies that either perform adequately on our chosen sustainability indicators or those that we expect can make progress in these areas.

In addition to a strong focus on integration, APG has minimum standards and an exclusion policy built into its investment processes.

We expect companies to act in line with the principles of the UN Global Compact. On a regular basis we screen our equity and bond portfolio and engage with companies we think are in breach of these. Where engagement does not lead to the desired change we can decide to divest. This is a last resort and the result of an intensive process that can take several years and involves clear requirements and deadlines. In line with our clients policies, APG does not invest in companies involved in the following:

− Controversial weapons: This means we do not invest in companies that are involved in the production, sale or distribution of cluster munitions, anti-personnel mines, chemical or biological weapons. We define involvement as production, sale and/or distribution of the core weapon system, or components/services of the core weapon system that are considered tailor made (or dedicated) for the weapon or weapons system and essential (key) for the lethal use of the weapons. Regarding nuclear weapons, we exclude companies involved in the production, development, sale and/or distribution of the core weapon system. We also consider companies involved in the production, development, sale and/or distribution of the company is deriving revenues of components or services that are considered tailor-made (or dedicated) for the weapon or weapon system and components or services that are considered essential (key) for the lethal use of the weapon or weapon system.

− Tobacco production: we define involvement as companies that derive revenues (i.e. > 0% revenue) from the production of tobacco products. This relates to companies engaged in manufacturing and producing tobacco products such as cigars, cigarettes, e-cigarettes, beedi, kretek, smokeless tobacco, reconstituted tobacco leaf, snuff, snus, and chewing tobacco. It also includes companies that grow or process raw tobacco leaves

In addition to the exclusion policy on corporates, we exclude sovereign bonds issued by countries that are subject to an arms embargo by the UN Security Council.

The exclusion policy has been changed over 2018, whereby as of January 2019 companies involved in tobacco production, and companies involved in nuclear weapons inside the Non-Proliferation Treaty are excluded from investment. The exclusion list is determined on a semi-annual basis. Per December 2019 we exclude 156 public and 119 private companies that are directly, or through ownership, involved in production of anti-personnel landmines, cluster munitions, nuclear weapons or tobacco production. We exclude 3 companies that we consider to be in violation of the UN Global Compact principles. 10 countries currently feature on the exclusion list for sovereign bonds. We apply the exclusion policy for listed and non-listed issuers, the list of private issuers is internally available and shared with our external managers. 


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  

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.

See 02.4

02.4. Additional information. [Optional]

The majority of acquired ESG information is company related, including ESG ratings and scores, analysis of policies and performance on specific issues, news and controversies related to ESG issues, and broker analyses of ESG issues. Part of this information is made available to portfolio managers via a centralized knowledge management system (KMS) in which we track our engagement with companies as well as other relevant research, financial and ESG information. For more in-depth analysis, more detailed reports are used.

We procure specialist research that establishes how companies perform against specific standards (e.g. UNGC principles) or verifies the involvement with controversial weapons (cluster munitions). The latter forms the basis for our exclusion policy. If we deem companies to potentially be in breach of the UNGC principles, we start an intensive engagement program that could ultimately result in exclusion if the company does not show sufficient progress over a period of time.

We also acquire ESG research at a country level that provides insight into the risks of investing in sovereign debt and corporates in specific countries, due to the absence of environmental legislation and processes that protect basic human rights or the lack of an institutional governance framework that would protect property rights. This information is used by some investment teams in their country allocation models. In our EMD portfolio we integrate various ESG factors into our investment decisions (including rule of law and corruption) that enables us to better assess risks in a country.

In case third parties do not cover companies, we initiate our own efforts to collect relevant ESG data of issuers.


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]

ESG related information is made available to analysts and portfolio managers via a centralized knowledge management system (KMS) in which we track our engagement with companies as well as other relevant research, financial and ESG information. For more in-depth analysis, more detailed reports are used.

Company inclusion classifications are formally updated on an annual basis. However, portfolio managers/analysts and members of the Global Responsible Investment & Governance team will have access to so-called pro-forma classifications, which are based on latest input data and thereby can monitor developments between formal update moments.

 


(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

We are convinced that investors make better investment decisions if they look structurally at sustainability factors and responsible business practices as this gives them a more comprehensive picture of investment risks and opportunities.

The RI policy requires that our investment teams actively consider relevant environmental, social and governance factors alongside considerations of return, risk and cost in a portfolio context, leading to informed and well-considered investment decisions for every industry and company we are invested in.

04.3. Additional information. [Optional]

Based on our belief, APG, together with our clients, has developed an industry-leading inclusion policy whereby the investment universe for capital market investments is assessed based on a proprietary methodology and categorized into leaders and laggards. Investments in laggards require engagement in order to improve their sustainability performance. Engagement is therefore one of the cornerstones of the inclusion policy. We aim to invest only in companies that either perform adequately on our chosen sustainability indicators or those that we expect can make progress in these areas.

In addition to a strong focus on integration, APG has minimum standards and an exclusion policy built into its investment processes.

We expect companies to act in line with the principles of the UN Global Compact. On a regular basis we screen our equity and bond portfolio and engage with companies we think are in breach of these. Where engagement does not lead to the desired change we can decide to divest. This is a last resort and the result of an intensive process that can take several years and involves clear requirements and deadlines. In line with our clients policies, APG does not invest in companies involved in the following:

− Controversial weapons: This means we do not invest in companies that are involved in the production, sale or distribution of cluster munitions, anti-personnel mines, chemical or biological weapons. We define involvement as production, sale and/or distribution of the core weapon system, or components/services of the core weapon system that are considered tailor made (or dedicated) for the weapon or weapons system and essential (key) for the lethal use of the weapons. Regarding nuclear weapons, we exclude companies involved in the production, development, sale and/or distribution of the core weapon system. We also consider companies involved in the production, development, sale and/or distribution of the company is deriving revenues of components or services that are considered tailor-made (or dedicated) for the weapon or weapon system and components or services that are considered essential (key) for the lethal use of the weapon or weapon system.

− Tobacco production: we define involvement as companies that derive revenues (i.e. > 0% revenue) from the production of tobacco products. This relates to companies engaged in manufacturing and producing tobacco products such as cigars, cigarettes, e-cigarettes, beedi, kretek, smokeless tobacco, reconstituted tobacco leaf, snuff, snus, and chewing tobacco. It also includes companies that grow or process raw tobacco leaves

In addition to the exclusion policy on corporates, we exclude sovereign bonds issued by countries that are subject to an arms embargo by the UN Security Council.

The exclusion policy has been changed over 2018, whereby as of January 2019 companies involved in tobacco production, and companies involved in nuclear weapons inside the Non-Proliferation Treaty are excluded from investment. The exclusion list is determined on a semi-annual basis. Per December 2019 we exclude 156 public and 119 private companies that are directly, or through ownership, involved in production of anti-personnel landmines, cluster munitions, nuclear weapons or tobacco production. We exclude 3 companies that we consider to be in violation of the UN Global Compact principles. 10 countries currently feature on the exclusion list for sovereign bonds. We apply the exclusion policy for listed and non-listed issuers, the list of private issuers is internally available and shared with our external managers.  


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

Under our exclusion policy we have added several new companies and countries, some of these additions have led to selling positions. Examples of ESG factors used are involvement in manufacturing of cluster munitions or involvement in production of tobacco. In addition to the exclusion policy on corporates, we exclude sovereign bonds issued by countries that are subject to an arms embargo by the UN Security Council.

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]


(B) Implementation: Thematic

FI 07. Thematic investing - overview

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

9 %
1 %
1 %

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

Across all asset classes we have investments that contribute to the United Nations Sustainable Development Goals, which we call Sustainable Development Investments (SDI). SDI’s are products and/or services that contribute to the UN SDGs. These investments meet our financial risk and return requirements and support the generation of positive social and/or environmental impact through their products and services, or at times through acknowledged transformational leadership.

 

07.3. Additional information [OPTIONAL]

Above percentages are calculated by dividing green/social/sustainable bonds investments over the total Sustainable Development Investments exposure of APG. This includes exposure in other asset classes. The total SDI exposure of APG is € 81 bln.


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.

We regularly meet with issuers to monitor and discuss past and new (green, social and sustainable) bond issuance. In addition we host roundtable discussion among issuers, investors and syndicate banks to encourage the market to adopt our expectations.

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.

          We regularly examine reports from issuers on the green and social impacts resulting from the assessments, this is done on a case-by-case basis.
        

09.2. Additional information. [Optional]


(C) Implementation: Integration

FI 10. Integration overview

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

We take ESG issues into account in our investment processes by:

  • Making ESG research and analysis available systematically through various ESG tools.
  • Including the key ESG ratings compared to peers in the investment case.
  • Having portfolio managers and analysts assess the ESG risks and determine how these may affect companies' performance and/or risk profiles and required premiums.
  • Having material ESG issues discussed at credit investment committees.

In addition to this we also screen entire portfolios against compliance with the UN Global Compact principles, apply an exclusion policy companies involved in the manufacture of controversial weapons, and engage with companies.

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

SSA

We fully integrate ESG within SSA. Although the focus for sovereigns in mostly exclusion based, we do integrate ESG factors into our decision making. For government related and agencies we integrate ESG factors of the issuer, and actively engage with issuers on issuance of green bonds, In our EMD portfolio we integrate various ESG factors into our investment decisions (including rule of law and corruption) that enables us to better assess risks in a country.

Corporate (financial)

Within corporates ESG is integrated through our Inclusion Policy. We also actively invest in Green Bonds and consider the available ESG information when selecting certain investments and carry out joint engagements with equity where we both have a position in a company. The exclusion policy is also applicable for fixed income investments.

Corporate (non-financial)

Within corporates ESG is integrated through our Inclusion Policy. We also actively invest in Green Bonds and consider the available ESG information when selecting certain investments and carry out joint engagements with equity where we both have a position in a company. The exclusion policy is also applicable for fixed income investments.

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

The emerging market debt team has deepened ESG integration in its investment process over the past years. The team uses the ESG Country risk tool that APG has developed together with research providers. The emerging market debt team has done an analysis on the data of the ESG Country Risk tool to assess the relationship between the risk premium of a country and the ESG scoring. The team has selected indicators deemed relevant for this relationship as these factors drive growth potential or are an indicator of social (in)stability. These selected ESG indicators are integrated in the in-house build score card for assessing risks and opportunities of the investments. Most of the indicators that the team adopted are governance and social indicators such as rule of law, government effectiveness, corruption perception, equality, education and the standard of living. Next to the ESG integration in the investment process through the Scorecard model, the team implements the Sovereign Bonds Exclusion list. Going forward, EMD will deepen the responsible profile of our clients portfolio, and search for potential new investment opportunities in sustainable development investments and ESG integration will take place in all phases of the investment management process. For SSA, other than sovereign issuers we apply the Inclusion Policy.

Corporate (financial)

We take ESG issues into account in our Corporate Bond Investment processes by:

  • Making ESG research and analysis available systematically through the Knowledge Management System (KMS).
  • Including the key ESG ratings compared to peers in the investment case.
  • Having portfolio managers and analysts assess the ESG risks and determine how these may affect companies' performance and/or risk profiles and required premiums.
  • Having material ESG issues discussed at credit investment committees.

In addition to this we also screen entire portfolios against compliance with the UN Global Compact principles, apply an exclusion policy companies involved in the manufacture of controversial weapons, and engage with companies.

Corporate (non-financial)

We take ESG issues into account in our Corporate Bond Investment processes by:

  • Making ESG research and analysis available systematically through the Knowledge Management System (KMS).
  • Including the key ESG ratings compared to peers in the investment case.
  • Having portfolio managers and analysts assess the ESG risks and determine how these may affect companies' performance and/or risk profiles and required premiums.
  • Having material ESG issues discussed at credit investment committees.

In addition to this we also screen entire portfolios against compliance with the UN Global Compact principles, apply an exclusion policy companies involved in the manufacture of controversial weapons, and engage with companies.

12.3. Additional information.[OPTIONAL]

We use an ESG country risk tool that is complementary to the other country risk research efforts led by APG's Economics and Financial Markets team, Global Emerging Markets team, and Financial Risk team. The tool is based on public sources generating detailed information for over 165 countries on 31 Environmental, Social and Governance criteria. Having the possibility to scrutinise and apply different weights to criteria and categories, portfolio managers can adjust the scoring according to their views and perform in-depth analysis on the underlying information. The methodology takes into account APG's exclusion policy on countries subject to an arms embargo by the UN Security Council in whose bonds we cannot invest.


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