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NORSAD FINANCE LIMITED

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.
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%

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

Our ESG incorporation process includes screening and risk categorisation that are integrated in the investment cycle and affect investment decision-making.

Our S&E processes are integrated in the following manner: ESG Screening->Due diligence->Presentation to Board: Approval -> Annual monitoring.

This ESG incorporation strategy ensures that ESG considerations are taken up throughout the investment cycle. By using screening, we are able to exclude or identify preferred investments based on their ESG criteria. Similarly, integration allows us to target specific impact generating sectors and structure our portfolio in accordance with our development mandate. This is largely aligned with our sustainability principles which are to provide financing that supports sustainable growth and job creation, diversifies and strengthens local economies, and contributes to sustainable infrastructure growth and industry development.

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]

-1 pagers-High level, initial ESG risk rating  (circulated to team for assessment and initial screening). 

- Screening memo with ESG risk assessment and mitigations presented for approval at Screening Committee level

- Board memo with ESG risk assessment and mitigations presented for approval at Board level

- Biannual Board Investment reporting on ESG performance to the Board of Directors.


(A) Implementation: Screening

FI 04. Types of screening applied

04.1. Indicate the type of screening you conduct.

Select all that apply
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

Negative/exclusionary: We apply the Norsad exclusion list which is an extension of the IFC exclusion list, for the negative screening. We exclude sectors which could have an adverse impact on social and environmental risks. We also exclude investment that do not deliver an adequate developmental impact which we assess using the DEAT tool to ascertain the level of developmental impact. 

Positive/best in class screening: Desk research, client discussions and a self-assessment forms are used to develop a preliminary summary of any ESG issues and opportunities. Norsad seeks investments that have a clearly articulated development impact and good track record in ESG. The final screening process is the presentation to the Norsad board of Directors where final approval is granted and any further guidance is given.

Norms-based screening: -We adhere to international standards such as:

IFC Interpretation Note on Financial Intermediaries
- The World Bank Group Environmental, Health and Safety Guidelines (EHS Guidelines),

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

          We apply the IFC exclusion list
        
Positive/best-in-class screening

other description

          We assess projects against the IFC Performance Standards World Bank EHS Guidelines as well sector specific and other best practice guidelines.
        
Norms-based screening

other description

          We assess projects against the IFC Performance Standards World Bank EHS Guidelines as well sector specific and other best practice guidelines.
        

06.2. Additional information. [Optional]


(C) Implementation: Integration

FI 10. Integration overview

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

ESG risk analysis is undertaken in conjunction the financial analysis. This includes gathering of information from multiple sources and identifying material impacts and potential impact on forecasts if deemed material. Some aspects of Governance impact on our credit risk model but the overall ESG risk analysis feeds into our overall risk assessment and mitigation strategy and is a key investment consideration in making better informed decisions. Integration of ESG occurs throughout the Norsad investment process with analysts and portfolio manager leveraging on the work and insights of the dedicated ESG officer when analysing investments and during portfolio reviews.

 

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

Corporate (financial)

 

With respect to investments in Financial Institutions, Norsad requires the FI to have an appropriate Social and Environmental (SE) management System, that is integrated into the FI’s credit and monitoring processes, to manage the SE risks related to its portfolio. For its microfinance FI clients, Norsad recommends them to sign up to the SMART campaign principles 7, the certification of these principles allows microfinance institutions to be fully transparent in the pricing, terms, and conditions of all financial products. When investing in financial institutions (FIs), Norsad's focus is both on identifying the SE risk exposure in the institutions' portfolio (including indirect risks) and pipeline as well as on assessing the capacity of the institution to manage the indirect SE impact of its business the potential.

 

Corporate (non-financial)

Our approach to managing SE risks focuses on avoiding, or at least reducing, mitigating or compensating for, negative risks where possible. This includes establishing accessible platforms and transparent processes for affected communities, stakeholders and employees to engage with companies on any environmental and social issues that result from company operations. Risks are identified, monitored and mitigated at each stage of the investment cycle. Where necessary, Norsad provides support to clients to effectively manage risk. Norsad seeks to engage its clients in assessing and addressing the SE risks of their business operations, even if these have potentially significant adverse impacts. We look for opportunities to facilitate improvement provided such impacts can be adequately assessed and sufficiently mitigated.

 

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]


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)

There is a Governance assessment to ensure operational adequacy. Necessary enhancements are recommended to the client. Our integration process further includes Social and Environmental Due Diligence (SEDD) assessments whereby the SE risks, impacts and opportunities of the potential investment are reviewed by looking at our FI portfolio:

• Conducting a site visit by the Investment Principal, the ESG Officer and/or the external ESG consultant to assess SE issues and performance first-hand; and

• Conducting interviews with key members of the client’s SE management team; and, in some cases with other individuals (i.e. 3rd party consultation).

Social and Environmental (SE) factors are researched and analysed to better assess risks including:

- Environmental Impacts
- Occupational Health and Safety
- Labour Rights
- Local Community Rights

 - Sector analysis for S&E risks and

 - The companies' ability to manage and mitigate those ESG risks is assessed. 

Corporate (non-financial)

The Norsad Social Environmental Management System (SEMS) or the Norsad Social and Environmental Sustainability Handbook 2018 outlines the core operational procedures and processes to be adhered to in the investment cycle. It provides a structured framework for applying SE business principles in the investment process and helps to maintain quality and consistency.
When conducting our assessment for financing, we ensure that each investment is categorized according to its potential SE risk profile at an early stage in our appraisal and decision-making process, so that the time and expertise dedicated to each investment is commensurate with its risk profile.
Based on this categorization, the level of SE due diligence and monitoring required and the allocation of resources both internally and externally will be determined. Where SE impacts are significant, an external consultant will be engaged.
When appointing external consultants, Norsad will ensure that:
- Consultants have the requisite skills, capacity and experience in the sector of the investment in markets Norsad operates in.
- Are familiar with the typical investment processes for DFIs, impact investors and PE firms, report rewriting and making suitable recommendations, cognisant of the limitations of the investor.
- Experienced in identifying SE value-add opportunities and identifying SE risks
For existing clients applying for new or additional loans, a decision will need to be made as to whether or to undertake a new Social and Environmental Due Diligence (SEDD), or whether to place reliance on the previous SEDD combined with the ongoing SE monitoring of the client to date.

12.3. Additional information.[OPTIONAL]


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