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Pareto Asset Management AS

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.

The strategy has evolved over the years. Being a Norwegian company, Pareto Asset Management found that the Norwegian Government Pension Fund was a natural starting point for the incorporation of our RI/ESG strategy, which we have applied for more than 10 years.

The last few years we have had a more active approach to RI/ESG incorporation, where we also look at other sources of information as well as emerging trends and issues. For å fundamentally oriented active manager - also in fixed income - integration is part of the game. 

As for the Nordic Ecolabeling, we have committed ourselves to a comprehensive and thorough ESG incorporation process for the fund for which we have gained approval. We are working to get a similiar kind of approval for another FI fund.

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:

specify description

          For ecolabeling we have a dedicated analyst. Otherwise,we try to make sure, through e.g. regular investment meetings, that ESG issues are always considered.
        

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

03.3. Additional information. [Optional]


(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

Product/activity/sector

  • Produce weapons that through normal use violate fundamental humanitarian principles.
  • Produce tobacco.
  • Sell weapons or military material to states as specified by the scheme for government bond exceptions mentioned in the mandate for the Norwegian Government Pension Fund.
  • Mining companies and power producers that themselves or through consolidated entities they control will have 30 per cent or more of their revenues from thermal coal , or basing 30 per cent or more of their business on thermal coal.
  • Engaged in producing pornography.

Environmental and social practices

  • Serious or systematic violations of human rights such as murder, torture, deprivation of liberty, forced labour, the worst forms of child labour.
  • Serious violations of individual rights in war or conflict situations.
  • Severe environmental damage.
  • Acts or omissions on an aggregated company level, to an unacceptable degree, leads to emissions of greenhouse gases.
  • Gross corruption.
  • Other especially severe breaches of common norms and rules.

Countries/geographic regions

In the event we consider investing in companies listed outside the OECD, a more thorough analysis needs to be made.

Corporate Governance

Issuers with sub-standard corporate governance.

 

04.3. Additional information. [Optional]

We also have a precautionary principle towards certain sectors.


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

          Dedicated analyst for ecolabeled fund. Also, the CCO sits in on ethics committee meetings.
        

06.2. Additional information. [Optional]


(C) Implementation: Integration

FI 10. Integration overview

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

We do not convert our evaluation of ESG factors into figures lending themselves to quantitative treatment (like e.g. a discount rate premium). It does, however, affect our judgement of the figures and estimates at hand. For instance, ESG questions often represent risk factors of possible financial importance. Do note, though, that ESG risks/exposure may have an impact on the coupon of the bond. In that case, we will have to weigh the coupon effect against the underlying ESG risk or fix thereof.

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

Corporate (financial)

In general, the range of relevant ESG factors is narrower for financial investments. A typical issue would be corporate governance.

Corporate (non-financial)

In general, environmental factors are relatively more important when discussing non-financial 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
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]

Continuous checks according to ecolabeling commitments.


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)

For financial companies, the G factors dominate. Voting rules, loan covenants, procedures for aligning different capital providers and stakeholders, such points are systematically reviewed before investing. 

 

Corporate (non-financial)

Again, for non-financial companies, the range of relevant ESG issues is much wider.

Environmental

  • Climate change
  • Pollution
  • Severe environmental damage

Social

  • Labor standards
  • Human rights
  • Conflict regions

Governance

  • Board composition
  • Executive compensation
  • Shareholders right

Inasmuch as in particular the domestic investment universe is limited, we often have very good prior knowledge of the companies under investigation. For foreign investments, more effort is required. The portfolio managers can no longer ask the ethics committee to undertake the initial investigation (see below).

 

12.3. Additional information.[OPTIONAL]

For both financial and non-financial investments, the portfolio managers have an explicit responsibility to identify and evaluate possible ESG issues (whereas, in the past, they would typically consult the ethics committee). 


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