Our Responsible Investment overlays
34
ESG Integration across asset classes
ESG issues are an increasingly important source of risk and opportunity, and therefore we seek to integrate ESG considerations into all our investment solutions with firm-level elements applicable to all our holdings. The strength of our ESG approach is that our fund managers are involved throughout the ESG research process and are able to tie our results directly into their investment decisions. Both research and integration methods vary between asset classes and strategies.
ESG integration across NAM We integrate ESG considerations into all our investment solu- tions, with certain firm-level elements applicable to all our holdings. These include voting and engagement, our company- wide ESG limits and exclusion list, individual ESG analyses of businesses, and the provision of ESG data and research to all portfolio managers. This means that every investment boutique has access to NAM’s proprietary ESG Model and ESG analysis from the RI team, as well as ESG data from external data pro- viders – all via our proprietary ESG data platform, which covers more than 13,000 companies (totalling over 36,000 securities), aggregates information from multiple sources and supports both our investment- and ESG analysts. ESG risk exposure is included in our regular portfolio perfor- mance reviews, alongside financial data. At the same time, sustainability risks are integrated in our investment decisions, but is also a natural part of our companywide approach to remuneration. All employees participating in our variable pay scheme are measured against both qualitative and quantita- tive targets suitable for their positions and role: these include sustainability risks where relevant. Going a step further in ESG integration we have developed the ESG STARS concept, which implements enhanced ESG integration. ESG integration in Equity STARS Within our equity ESG research, portfolio managers (PMs) work closely with the RI team as we perform our ESG analysis and engagement dialogues. The resulting ESG scores that we assign to companies define the investment universe, in that our ESG STARS products cannot invest in C-scored companies. The ESG score can affect both the discount rate a PM uses when valuing future cash flows, and how long the PM expects the company to generate above-average returns. Thus, the ESG score affects how we value both the risks and the opportuni- ties a company is facing.
ESG integration in Fixed Income STARS The fixed income universe needs ESG outputs that translate easily into trading rules, so that PMs can react quickly when new issues come to the market. While ESG integration for equities can affect both the discount rate and the “fade” rate of excess returns, for bonds it is focused on the risk of default, giving a binary set of outcomes. Corporate bonds allow us to leverage work done for equities, although at the lower end of the credit scale there are many unlisted issuers with low data coverage. In those cases, the credit analysts can make an initial assessment of the issuers’ ESG profile which the RI team then verifies, conducting in- depth analysis where necessary. For sovereign debt, we have built an ESG assessment model tailored to country risks. It makes a detailed assessment of ESG factors that contribute to economic development and has a grounding in academic research. This model was developed in close co-operation with the EMD credit analysis team, ensur- ing that it not only produces robust results but also meets their investment needs. During 2021, methodology to screen sover- eign issuers for Good Governance was developed and imple- mented for our Article 8 Emerging Markets Debt products.
Made with FlippingBook flipbook maker