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More than

396 extracts

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Sustainability factors should be integrated into the different levels of strategic and tactical asset allocation. On a strategic level, an asset manager might consider taking material sustainability factors into account when defining its target allocation for the various asset classes (e.g. leave aside certain sectors or countries). On a tactical level, sustainability information might influence top-down decisions regarding the attribution to different sectors or markets at a given point in time. Asset managers might also decide to apply ESG factors purely in the bottom-up process, integrating such factors in the assessment of individual portfolio holdings.
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This term refers to investors addressing concerns about ESG issues by actively exercising their voting rights based on ESG principles or an ESG policy. Investors might choose to reject a certain proposal at the Annual General Meeting (AGM) based on the fact that it is not in line with their overall ESG policy. Many of the AGM agenda points do not directly refer to environmental or social topics, but rather to governance aspects. In some cases, investors therefore chose to indirectly express their discontent with a sustainability strategy by voting against other agenda items (e.g. blocking the re-election of certain board members who do not support the company’s progressive ESG strategy).
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An effective implementation of a sustainable investment policy requires continuous monitoring of the process. Specific sustainability KPIs are the basis for such monitoring. Usually, such KPIs – e.g. sustainability ratings provided by an external provider or internally prepared KPIs – are integrated into the portfolio management and reporting system. This allows for tracking specific sustainability indicators (e.g. average sustainability rating of a portfolio) or the violation of a defined policy (e.g. black-listed company appears in a portfolio). The evolution of the sustainability KPIs can be made a mandatory agenda item at portfolio management or risk management meetings. Furthermore, such KPIs can be integrated into personal objectives of relevant staff. The asset manager should describe how the process of ESG implementation (chapter 1.6.2) is managed, ensured and monitored. He also defines management responsibilities for the monitoring process. The asset manager ensures that it has allocated sufficient resources that allow for proper monitoring of the investment process. The portfolio should be tested against the pre-defined sustainability KPIs regularly, e.g. once a year.
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There are many different ways of integrating sustainability factors into an investment process. The following approaches are prevalent in the market and serve different needs or motives of different investors. They are not mutually exclusive, and investors usually choose to combine different forms, depending on their motivation. The application of these approaches also varies across different asset classes (e.g. equities, fixed income, alternative investments) or investment styles (e.g. fundamental / quantitative investing, active / passive investing).
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An asset manager can establish their own voting policy covering the aspects perceived as relevant for the organisation (e.g. renumeration standards, governance structures, diversity) or act on the advice of external, specialised providers.
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Based on the SFAMA Specialist Recommendation on Risk Management, asset managers should integrate sustainability risks and opportunities into their existing risk management processes for identifying such risks and opportunities. They should also define how they identify, assess and manage sustainability risks and opportunities for each product or investment strategy. This might include a description of the resources and tools used in the process.
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The exclusion approach (or negative screening) refers to the deliberate exclusion of issuers from an investment portfolio due to activities or business practices that violate given norms or values – based on client’s preferences – or due to anticipated risks.
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A structured engagement process defines clear engagement targets with a clear timeframe and reports on outcomes such as changes in a company’s strategy and processes so as to improve ESG performance and reduce financial risks.
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The Federal Act on War Material (WMA) of 13 December 199613F14 forms the basis for norms-based exclusions practised by many Swiss investors. It was amended in February 2013 to include provisions on financing in the context of war materials prohibited in Switzerland, e.g. nuclear, biological and chemical weapons, anti-personnel mines and cluster munitions. It prohibits the direct financing of the development, manufacture or acquisition of prohibited war materials (Article 8bWMA). The indirect financing of prohibited war materials is banned only if intended to circumvent the ban on direct financing (Article 8c WMA). It refers to participation in companies that develop, manufacture or acquire prohibited war materials, or the acquisition of debt securities or other investment products issued by such companies. Based on this regulation – and taking current investment practice into account – excluding companies that produce such war materials prohibited in Switzerland is considered a minimum requirement for sustainably managed assets.
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There are different forms and levels of engagement: • In the case of direct company engagement, each investor holds an individual dialogue on ESG aspects with companies. Such engagements are often carried out by analysts or portfolio managers that hold a dialogue with senior management and / or boards of the companies they invest in. • In a collaborative engagement process, different investors team up to bundle their forces and investor power in the dialogue with companies or when co-filing shareholder proposals. The PRI (Principles for Responsible Investment) offers a “Collaborative Platform” on which investors can post initiatives and look for allies for their engagement processes. Some collaborative engagement processes are formalised into separate organisations (e.g. Climate Action 100+, The Institutional Investors Group on Climate Change IIGCC). • A third form of engagement is public policy engagement, where investors lobby politicians for improved frameworks for a sustainable economy (e.g. calling for a carbon tax).
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Both institutional and private clients increasingly expect to be informed on a regular basis about the implementation of the sustainable investment policy including the data used. There are different forms for asset managers to provide this transparency and keep their clients informed. Building on existing frameworks that make recommendations for sustainable investment reporting may help to increase comparability for clients.
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This approach prioritises investments in companies with high sustainability standards across different sectors. A company’s or issuer’s ESG performance is compared with the ESG performance of its peers (e.g. of the same sector or industry) based on sustainability research / data. All companies or issuers with a rating above a pre-defined threshold are considered investable. The threshold can be set at different levels (e.g. 30 % best performing companies or all companies that reach a minimum ESG rating). The level of the pre-defined threshold defines the size of the remaining investment universe. Some best-in-class approaches focus on a small share of the total investment universe, while others still define bigger shares of the total universe as investable.
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Investors might choose to outsource the engagement process to a service provider that pools the interests of different investors and thereby carries more weight in the dialogue with the companies. An asset manager can establish their own engagement policy covering the aspects perceived as relevant for the organisation or rely on an engagement policy of a respective service provider. The engagement policy should also address the escalation process foreseen in case an engagement is not successful.
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Sustainable thematic investments refer to investment in businesses contributing to sustainable solutions both in the environmental and / or social dimension. In the environmental segment, this could include investments in renewable energy, energy efficiency, clean technology, low-carbon transportation infrastructure, water treatment and / or resource efficiency. In the social segment, this includes investments in education, health systems, poverty reduction and / or solutions for an ageing society.
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ESG integration refers to the inclusion of ESG risks and opportunities in the traditional financial analysis and investment decision based on a systematic process and on appropriate research sources. The idea is to get a holistic view of a specific issuer of securities. There are different forms of how ESG factors can be integrated into the financial analysis or the investment decision. Sustainability information can be used to adapt estimates of future cash-flows or it can lead to adjusted discount rates, to name just two examples. Usually, ESG factors are only integrated into the investment decision if they are expected to be financially material. Hence, a company with a low sustainability performance in some areas might still be considered an interesting investment, as long as the expected financial risk / return of an investment remains attractive. This is a major difference to the best-in-class approach, where a minimum sustainability standard is defined for each investment.

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