Sustainability

The Company believes that environmental, social and governance (ESG) factors may affect the value of the investments made by the Company over time. Sustainable investment approach is developing fast. The Company shares the view that by integrating the ESG factors in asset management, the return on investment grows or the impact is neutral at a lower overall risk level, as demonstrated by academic research as well. Moreover, integrating ESG factors into the asset management process contributes to the sustainable development of the world as well.

As of today, there is no one common standard or practice regarding sustainable investment. Standards and practices are evolving over time, also due to changes in legal and regulatory requirements. As a consequence, we are relying on our own experience in terms of ESG criteria application and integration, strictly following the principles incorporated in our Sustainability and Engagement Policy.

Sustainability and Engagement Policy

It should be considered that there is a risk of greenwashing due to application and integration of ESG criteria. Greenwashing is creation of a false impression or provision of misleading information that causes or may cause an investor to believe that the relevant investment products are environmentally friendly or have a greater positive impact on the environment than they actually have. To avoid the risk of greenwashing, the Company strictly complies with legal and regulatory requirements as well as the Company’s risk management standards and policies.

The Company supports the Paris Agreement - UN Framework Convention on Climate Change, as it recognizes a critical need to rush the transition towards global net zero emissions. As an asset manager we are considering to play our part to help deliver the goals of the Paris Agreement.

The Company supports the Task Force on Climate-Related Financial Disclosures. We are evaluating the opportunities to include the forward-looking information on the material financial impacts of climate-related risks and opportunities in our decision making process.

CBL is signatory to Principles for Responsible Investment (PRI)

In June 2019, the Company signed a declaration confirming its commitment to adopt and implement the UN Principles for Responsible Investment. Consequently, the Company undertook to respect the following six principles:

1. incorporate the ESG issues into investment analysis and decision-making processes;
2. be active owners and incorporate the ESG issues into ownership policies and practices;
3. seek appropriate disclosure on the ESG issues by the entities in which we invest;
4. promote acceptance and implementation of the Principles within the investment industry;
5. to cooperate with the PRI and PRI signatories to enhance effectiveness in implementing the Principles;
6. to report on activities and progress towards implementing the Principles.

Incorporation of ESG issues into investment analysis and decision-making processes is covered in Principle 1 of the UN Principles of Responsible Investing. According to UN PRI, ESG incorporation refers to the review and use of ESG information in the investment decision-making process and includes four types of approach:

1. Type I is called screening and consists of three different methodologies as (a) negative or exclusionary screening; (b) positive or best-in-class screening; (c) norms-based screening.
2. Type II includes sustainability-themed investment (also referred to as environmentally and socially-themed investment) and its methodology is related to the choice of investment in themes or assets specifically related to sustainability issues.
3. Type III is ESG integration and it is about systematic and explicit inclusion by investment managers of environmental, social, and governance factors into traditional financial analysis.
4. Type IV is the so-called combined approach that consists of a mix of the above-mentioned methodologies.

SFDR (Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27.11.2019 on sustainability‐related disclosures in the financial services sector) requires investment fund managers to classify each investment fund they manage as a product under Articles 6, 8 or 9 of the SFDR and disclose certain information in accordance with this instruction to provide investors with greater transparency before making an investment.

• An investment fund under Article 6 of the SFDR – an investment fund without a sustainable investment objective and without obligations regarding investments in assets with environmental and/or social benefit, i.e., an investment fund that is not classified as an investment fund under Articles 8 or 9 of the SFDR.
• An investment fund under Article 8 of the SFDR – an investment fund that promotes investments with a beneficial impact on environmental and/or social characteristics. Such promotion may include assessment of certain environmental and social harm or consideration of a relevant rating when making investment decisions.
• An investment fund under Article 9 of the SFDR – an investment fund, the purpose of which is sustainable investments that contribute to achievement of environmental and/or social goals.

According to the type of financial instrument, compliance with the requirements of Article 6, 8 or 9 of SFDR is used to determine sustainability risk, or quantitative ESG factors (Sustainalytics ESG Risk Score) are used.

The company believes that Investments in financial instruments promoting Sustainability meet the following criteria:

• Investments in shares and debt securities for which the ESG rating corresponds to Negligible, Low or Medium level of ESG risk;
• Investments in fund units that meet the requirements of Articles 8 and 9 of the SFDR.
   

Integration of sustainability risks in CBL Global EM Bond Fund [investment fund under Article 8 of the SFDR]

The investment process of the fund is based on the analysis of fundamental creditworthiness of issuers. After excluding economic sectors and issuers, in addition to traditional financial analysis, the Company systematically integrates ESG factors into the overall assessment, the result of which is the internal rating assigned to a specific issuer. The Company uses data on ESG factors provided by external suppliers (e.g., Sustainalytics) and using a model developed by the Company converts these data into the internal rating of an issuer. This is the basis for making the final investment decision. Full implementation of the process is possible only if a certain amount of ESG data is available about an issuer. Following the development processes, it can be found that the amount of data is constantly increasing and the quality of data is improving.

Additional information on the investment process is provided below.

For comparable investment alternatives, we use the best-in-class approach and choose the bond issue where the issuer shows better results or dynamics in the following indicators:

1. Exclusion and Involvement

Exclusion of economic sectors or bond issuers where it is clear that an issuer does not follow the principles of sustainability. For example, business is related to pornography, production of inhumane weapons, etc.

An issuer shall also be excluded if it is included in one of the lists below:

• companies that do not have the policy for prevention of accidents at work
• insufficient protection of whistleblowers
• absence of the human rights policy
• absence of the anti-corruption and anti-bribery policy

N.B.! In case of exclusion, the Company takes involvement measures to facilitate elimination of deficiencies.

2. Rating Assignment and Assessment

• each issuer is assigned a credit rating based on business analysis and financial data
• a credit rating is adjusted on the grounds of ESG factors

Based on the internal rating assigned by the Company, which also includes ESG factors, we assign what we believe is a fair evaluation of each particular bond. In general, lower ESG risks lead to a higher internal rating and a correspondingly lower and fair risk premium, and vice versa.

3. Creation of a portfolio

• the specific weight of energy consumption using non-renewable energy resources in an investee company compared to renewable energy resources
• the intensity of greenhouse gas (GHG) emissions of an investee company
• the average indicator of respect for human rights
• the average corruption rate

Integration of sustainability risks in CBL Global EM Bond Fund – philosophy and methodology

Integration of sustainability risks in CBL Eastern European Bond Fund [investment fund under Article 6 of the SFDR]

We are using a mix of the above-mentioned methodologies, i.e., Type IV of approach is best applicable to our fixed-income investment process. Overall, our investment process is based on bottom-up issuer credit analysis. In addition to traditional financial analysis, we systematically integrate ESG factors into the overall analysis with the aim to assign an internal rating for a particular issuer. Some of the details are disclosed below.

• Exclusion of several bond issues or sectors because the issuing organization is misaligned with principles of sustainability, for example, business activity is related to pornography and production and development of inhumane weapons, etc.
• Each issuer initially receives its credit rating based entirely on its financials, while at the final stage we adjust the credit rating based on its ESG factors. We use data on ESG factors provided by external suppliers (e.g., Sustainalytics) and convert that data into the final internal rating for the issuer with the help of our proprietary model.
• Based on our final internal rating, which, among others, incorporates ESG factors, we arrive at our proprietary intrinsic value for a particular bond. All in all, lower ESG risks contribute to higher overall internal rating and consequently lower intrinsic credit spread, and vice versa.

Integration of sustainability risks in CBL European Leaders Equity Fund and CBL US Leaders Equity Fund [investment fund under Article 6 of the SFDR]

We are using Type I negative screening approach as a part of CBL European Leaders and CBL US Leaders Equity funds investment process. Overall, our investment process is based on bottom-up fundamental and technical analysis. In addition to traditional analysis, we systematically integrate ESG factors into the overall analysis with the aim to assign an internal rating for a particular issuer. Some of the details are disclosed below.

• Each issuer initially receives its composite rating based entirely on its fundamental and technical characteristics, while at the final stage we adjust the rating based on its combined ESG factor including controversies. We use data for ESG factors from external data provider and convert that data into the final internal rating for the issuer with the help of our proprietary model.
• Based on our final internal rating, which, among others, incorporates ESG factors, we arrive at our proprietary intrinsic value for a particular stock. All in all, higher ESG risks contribute to lower overall internal rating; but do not exclude the stock from the investment process.

Integration of sustainability risks in Investment portfolios

The manager believes that certain ESG factors can influence the return and risk profile of the instruments included in the portfolio. Integrating ESG criteria into the portfolio management process requires the client’s pre-contractual consent based on a good understanding of the risks associated with sustainable investments. When assessing the client’s investment goals and risk tolerance, the manager also evaluates the client’s sustainability preferences and understanding of the associated risks. Based on the information provided by the client the manager makes investment decisions by evaluating economic, financial and other indicators, which may include ESG considerations. In accordance with the client’s sustainability preferences, within the framework of security selection process the manager, using public information as well as data provided by external data providers, assesses the issuer’s ESG factors and identifies ESG risks relevant to the issuer. When choosing investment funds managed by third parties for inclusion in the client’s investment portfolio, the manager evaluates whether the significant ESG risks are considered in the fund management process and how these risks are mitigated.

Integration of sustainability risks in Finotherapy, Investment Strategy Questionnaire, CBL Opportunities funds [investment fund under Article 6 of the SFDR] and 3rd pillar pension products

The company has opted not to include ESG criteria in the suitability assessment of investment portfolio product, Finotherapy, Opportunities funds and 3rd pillar pension products.

The company recognizes the importance of sustainable investing in addressing the sustainability challenges of our planet. However, sustainable finance adoption has been encumbered by the lack of clearly defined criteria to establish the degree to which an investment promotes environmental or social characteristics, as well as the low levels of ESG data presently available. The company is actively developing policies for the integration of sustainability risks into investment decisions in the future but recognizes that successful integration hinges on upcoming regulatory initiatives and the development of a consistent set of standards for comparing the sustainability of investments.

Integration of sustainability risks in CBL Alternative Investment Funds [investment fund under Article 6 of the SFDR]

We do not integrate sustainability risks as a part of CBL Alternative Investment Funds' management process due to small investment universe and niche nature of the investment products.

Adverse impact of investment decisions on sustainability factors is considered when managing the investment fund under Article 8 of the SFDR

CBL Asset Management is closely monitoring the ongoing changes in market practices, regulation and data availability enabling systematic assessment of principal adverse impacts that investment decisions have on climate and other environment-related issues and in the field of social and labor force matters, respect for human rights, anti-corruption, and anti-bribery matters.

The company decided to take into account the negative impact of investment decisions on sustainability factors and prepare an annual report on the negative impact of investment decisions on sustainability factors, when transforming a fund into an investment fund under Article 8 of the SFDR in accordance with the requirements of the above-mentioned regulation. Sustainalytics data are used in the process of preparation of the report.

No consideration of sustainability adverse impact of investment decisions on sustainability factors is taken into account when managing the investment funds under Article 6 of the SFDR

As mentioned above, the Company is closely monitoring the ongoing changes in market practices, regulation and data availability enabling systematic assessment of principal adverse impacts that investment decisions have on climate and other environment-related issues and in the field of social and employee matters, respect for human rights, anti-corruption, and anti-bribery matters.

Unfortunately, there is still lack of quality, systematic data regarding these issues within the investment universe where the company is mainly operating. It does not allow incorporating the principal adverse impacts in our investment decisions and financial advice to the full extent.

Due to this reason CBL Asset Management does not make a holistic consideration of principal adverse impacts of investment decisions on sustainability factors concerning the climate and other environment-related issues and in the field of social and employee matters, respect for human rights, anti-corruption, and anti-bribery matters.

Furthermore, CBL Asset Management does not consider principal adverse impacts on sustainability factors of its financial advice.

However, we are fully dedicated to the sustainability agenda and will adapt our stance to the assessment of principal adverse impact in our investment process as soon as meaningful implementation becomes practical.

Group’s remuneration policy

Our remuneration policy includes sustainability risk considerations and incorporates, among other elements, the adherence to the Citadele Group Code of Ethics and the alignment of stakeholder interests in employee behavior.

The Group is dedicated to fair and reasonable remuneration practices and policies, serving both the Group and its employees and contributing to business sustainability and viability over a long-term. The Remuneration policy incorporates, among other elements, the adherence to the Code of Ethics of the Citadele Group and the alignment of stakeholder interests in the employee behaviour. Performance of the assets under management portfolio is not the sole or the dominant components of the Remuneration policy; therefore, the risk of misalignment of individual motivations with the potential sustainability risks in the investment decision-making is limited. Moreover, the variable part of the remuneration is deferred for one to three years for positions with a material impact on the business and portfolio risk profile, serving as an additional restraint to excessive risk-taking and short-term focused behaviour. The Group closely follows the evolution and regularly incorporates in the Remuneration policy the best practices and innovations in sustainable finance and in environmental, social and governance (ESG) field.

Remuneration Policy
CBL funds Sustainability

 

Information updated on January 5, 2023