Sustainability

General Issues on Information Disclosure

CBL Asset Management (the Company) is a part of the Citadele Group. The Citadele Group believes that sustainability means developing business with a long-term perspective and in line with social, environmental, and economic goals in the decisions made, products offered, and services provided. The Company supports the kind of approach and acts within the business framework to achieve the Citadele Group`s goals on the domain of sustainability.

The Company provides the relevant information on the product level, while all the relevant information on the company level is provided by the Citadele Group and is disclosed [here].

The Citadele Group constantly monitors the changes in the business environment and regulation to provide up to date disclosure. The next round of discussions and updates is set in the quarter IV 2023 - quarter I 2024.

Citadele Group`s Sustainability Strategy

Citadele Group has committed to align its operations and portfolio with the goals and the timeline of the Paris Agreement. To achieve this objective, the Citadele Group has set the ambition to reach net-zero operations, including financed emissions, by the year 2050.

To reach the ambition of achieving net-zero by 2050, the Citadele Group will be focusing on:

reducing financed emissions,
achieving carbon-neutrality in own office operations, and
continuing to finance the transition by providing green financing and investment options.

The Citadele Group has set a goal to be carbon neutral in our own operations by end of 2023. Understanding the urgent need to take action on climate change and the Citadele Group is committed to leading by example. The Citadele Group has been working towards this goal, having reduced our energy consumption, and switching to renewable energy in our headquarters office and branches where feasible in 2022. In 2023 the Citadele Group is taking further steps to minimize the carbon footprint of our office operations by focusing on sustainable travel and procurement policies.

The climate strategy is built around both risks and opportunities presented by the changing climate and transition to a low carbon economy. It is underpinned by the way the Citadele Group assesses and manages its exposure to climate-related risk. The Citadele Group is mindful of how our business decisions can impact the environment and society, both directly through our operations and indirectly through the projects we finance. We aim to minimize the negative and maximize the positive non-financial impacts of our operations on the environment and society, at the same time, managing the environmental risks and opportunities on the Citadele Group.

The Citadele Group’s sustainability strategy is structured around UN Sustainable Development Goals (SDGs) framework. The Citadele Group has prioritised five of the SDGs that are linked to business strategy and sustainability work, and which are in the areas where the Citadele Group have the largest opportunity to make an impact.
The five prioritised goals include:

Good health and well-being (SDG 3),
Affordable and clean energy (SDG 7),
Decent work and economic growth (SDG 8),
Industries, innovation and infrastructure (SDG 9),
Climate action (SDG 13).

Further relevant information regarding the Citadele Group`s sustainability strategy and its relevant aspects is disclosed in Sustainability Report 2022 and in ESG policy. 2023 (updated). The Company supports the Citadele Group`s sustainability strategy contributing to its realization through investment activities.

CBL Asset Management Sustainability Strategy

In June 2023 the Company has identified and prioritised three of the UN Sustainable Development Goals that form the basis for our sustainability strategy and should be realized through asset management processes. It is worth considering that each investment product`s manager has a possibility to identify and prioritised additional UN SDGs to achieve better results through asset management process.

SDG 7: Affordable and clean energy. The Company believes that access to an affordable, reliable, and sustainable energy is crucial for social well-being and transitioning to green economy. The Company supports this shift through investments in renewable energy resources, in companies implementing the usage of clean energy technologies and infrastructures, etc. The process and relevant parameters are dependent on the investment strategy and could differ from product to product. Further information if applicable could be found at the investment product`s website.

SDG 8: Decent work and economic growth. The achievement of the goal is highly dependent on social and employee issues. The Company is supporting investee company’s and society`s efforts towards decent work conditions and economic growth. The process and relevant parameters are dependent on the investment strategy and could differ from product to product. Further information if applicable could be found at the investment product`s website.

SDG 13: Climate action. Climate change is one of the toughest problems to be solved. The Company is contributing to the process by considering in the asset allocation process the investee company’s efforts to combat climate change by reducing the use of fossil fuels, etc. The process and relevant parameters are dependent on the investment strategy and could differ from product to product. Further information if applicable could be found at the investment product`s website.

CBL Asset Management 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:

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

The Company prepares annual PRI report to disclosure its progress and plans for the coming periods on the domain of sustainability. The management evaluates the possibility to publish the PRI report on its webpage to increase the overall level of transparency.

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:

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.
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.
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.
Type IV is the so-called combined approach that consists of a mix of the above-mentioned methodologies.

Sustainability Risk Integration into Decision-making Process at CBL Asset Management

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 that could be found below in the "Documents" section.

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.

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.

In order to comply with the existing regulatory requirements the Company prepared the description of the integration of sustainability risks into decision-making processes managing a number of products. Moreover, the manager of each product follows and complies with the process of the integration of sustainability risks into decision-making processes described in internal documents.

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

According to the latest scientific findings the materiality of ESG risks demonstrates the growing importance. The fund`s management believes that the relevance of the ESG risk in the emerging market is of greater importance in comparison to the developed market, and the internal overall risk assessment demonstrated this aspect. Based on the internal materiality assessment of risks the Company considers that the ESG risk materiality is low, and no further engagement is necessary. Nevertheless, the Company believes that the integration of sustainability risks in CBL Global EM Bond Fund management process allows to provide added value to investors and to contribute to the achievement of the prioritised UN SDGs that form the basis for our sustainability strategy and should be realized through asset management processes.

The investment process of the fund is based on the analysis of fundamental creditworthiness of 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. Fund`s managers and analysts are responsible for the analysis of fundamental creditworthiness of issuers and systematic integration of the ESG factors into the overall assessment.

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

We shall engage with companies if they lack at least one of the above stated policies. And we will exclude mentioned companies, if no action is taken on their side within 12 months since the time of engagement.

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

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

Further information regarding the risk integration process and its implication to achieve the pre-determined UN SDGs is disclosed in the following document: Integration of sustainability risks in CBL Global EM Bond Fund (January 2023; version 1.0)

Pre-contractual disclosure for CBL Global EM Bond Fund is available here (January 2023; version 1.0).

The Fund neither has as its objective a sustainable investment nor makes Taxonomy-aligned investments.

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. Fund`s managers and analysts are responsible for the analysis of fundamental creditworthiness of issuers and systematic integration of the ESG factors into the overall assessment.

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.

Pre-contractual disclosure for CBL Eastern European Bond Fund is available here (December 2023; version 1.0).

The Fund does not make Taxonomy-aligned investments.

Integration of sustainability risks in CBL European Leaders Equity Fund [investment fund under Article 8 of the SFDR]

The fund's investment process is based on financial and technical analysis of company shares. In addition, the Company systematically integrates ESG factors into the overall analysis. The Company uses data on ESG factors from external data providers (i.e., Sustainalytics) and, with the help of a model developed by the Company, converts this data into the company's internal rating. This is the basis for making the final investment decision. Additional information on the investment process is attached below.

1. Exclusion and Engagement
Exclusion of economic sectors or companies where it is clear that they do not follow the principles of sustainability. For example, we do not include into our portfolio businesses that are related to pornography, production of inhumane weapons, etc. A company shall be excluded if there is information that the company is related to:

Production of Controversial Weapons
Convictions for Violations of Anti-Corruptions & Anti-Bribery Laws
Incidents of Discrimination Leading to Sanctions

We shall engage with companies if they lack at least one of the below stated policies. And we will exclude mentioned companies, if no action is taken on their side within 12 months since the time of engagement.

Anti-Corruption & Anti-Bribery Policy
Human Rights Policy
Whistleblower Protection

2. Assigning Score and Assessing
Companies are evaluated based on a number of fundamental (including, for example, the company's profit growth dynamics, profitability and solvency indicators, the company's stock market value and earnings ratio, etc.) and technical factors (the company's stock price dynamics assessment), and the overall rating is adjusted by ESG indicators, improving our internal ranking of companies that are best in their industry in the following categories:

Scope 1,2&3 Carbon Intensity
Water Consumption Intensity

3. Creation of a Portfolio
Top 40-50 companies that score the highest on both fundamental, technical and ESG factors will be considered in the portfolio.

Pre-contractual disclosure for CBL European Leaders Equity Fund is available here (December 2023; version 1.0).

The Fund neither has as its objective a sustainable investment nor makes Taxonomy-aligned investments.

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

The fund's investment process is based on financial and technical analysis of company shares. In addition, the Company integrates ESG factors into the overall analysis. The Company applies Exclusion approach.

Exclusion of economic sectors or companies where it is clear that they do not follow the principles of sustainability. For example, we do not include into our portfolio businesses that are related to pornography, production of inhumane weapons, etc.

Pre-contractual disclosure for CBL US Leaders Equity Fund is available here (December 2023; version 1.0).

The Fund does not make Taxonomy-aligned investments.

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.

If the client clearly expressed his/her/its sustainability preferences and understanding of the associated risks the following is considered: 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. Further details on the ESG risk integration process within the investments in shares and debt securities is available in the internal Company`s documentation.
Investments in fund units that meet the requirements of Articles 8 and 9 of the SFDR.

The manager of the client`s individual investment portfolio is responsible for the implementation of the client`s ESG preferences and providing the client with regular report regarding the state of the investment portfolio (including the information on ESG).

Pre-contractual disclosure for investments in Investment Portfolios is available here (December 2023; version 1.0).

Integration of sustainability risks in Fund of Funds [investment under Article 6 of the SFDR]

The integration of ESG risks is a part of the overall analysis and decision-making process while managing the Fund of Funds. The investments of funds of funds are deemed sustainable by the Company if they meet one of the following criteria:

The Fund`s Managing Company has signed the UN Principles for Responsible Investment (PRI), confirming the commitment to make responsible investments.
The Fund is classified as an SFDR Article 8 or Article 9 investment fund.

If a Fund lacks both of the above criteria, engagement measures are taken.

Pre-contractual disclosure for investments in Fund of Funds is available here (December 2023; version 1.0).

The product mentioned above does not make Taxonomy-aligned 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.

Based on the internal materiality assessment of risks the Company considers that the ESG risk materiality in this product is below average, and other underlying risks might have higher impact on the return of this financial product.

There is lack of quality, systematic data regarding these issues within the investment universe; as well as, limited human resources to provide meaningful consideration of sustainability adverse impact of investment decisions on sustainability factors. The reasons mentioned above do not allow incorporating the principal adverse impacts in the management process.

The product mentioned above does not make Taxonomy-aligned investments.

Integration of sustainability risks in pension products [investment under Article 6 of the SFDR]

The Company while managing the state-funded pension investment plans (2nd pillar) and 3rd pillar pension plans considers the ESG risks within the management process and ESG factors integration in the decision-making process includes:

For pension plans whose assets are invested in fund units, the process is as mentioned in the paragraphs above: “Integration of sustainability risks in Fund of Funds”;
For pension plans whose assets are invested in bonds, the process is as mentioned in the paragraphs above: “Integration of sustainability risks in CBL Eastern European Bond Fund”;
For pension plans whose assets are invested in shares, the process is as mentioned in the paragraphs above: “Integration of sustainability risks in CBL US Leaders Equity Fund”.

The Company while managing the "CBL Ilgtspējīgu iespēju ieguldījumu plāns" in addition to the approaches mentioned above, ensures that additional ESG factors are taken into consideration in the investment selection and management process. The factors included are as follows:

at least 70% of the Plan's investments in financial instruments are evaluated taking into account quantitative ESG factors (Morningstar Historical Portfolio Sustainability Score (MHPSS), assessment of ESG factors by rating agencies, etc.) and/or compliance with Regulation (EU) 2018/2088 on the requirements of Article 8 or 9 investment products;
if the compliance with the requirements mentioned above could not be provided for more than 3 consecutive months, the financial instruments are sold.

Pre-contractual disclosure for investments in Pension Plans is available here (December 2023; version 1.0).

The products mentioned above do not make Taxonomy-aligned investments.

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.

The methodology to consider the principle adverse impact of investment decisions on sustainability factors is an integral part of the ESG risks integration process. The managers of the fund are disclosing all the relevant information within the following documents:

Integration of sustainability risks in CBL Global EM Bond Fund (January 2023; version 1.0)
Principal Adverse Impacts Statement for the reference period of 2023 (January 2023. Version 1.0)
Integration of sustainability risks in CBL European Leaders Equity Fund (December 2023; version 1.0; LV)
Principal Adverse Impacts Statement for the reference period of 2023 (December 2023. Version 1.0)

The methodology to consider the principle adverse impact of investment decisions on sustainability factors contains the necessity to engage with the companies issuing the financial instruments. The engagement process is provided in line with the requirements mentioned in Sustainability and Engagement Policy. Moreover, the Company disclosures its achievements on the annual basis in the Report on the Implementation of the Engagement Policy, that could be found below in the "Documents" section.

The principles of the Corporate Responsibility are integrated in the culture and everyday business activities of the Citadele Group and is disclosed [here]. The Company supports these principles and integrates them in all the processes within the asset management value chain.

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 playing our part to help deliver the goals of the Paris Agreement, but currently the Company has no net-zero investment products.

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. As soon as the Company has access to all the relevant data within our investment universe, we are going to evaluate the relevance of the introduction and compliance with Task Force on Climate-Related Financial Disclosures principles.

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; as well as, limited human resources to provide meaningful consideration of sustainability adverse impact of investment decisions on sustainability factors. The reasons mentioned above do 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.

Documents

Sustainability and Engagement Policy (February 2024. Version 5.0)
Report on the Implementation of the Engagement Policy (2022, Version 1.0)
Description of remuneration policy
CBL funds Sustainability

Information updated on January 29, 2024