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
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:
- 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.
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.
Integration of sustainability risks in CBL Bond funds
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 for ESG factors from external data provider 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
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 CBL Russian Equity Fund
We do not integrate sustainability risks as a part of CBL Russian Equity Fund management process due to small investment universe and niche nature of the investment product.
Integration of sustainability risks in Investment portfolios, Finotherapy, CBL Opportunities funds and 3rd pillar pension products
The investment portfolio manager assesses a variety of economic, financial, and other indicators, which may include ESG considerations, to make investment decisions appropriate for the portfolio objectives. Explicit integration of ESG criteria into the portfolio management process requires pre-contractual consent from the client that is founded on a good understanding of risks associated with sustainable investing. Due to the lack of clear industry standards for sustainable investments and low awareness of sustainable investment goals and associated risks among existing and potential clients, 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.
No consideration of sustainability adverse impacts
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 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. Moreover, the implementation of EU taxonomy for sustainable activities is still being in the introductory phase that 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
While our remuneration policy is undergoing revision to explicitly include sustainability risk considerations, it already incorporates, among other elements, the adherence to the Citadele Group Code of Ethics and the alignment of stakeholder interests in employee behavior.
Information updated on March 9, 2021