ESG

Environmental, Social, and Corporate Governance (ESG) data refers to metrics related to intangible assets within the enterprise. Research shows that intangible assets comprise an increasing percentage of future enterprise value. While there are many ways to think of intangible asset metrics, these three central factors together, ESG, comprise a label that has been adopted throughout the United States financial industry. They are used for a myriad of specific purposes with the ultimate objective of measuring elements related to sustainability and societal impact of a company or business.

How we deal with climate change

Every business and asset will be affected by climate change and collective action is needed to mitigate or adapt to it. This will be the case even if society successfully transitions toward a climate neutral economy, and, as envisaged by
the Paris Accord, succeeds in keeping future temperature increases this century ‘well below’ two degrees Celsius. Unfortunately, our analysis suggests that we are currently likely to miss these targets and that more action is necessary.

The impacts of climate change run through all the elements of our responsible investment strategy. How can we make sure that a proper assessment of risks and opportunities is reflected in investment decisions? How can we help finance measures to mitigate and adapt to climate change? How can we deal with the fact that many consequences of climate change will only materialize over a medium- to long-term time horizon? And how can we help to encourage changes that better enable financial markets to effectively deal with climate change, and approach it as both a risk and an opportunity?

TodoVale has defined a holistic strategy to reflect climate change in its investment approach and we are committed to action in eight areas:

1. Net-zero portfolios by 2050

2. Scenarios

3. Strengthen ESG integration

4. Benchmarks

5. Finance the transition to a climate neutral economy

6. Drive change through advocacy

7. Engagement

8. Selective exclusions

ESG Integration

  • Training
  • Information
  • Process Integration
  • Active Ownership

Investment should not only be motivated by profit, but also by social and environmental goals. One aspect does not preclude the other. Rather, both tend to go hand-in-hand.

We believe that proactively integrating sustainability risks and opportunities, expressed in Environmental, Social and Governance (ESG) factors in our investment decisions will help us to do our job well on a long-term basis (ESG integration). ESG integration – across asset classes, and alongside traditional financial metrics and state-of-the-art risk management practices – helps us to achieve superior risk-adjusted, long-term financial returns.

How we integrate ESG in our investment processes

Our focus on responsible investment has led us to view ESG factors as key considerations to be included when assessing individual investments.

At TodoVale, we define ESG integration along four basic requirements: training, data, investment process and active ownership. These four requirements not only help us to integrate ESG factors in the investment decisions, but also to understand and monitor where we or our asset managers stand in terms of capabilities.

We follow a strict interpretation of this strategy. We only apply it to asset classes where sufficient ESG information is accessible, and portfolios offer frequent turnover and sufficient variety of issuers so that taking into account ESG factors can actually influence investment decisions. Although often considered a separate responsible investment tool, we include active ownership practices as part of our ESG integration approach.

The four basic requirements

We work closely with our internal and external asset managers to make sure the following four basic requirements for ESG integration are reflected in their investment approach:

Training

Training

Raising awareness and teaching investment professionals how to use ESG factors

information

Information

Make ESG data, research and analysis accessible to investment decisions makers

process integration

Process integration

Reflect ESG information in the way portfolios are constructe

ownership

Active ownership

At TodoVale we are convinced that the purchase of an asset marks the beginning, not the end of responsibility

ESG in investment practices

Every investment involves risk and opportunity. Our aim is to generate maximum return through the risk we are willing to take, and TodoVale has always invested its premiums according to this principle. Over the years, we have developed a sophisticated framework for managing our portfolio. Traditional tools used to assess risk and return are based on information that can be easily quantified, and aggregated from balance sheets or income statements. Unfortunately, this type of reporting does not always provide a complete picture. Our focus on responsible investment has led us to view ESG factors as key considerations to be included when assessing individual investments. We work closely with our internal and external managers to make sure that the following four basic requirements for ESG integration are reflected in their investment approach:

Training: Raising awareness and teaching investment professionals how to use ESG

A large number of ESG factors can potentially affect risk and return; the channels through which such factors can exert influence are at times complex and vary from sector to sector. All other things being equal, it is riskier to own equity or bonds of a company that, for example, produces excessive greenhouse gas, treats its employees poorly or does not provide information on how it pays its directors, than it is to have exposure to a company that does not do such things. Likewise, it is more rewarding to invest in a company that helps society, benefits the environment and is well governed, or to invest in a real-estate asset that attracts tenants by minimizing energy consumption and greenhouse gas emissions.

It is important for portfolio managers to receive adequate and regular training to help them understand the economic importance of ESG. That is why all TodoVale’s investment professionals receive responsible investment training.

Information: make ESG data, research and analysis accessible to investment decisions makers

To reflect ESG issues in investment decisions, portfolio managers need access to relevant information in the form of ESG analysis, ratings, and data. At TodoVale, we have integrated ESG information into our systems and can retrieve information about ESG performance of our portfolios at our fingertips. In addition, our in-house portfolio managers and analysts have direct access to the ESG research and analysis sourced from specialized providers.

Process integration: reflect ESG in the way portfolios are constructed

The process by which ESG considerations are reflected in decisions to buy/ sell, or overweight/underweight a certain security or asset needs to be clearly understood. This process should be documented and consistently applied.

Each manager and team will have to define an approach that fits a specific investment strategy. For a description of the tools, policies, and procedures that we apply to make sure that ESG factors are indeed fully integrated in the investment process and in day-to-day investment decision-making, please consult the TodoVale white paper.

Active ownership: the purchase of an asset marks the beginning, not the end of responsibility

Asset managers are expected to execute proxy votes actively, based on best-practice policies addressing ESG issues, and to integrate relevant
ESG issues in discussions with companies in which we invest, either as part of regular meetings or through separate channels. Read TodoVale’s proxy voting policy here.

How we integrate ESG on an asset class level

Credit
  • We apply the four basic requirements for successful ESG integration to all our active credit mandates.
Private debt
  • ESG consideration applied to private loans and infrastructure debt investments.
Listed equities
  • Active mandates fully integrate ESG along our four basic requirements.
  • Passive and quant strategies selectively use ESG benchmarks or tilts, all others are in scope for proxy voting and engagement only.
Private Equity
  • We fully reflect the four basic requirements for successful ESG integration in our private equity investment process for primary fund investments, secondary investments, and selected co-investments.
Real Estate
  • Implementing ESG in real estate is based on three pillars which take into account local best practice and provide a global framework to assess potential acquisitions, as well as the existing portfolio, along the entire value chain.
Supranational, Government and Government Guaranteed Bonds
  • Disciplined ALM practices and, in some cases, insurance regulation require TodoVale to hold substantial amounts of minimum-risk assets denominated in local currency to back local liabilities. TodoVale does not generally manage any multi-currency sovereign bond portfolios that would allow for ESG factors to influence issuer selection. Accordingly, this asset class is in scope for engagement only.
Mortgages and Hedge Funds
  • We are currently investigating ESG integration approaches for the mortgage and hedge fund asset classes

ESG in manager selection

Today, roughly 60 percent of our investment portfolio is managed externally. This outsourcing process provides TodoVale access to the world’s best asset managers; currently our assets are managed by over 40 internal and external asset managers.

We work closely with our external managers to ensure they consider ESG and climate-related aspects consistently in their investment processes.

A dedicated manager selection team is responsible for appointing the most suitable manager for each portfolio. In our due diligence for all asset classes in scope, we confirm the manager’s alignment to our responsible investing principles. This includes reviewing the asset managers’ ESG considerations in their investment decisions and monitoring, their views on how ESG factors affect risk-adjusted performance, as well as their commitment to responsible investing, particularly with regard to climate change. Once an asset manager is selected, we use a thorough review process to track performance and development.

More information about our process for selecting and reviewing the performance of internal and external asset managers can be found in our White Paper.

Purpose

1. Introduction and purpose

We work with our customers, brokers and other distribution partners to ensure responsible and sustainable business practices and to protect reputation, while promoting best practices in managing environmental, social and governance (ESG) risks.

Our aim is to promote international best practice standards that help ensure that potentially adverse ESG impacts are adequately managed.

Why it matters

Society is facing increasingly interconnected and complex ESG challenges. The insurance industry cannot be a bystander and where appropriate, it must play its role in addressing these challenges as a manager of risk. Failing to do so, can have a damaging effect on society, stakeholder trust and the reputation of the insurance industry and its customers. That is why we work with our corporate customers and brokers to better manage ESG risks and strive to promote best practices in managing these risks.

Engaging with customers

We integrate our commitment to corporate responsibility and the UN Global Compact in our underwriting and business decisions. We believe it is better to engage with customers to understand their business and operations, and work together to ensure responsible and sustainable business practices are in place.

This enables us to make better-informed decisions on how we can support customers in developing best practice.

Our risk-profiling methodology

Using our proprietary risk-profiling methodology, we have prioritized five key areas of concern: thermal coal; banned cluster munitions and anti-personnel land mines; and governance, human rights and environmental risks in dam construction, mining, and oil and gas activities.

For each of these areas of concern, we have drawn up an issue brief that sets out our position and best practices. We also provide guidance and training for underwriters and other relevant stakeholder groups, and have established ESG risk assessment and referral processes.

Being a responsible investor

We believe that proactively integrating ESG factors in our investing will help us to do our job well on a long-term basis. ESG integration – across asset classes, and alongside traditional financial metrics and state-of-the-art risk management practices – helps us to achieve superior risk-adjusted, long-term financial returns.

This document serves to outline TodoVale’s approach in addressing ESG issues in both underwriting and investing.

What is responsible investing?

At TodoVale, we define responsible investing (RI) as an investment process that incorporates environmental, social and governance (ESG) factors into its approach. RI enables clients to align their investments with global megatrends that are changing the investment landscape. Issues such as increasing regulation, the growing need for risk mitigation and a heightened social conscience can be more effectively addressed by integrating ESG factors into the investment process.

Why is responsible investing important?

ESG can allow firms to foster a meaningful change in the global economy, and in the communities in which we live and work. We believe that ESG analysis leads to more effective investment solutions that address global challenges and create sustainable value for our clients.

The integration of ESG factors is used to enhance traditional financial analysis by identifying potential risks and opportunities beyond technical valuations, providing data on issues such as potential reputational risk or identifying firms which are adapting to meet new market challenges. It is important to note that the main objective of ESG integration remains financial performance.

Is there a difference between socially responsible investing and ESG integration?

Socially responsible investing (SRI) and ESG are often treated as one in the same, however, there are some key differences between the two and the impact they have on the investment process.

Environmental, social and governance (ESG)

ESG refers to the practices of an investment that may have a material impact on the performance of that investment. The integration of ESG factors is used to enhance traditional financial analysis by identifying potential risks and opportunities beyond technical valuations. The main objective of ESG integration remains financial performance.

Socially responsible investing (SRI)

SRI goes one step further than ESG by actively eliminating or selecting investments according to specific social/sustainable guidelines. The underlying motive could be religion, personal values or political beliefs. SRI strategies use ESG factors to shape the objectives of the strategy and/or apply negative or positive screens on the investment universe.

Responsible investment is a young industry that lacks widely-acknowledged and precise norms, guidelines and definitions. So far, there is an understanding that responsible investment is a generic term that refers to a wide range of approaches that integrate environmental, social and governance (ESG) criteria in the investment process. Responsible investment can take on a variety of forms and should help to identify and to mitigate investment risks.

What does ESG mean at TodoVale Investment Managers?

As a responsible investor we want to manage ESG risks and opportunities when investing on behalf of our clients, and we have identified certain sectors we will not invest in above a specified threshold. Consequently, sectorial exclusions on controversial weapons, palm oil, soft commodities and coal are applied across all assets.

Going beyond this, we apply our ESG standards to our responsible investing (RI) and ESG integrated open ended funds, which will also be available to institutional clients on an opt-in basis.

These standards help us to manage ESG risks and focus on material issues such as climate change, health and social capital, while also considering severe controversies as well as low ESG quality.

As a result of these ESG standards, the following sectors and areas are excluded from our RI and ESG integrated funds:

  • Tobacco
  • White phosphorus weapons 
  • Severe breaches of United Nations Global Compact (UNGC) principles
  • Low ESG quality companies

The TodoVale ESG standards form one dimension of our ESG integration approach, which also include ESG corporate analysis and scoring, and common views on thematic engagement and voting.

Our approach