ESG

Environmental, Social, and Governance (ESG) data refers to metrics associated to intangible assets within the enterprise. Analysis shows that intangible assets comprise an increasing percentage in value of future enterprise. Whereas there are many ways to consider intangible asset metrics, these three (3) central factors in conjunction, ESG, comprise a label that has been accepted throughout the United States financial industry. They’re used for a myriad of specific motives with the ultimate objective of measuring elements associated to sustainability and societal impact of a business or company.

8 steps for developing a responsible investment strategy to help combat Climate change

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 shouldn’t just be actuated by profit, but additionally by social and environmental goals. One aspect doesn’t prevent the other. Rather, both tend to move hand-in-hand.

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

How we integrate ESG in our investment processes

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

At TodoVale, we define ESG integration on four basic requirements: training, data, investment procedure and active ownership. These four requirements not only assist us to integrate ESG factors in the investment decisions, but additionally to better 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 categories where sufficient ESG data is accessible, and portfolios provides frequent turnover and sufficient diversity of issuers so that taking into considerations ESG factors can truly influence investment decisions. Although usually considered a separate accountable investment tool, we tend to 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 certain the following four basic requirements for ESG integration are considered in their investment approach:

Training

Raising awareness and training investment professionals the way to use ESG factors

Information

Make ESG information, research and analysis available to investment decisions makers

Process integration

Reflect ESG data in the way portfolios are constructed

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’ve 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 concentration on accountable investment has led us to view ESG factors as key considerations to be added when assessing individual investments. We work closely with our internal and external managers to ensure 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 doesn’t provide data on how it pays its directors, than it is to possess exposure to a company that doesn’t do such things. Likewise, it is more satisfying to invest in a company that assist society, benefits the environment and is well governed, or to invest in a real-estate asset that entice tenants by minimizing energy consumption and greenhouse gas emissions.

It is vital for portfolio managers to receive adequate and regular training to assist 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 consistently applied and well documented.

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 firms in which we invest, through separate channels or either as part of regular meetings.

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 non-public loans and infrastructure debt investments.
Listed equities	Active mandates completely integrate ESG along our four basic requirements. Passive and quantitative analyst strategies selectively use ESG benchmarks or tilts, all others are in extent for proxy voting and engagement only.
Private Equity	We totally reflect the four basic requirements for successful ESG integration in our non-public equity investment process for primary investments, secondary investments, and selected co-investments
Real Estate	Implementing ESG in real estate is based on three pillars which take into consideration local best practice and provide a global framework to assess possible 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. Therefore, this asset class is in scope for engagement alone.
Mortgages and Hedge Funds	We are currently looking into ESG integration approach for the mortgage and hedge fund asset classes

ESG in manager selection

Today, approximately 60% 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 make sure they consider ESG and climate-related aspects consistently in their investment procedure.

A committed manager selection team is accountable for appointing the most suitable manager for each portfolio. In our due diligence for all asset categories in scope, we verify the manager’s alignment to our accountable investing principles. This involves reviewing the asset managers’ ESG considerations in their investment decisions and observing their views on how ESG factors have an effect on risk-adjusted performance, as well as their dedication to accountable investing, particularly with regard to climate change. Once an asset manager is chosen, we use an in-depth review method 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 clients, brokers and other distribution partners to ensure sustainable and responsible business practices and to protect reputation, whereas promoting best practices in managing environmental, social and governance (ESG) risks.

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

Why it matters

Society is facing more and more interconnected and sophisticated ESG challenges. The insurance industry can’t be a bystander and where suitable, it must play its role in tackling these challenges as a manager of risk. Failing to do so, can have a dangerous effect on society, stakeholder trust and the reputation of the insurance industry and its clients. That is why we work with our corporate clients and brokers to better manage ESG risks and endeavor 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 makes it possible for us to make better-informed decisions on how we can support clients 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 mining, dam construction, 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 trust that proactively integrating ESG factors in our investing will assist us to do our job well on a long-term basis. ESG integration – across asset categories, and alongside traditional financial metrics and state-of-the-art risk management practices – assist us to achieve higher 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. Responsible investing (RI) enables customers 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 enable corporations to foster a significant change in the global economy, and in the communities in which we work and live. We trust that ESG analysis leads to additional effective investment solutions that tackles global challenges and create sustainable value for our customers.

The integration of ESG factors is used to boost traditional financial analysis by recognizing possible risks and opportunities beyond technical valuations, providing information on issues such as potential reputational risk or recognizing corporations which are adapting to meet new market challenges. It is vital to note that the main purpose 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 which may have a material effect on the performance of that investment. The integration of ESG factors is used to boost traditional financial analysis by recognizing possible risks and opportunities beyond technical valuations. The main purpose of ESG integration remains financial performance.

Socially responsible investing (SRI)

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

Responsible investment (RI) is a young industry that lacks widely-acknowledged and detailed norms, definitions and guidelines. So far, there is a comprehension that responsible investment is a generic word that refers to a wide scope of approaches that integrate environmental, social and governance (ESG) criteria within the investment procedure. RI can take on a variety of forms and should assist to recognize and to mitigate investment risks.

What does ESG mean at TodoVale Investment Managers?

As an accountable investor we tend to manage opportunities and ESG risks when investing on behalf of our customers, and we have recognized certain sectors we won’t invest in above a specified threshold. As a result, sectorial exclusions on controversial weapons, soft commodities, palm oil and coal are applied across all assets.

Going beyond this, we tend to apply our ESG qualities to our responsible investing and ESG integrated open concluded funds, which will also be available to institutional customers on an opt-in basis.

These qualities assist us to manage ESG risks and pay close attention on material issues such as climate change, social capital and health, whereas also taking into account severe controversies as well as low ESG quality.

As a result of these ESG qualities, the following sectors and areas are excluded from our responsible investing and ESG integrated funds:

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

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

TODOVALE 2021 ENVIRONMENTAL, SOCIAL AND GOVERNANCE ANNUAL REPORT