Winners of the PRI Awards 2021

Introduction: provide a short overview of the practice, process or product that is being proposed for the award

Rockefeller Asset Management (RAM) takes the view that investors will increasingly differentiate between ‘ESG Leaders’ and ‘ESG Improvers’, namely those firms showing the greatest improvement in their ESG footprint, and that these Improvers offer potential to generate uncorrelated alpha over the long run. After nearly two years of research, RAM built a proprietary process, which it calls Rockefeller’s ESG Improvers Score (REIS), to calculate a firm’s ESG trajectory.

A backtested, hypothetical portfolio of top-quintile ESG Improvers outperformed bottom-quintile ‘ESG Decliners’ by an average of 3.8% annually, in an analysis covering US all-cap equities from 2010 to 2020. The ESG Improvers factor generated excess returns even after controlling for other factor and sector biases and demonstrated correlation benefits when combined with traditional investment factors such as quality, low volatility and value.

The approach proved to have three wide-reaching implications for RAM, and led to its first quantitative multi-factor strategy:

1. On product development, RAM partnered with Bloomberg to launch the first-of-its-kind Bloomberg Rockefeller Multi-Factor ESG Improvers strategy;

2. In ESG integration, RAM used the approach to enhance its long-only and long-short fundamental research and idea generation process; and

3. Regarding stewardship, the approach informs RAM’s engagement approach that seeks to create shareholder value and catalyse positive ESG improvement.

Process, practice or tool: Provide a description of the innovative approach to ESG incorporation, its coverage within your firm, why you decided to undertake this approach and the value it provided preferably using a practical example of how you have applied your approach to an investment (security/issuer/sector/asset class/portfolio) (600 words)

Rockefeller Asset Management’s ESG Improvers approach is based on its proprietary materiality assessment which spans the 77 SICs (Standard Industrial Classification) industries. The approach was developed in collaboration with equity and ESG analysts and is based on guidance from the Sustainability Accounting Standards Board. RAM then conducted an extensive data-mapping project to determine which metrics best quantify each material ESG issue.

After integrating various data providers, its analysts utilised academic imputation best practices to approximate missing values and developed a quantitative process to determine material issue weights, referred to as the Rockefeller ESG Relevance Ranking. Material ESG issues can have varying impacts on financial performance. Weights are therefore adjusted based on the statistical significance of regressions investigating the relationship between financial performance and material ESG metrics.

RAM then constructed the REIS to isolate the component of a firm’s ESG trajectory unexplained by variables such as return on assets, market cap, geography and sector. The process allows RAM to quantitatively assess a firm’s ESG trajectory. Backtested results indicate that ESG Improvers generate alpha on a standalone basis and enhance the signal of traditional multi-factor portfolios.

RAM’s investment analysts have long used ESG Improver analysis to enhance the fundamental research process, contributing to stocks either entering or not being considered for investment in bottom-up actively managed strategies. They believe that there is strong economic and market rationale for investing in ESG Improvers:

• Improving ESG practices help to increase brand value, enhance customer and employee loyalty, reduce costs and create competitive advantage;
• The market will continue to undervalue improvers;
• Future ESG leaders may command a premium as investors reward sustainable firms; and
• The ESG Improvers process represents an assessment of management quality.

RAM embarked on this research project two years ago to better assess the risk and return ramifications of ESG information and test its hypothesis about ESG Improvers. The underlying data, material issue weights and ESG Improvers scores for around 3,300 companies, spanning 23 developed markets, are now distributed via an online interface to all analysts and portfolio managers representing roughly 80% of RAM’s asset under management.

REIS has wide reaching applications across RAM’s platform of strategies:

• Portfolio managers and analysts use REIS to enhance the research and idea generation process. Practical applications occur weekly as analysts assess a firm’s ESG trajectory in stock pitches using REIS.
• The Bloomberg Rockefeller U.S. All Cap Multi-Factor ESG Improvers strategy, launched in December 2020, combines REIS with quality and low volatility factors to pursue outperformance over traditional market-cap weighted indices with low tracking error and minimal sector or other factor deviations. Given REIS is one of the three factors used, all security selection is impacted by REIS.
• In October 2020, RAM launched the VantageRock Long Short Equity strategy, one of the few ESG integrated long-short strategies in the market. The portfolio managers incorporate REIS and the ESG Improvers philosophy within their research and idea generation process, sourcing long ideas from top quintile Improvers and short ideas from bottom quintile Decliners. One particularly innovative application is sourcing short candidates from ESG Decliners.
• Shareholder engagement is a key component of RAM’s approach for multiple strategies. RAM’s managers believe that constructively engaging with companies to improve their ESG footprint will lead to stronger financial performance over time. REIS helps assess and inform their shareholder engagement targets and priorities.

Outcomes, benefits, challenges and next steps: provide an example of the outcomes, outline the benefits and challenges associated with the introduction of this initiative and what you have learned from this approach that can be applied more broadly. How might you intend to develop the process or practice? (500 words)

Outcomes:

• Alpha: Top quintile ESG Improvers outperformed the Bloomberg US 3000 Index by 3.0% annualised, while decliners underperformed by -0.8% annualised in analysis covering US equities from 2010 to 2020. The signal is monotonic, in that outperformance grows with each quintile. On a risk-adjusted basis, top and bottom quintile information ratios were 0.8 and -0.2, respectively. When tightly controlling for sector and other factors biases such as size, value, momentum, growth, quality, etc., RAM found that a portfolio tilting toward REIS with low tracking error generated 0.5% annualised excess returns over the same period. Performance attribution shows returns were generated predominantly from an unexplained security selection effect. From a fundamental investor’s standpoint, RAM also believes the enhancements to its research and idea generation process contributed to positive performance.

• Correlation benefits: The ESG Improvers factor showed low or negative excess return correlations when assessing daily excess returns relative to the Bloomberg US 3000 Index. Using Bloomberg’s Fundamental Factor Model, correlations between growth, size, momentum and value were 0.04, -0.13, -0.09 and 0.24, respectively. As a result, incorporating REIS with a two-factor quality and low volatility portfolio enhanced excess returns by 0.45% annualised and the information ratio by approximately 50%. More pronounced risk and return benefits occurred when incorporating REIS with value and momentum factor portfolios.

• New innovative strategies: As mentioned above, REIS was critical in the creation of the Bloomberg Rockefeller U.S. All Cap Multi-Factor ESG Improvers quantitative strategy and was integrated into the VantageRock Long-Short Equity fundamental strategy.

• Engagement process: The score and underlying data is leveraged by RAM’s engagement team to help drive shareholder value and catalyse ESG improvement.

(The performance information presented is from hypothetical backtested results. See the disclosures and methodology below for additional information regarding the universe, methodology and inherent limitations.)

Challenges: The investment team faced two major challenges in developing the factor:

• While the methodology was grounded in academic research from George Serafeim, a Harvard professor and leading ESG academic, there had been little practical application of quantifying ESG improvement and integrating it with traditional investment factors in a live environment.
• ESG data suffers from limited history, coverage gaps and inherent biases, increasing the importance of data mapping, imputation and controlling for unintended exposures.

Improvements: Next steps for advancing the methodology and process include:

• Understanding the risk and return implications across geographies, publishing the results of RAM’s recent analysis covering 23 developed equity markets, and extending the research to emerging markets.
• While REIS quantifies and integrates environmental material issues such as air quality, physical climate risk, climate transition risk, energy management and GHG emissions, and social issues such as diversity, equity, and inclusion, RAM has yet to explore the implications of combining REIS with decarbonisation and 2°-aligned strategies.
• Quantitatively connecting the ESG Improvers approach with RAM’s shareholder engagement process for systematic multi-factor strategies.
• Attempting to expand the research to other asset classes including municipal, corporate, agency and government bonds.

Important Disclaimers

Introduction: provide a short overview of the practice, process or product that is being proposed for the award

In 2016, J.P Morgan Asset Management set out to formalise its ESG incorporation process across its actively managed assets under management (AUM). Five years later, it has integrated 97% of AUM – US$2.4trn – across over 450 strategies and 80 countries. It attributes its success to the integrity of its robust and transparent process, which is set out in detail here .

The process uses a consistent yet flexible framework to incorporate material, relevant ESG factors into each investment process in a manner consistent with the underlying investment style. The firm’s Sustainable Investment Leadership Team (SILT) – a cross-regional, cross-functional group of senior executives – in partnership with its dedicated Sustainable Investing team, use the same 10-point framework and assessment process to evaluate integration across all of its active investment strategies. The ESG incorporation process also benefits from scale, especially when it comes to the sharing of knowledge and best practices. The latest insights of the firm’s 1,000-plus investment professionals, as well as historical data, are available in a centralised technology platform, Spectrum, and can be accessed by all of its investment teams. The breadth of information also helps J.P. Morgan Asset Management assess its processes, plan enhancements and launch new dedicated sustainable products.

Process, practice or tool: Provide a description of the innovative approach to ESG incorporation, its coverage within your firm, why you decided to undertake this approach and the value it provided preferably using a practical example of how you have applied your approach to an investment (security/issuer/sector/asset class/portfolio)

• J.P. Morgan Asset Management has developed proprietary ESG incorporation criteria based on a structured, consistent and flexible framework. Its robust governance ensures that all strategies have met the same threshold for ESG incorporation and the firm continues to monitor ESG considerations in a meaningful and comparable way, while also being true to the nature of the asset class and investment process.

The greatest value from the approach comes from the integrity of its process and the scale of ESG incorporation the firm has achieved. Consistency comes from its independent review process, led by its SILT ESG Data & Research Working Group, where all teams are assessed using the same proprietary 10-metric scoring system. Teams are required to illustrate exactly how the ESG factors are used to influence their investment decisions.

To receive ESG integrated status under its current methodology, the investment team must receive an aggregate score of at least 30 points and, for each metric, receive at least a 2 on a scale of 1 to 5. If the strategy does not meet this threshold, the Working Group will discuss any specific shortcomings and the improvements that need to be made before it can be re-evaluated. The 10-metric scoring system is also used to measure progress over time. The firm requires all ESG integrated teams to continue incorporating ESG factors in a meaningful and consistent way on a day-to-day basis.

The consistency of the process is complemented by the flexibility to incorporate ESG factors in a way that preserves the integrity of a specific investment process and alpha-generation engine. For example, the firm’s equities teams have developed a research process that includes:

• A 40-question ESG checklist, which has been answered for almost 2,500 stocks globally and which has produced a unique proprietary database of ESG factors across the investible universe;
• Quantitative-led ESG scores that leverage third-party ESG data, weighted according to the firm’s own views on materiality. The scores provide further breadth for stocks not currently covered by the 40-question checklist;
• A strategic classification framework for all stocks based on the analysts’ judgment of the quality of the business, where ESG is an explicit consideration; and
• Additional research into specific ESG topics identified as material to the investment process.

J.P. Morgan Asset Management’s Emerging Markets Asia Pacific (EMAP) Equity team has further enhanced the equity process. When taking ESG considerations into account, the team uses a 98-question checklist which reflects many of the characteristics commonly associated with emerging markets. The EMAP team has also built a proprietary materiality framework which is starting to be rolled out to other equity teams.

Materiality is also important in fixed income, where the team has developed its own proprietary materiality matrix that ranks each fixed income sub-sector on the materiality of each type of ESG factor.

The flexibility of the firm’s ESG incorporation process has therefore allowed its wide application, but the centralised aspects of the process ensure quality control and enable the firm to realise the tremendous value of scale. As part of the next phase of ESG integration, J.P. Morgan Asset Management is developing its proprietary scoring system, led by its Sustainable Investing team, with the help of the SILT ESG Data & Research Working Group (see below).

Outcomes, benefits, challenges and next steps: provide an example of the outcomes, outline the benefits and challenges associated with the introduction of this initiative and what you have learned from this approach that can be applied more broadly. How might you intend to develop the process or practice?

Three of the most significant outcomes and benefits from its ESG incorporation process are:

1. The scale and centralisation of information : J.P. Morgan Asset Management now has a large and rapidly growing dataset that can be used to assess and improve its ESG integration processes. For example, an analysis by its EMAP team found that companies that the team rated higher on sustainability have generated more alpha over most of the last decade: returns for stocks ranked in the first and second quintiles were 4% and 1.4%, respectively, while all other quintiles had negative excess returns, as low as -3% for the fifth quintile. The firm will be able to expand these kinds of analyses more broadly, over longer periods of time and for many uses, including thought leadership, investment stewardship and product development.

2. Sharing knowledge and best practices : The firm’s SILT Working Group meets formally once a month and is uniquely positioned to monitor best practices among teams, due to its central role in the ESG incorporation process. The team also helps share best practices through its lines of business, whether via structured information sharing and training sessions or ad hoc ‘lunch and learn’ events. Currently, the group is starting to bring fellow investors up to speed on the roll-out of the quantitative proprietary scoring tool it helped develop by explaining the underlying methodology and the ways it can be used in the investment process.

3. Foundation for launching dedicated sustainability products: The firm’s efforts to develop a structured process for ESG incorporation across asset classes and regions has created a robust framework for launching dedicated ESG and sustainability products. Under the EU’s new Sustainable Finance Disclosure Regulation classification, it now has 65 products with over US$10bn in assets that promote ESG and sustainability.

   One of the greater challenges the firm encountered was related to the complexity of incorporating ESG across regions. Navigating differing regulatory guidance is particularly challenging with respect to fiduciary duty. However, expert input from its global Sustainable Investment team, coupled with the depth and breadth of many other resources at J.P. Morgan Asset Management, helps ensure that its process remains compliant with relevant global standards and is continually monitored.

   Another challenge was undertaking full-scale internal education on ESG as the firm began its ESG integration journey. Here, its Sustainable Investment team and the SILT Working Group have been invaluable resources for educating all levels of the firm, as noted in the earlier discussion of knowledge sharing.

   In terms of next steps, J.P. Morgan Asset Management is well into the process of developing a proprietary ESG scoring system and its equities and fixed income teams have started to adopt its enhanced propriety quantitative ESG score. The enhancement to the existing quantitative score leverages the firm’s expertise in ESG and sustainable research to provide a wide range of rich data from third-party ESG ratings, proprietary information obtained from direct company engagement and bespoke alternative datasets using machine learning algorithms and natural language processing.

Important Disclaimers

Introduction: provide a short overview of the practice, process or product that is being proposed for the award

Acadian’s investment universe comprises more than 40,000 securities globally. The size of the universe requires the firm to adopt a nuanced approach to company engagement simply because meeting company management isn’t feasible at large scale. This raises the question as to how a systematic investment manager can use engagement to offer differentiated insights to companies and enhance shareholder value to clients.

Acadian’s approach to engagement draws upon the firm’s strength in understanding data and building predictive models. ‘Structured’ (hard) data includes a company’s CO ₂ emissions, statistics on gender diversity and ESG vendors’ policy scores that capture whether a company has a particular governance policy in place. By contrast, ‘unstructured’ (soft) data includes free-form text published in company reports, press releases, regulatory filings and AGM and earnings call transcripts.

By combining these datasets with machine learning models, Acadian has developed a tool that compares what companies say about sustainability versus what they actually do. The underlying premise is that a company’s actions speak louder than its words. The tool is used to prioritise engagement and offers portfolio managers unique insights that can be shared directly with companies.

Process, practice or tool: Provide a description of the innovative approach to ESG incorporation, its coverage within your firm, why you decided to undertake this approach and the value it provided preferably using a practical example of how you have applied your approach to an investment (security/issuer/sector/asset class/portfolio)

Acadian has built an Artificial Intelligence screening tool, called ENGAGER (Engaging on Non-Green company Actions Gathered by Evaluating management Rhetoric). The tool identifies and prioritises company engagements, distinguishing between ‘green-leaders’ and potential ‘green-washers’ associated with the firm’s conviction themes, namely the energy transition, employee well-being and management long-termism.

ENGAGER mines company documents and applies computational linguistic techniques to compare companies’ announced sustainability commitments associated with each theme. Commitments are assessed over time to determine whether a company’s rhetoric is supported with evidence via hard data points.

Specifically, ENGAGER scores companies’ sustainability plans to evaluate consistency, depth of messaging and whether a company is ultimately true to its word as measured by changes in tangible targets.

To take the example of Acadian’s energy transition theme, ENGAGER identifies whether a company’s plans are aligned to the EU Taxonomy and assesses the credibility of its plans based upon recommendations outlined by the Taskforce for Climate-related Financial Disclosures (TCFD) – namely, governance, strategy, risk management, metrics and targets. For instance, when mining earnings call transcripts, ENGAGER assesses the extent to which company management directly answers sellside analysts’ sustainability questions, whether they avoid difficult questions and whether the answers offer sufficient granularity to inform investment decisions. By combining multiple sources of information, ENGAGER cross-validates company statements at a large scale. This includes, for example, comparing companies’ environmental goals with actual carbon emissions.

Similarly, during Acadian’s engagements on employee well-being, ENGAGER identified an influx of companies adding sentences post-COVID to their regulatory filings emphasising their concerns for their employees’ physical health and mental wellbeing. By cross-validating companies’ statements with employees’ perceptions obtained from social media reviews, ENGAGER identified inconsistencies and selected companies to engage with where employee morale appeared low.

Outcomes, benefits, challenges and next steps: provide an example of the outcomes, outline the benefits and challenges associated with the introduction of this initiative and what you have learned from this approach that can be applied more broadly. How might you intend to develop the process or practice?

In Acadian’s view, the ability to cross-check companies’ sustainability discussions offers a novel way to identify both risks and opportunities within a portfolio. Its climate-aware funds, for example, penalise companies that score relatively poorly on carbon metrics and tilt towards companies that offer transition alignment solutions.

As companies increasingly announce net-zero targets, the challenge for investors is to assess the credibility of those commitments. The ENGAGER tool provides a systematic solution to do so. One example of ENGAGER’s ability to quantify the impact of greenwashing is illustrated by the detection of boilerplate statements in regulatory filings. Its sustainability research finds that, while a number of companies acknowledge climate change risk in their regulatory disclosures, many stop short of describing plans to mitigate or adapt to climate risk. By drawing comparisons across filings, ENGAGER can quantify the perceived impact of granular versus boilerplate disclosures on a firm’s cost of equity. This information offers portfolio managers a framework to directly engage with companies and to explain the importance of disclosures in valuation terms.

Most recently, the firm applied ENGAGER to analyse human rights issues in China. In particular, the tool mapped out customer/supplier linkages for a European car manufacturer. Acadian shared its insights directly with the company and asked it to cross-check its suppliers’ involvement in the Uyghur region. Acadian was told that ENGAGER’s analysis offered differentiated insights and that the outputs were of great interest to the company’s purchasing department.

One of the greatest benefits of the ENGAGER tool lies in its ability to mine information time-efficiently, uncovering issues that may be material for investment decisions.

One challenge is that it has proved harder to engage with companies in Asia compared with those in Europe and North America. This is largely because the contact details of companies in the region are often missing from their websites. For this reason, Acadian advocates combining direct engagement efforts with collaborative and third-party initiatives to further the advancement of firms’ disclosures.

In Acadian’s view, the ability to combine structured and unstructured datasets offers a way to generate novel insights. Currently, it is investigating ways to further quantify ENGAGER’s insights for firm valuation and it intends to develop the tool in this direction to enhance its dialogues with companies.

Introduction: provide a short overview of the practice, process or product that is being proposed for the award

In the world of ESG, considerable attention has been paid to the environment and governance pillars. For many investors, the COVID‐19 pandemic has been a wake‐up call on the importance of social issues. In addition, inequality, leading to social tensions, can affect the climate for doing business and investing.

BNP Paribas Asset Management’s Inclusive Growth is a global equity strategy, managed within its Fundamental Active Equities group, with a solid ESG incorporation process. The firm believes the strategy gives investors the opportunity to identify and invest in companies that tackle social issues, both in the world of business and in wider society. The fund focuses on companies that implement best practices that contribute to inclusive growth, and it does so by identifying companies that create opportunities and help to build successful, more inclusive and sustainable societies. Underpinning the strategy, the firm has developed a proprietary data model to incorporate an Inclusive Growth assessment in its investment practice.

Process, practice or tool: Provide a description of the innovative approach to ESG incorporation, its coverage within your firm, why you decided to undertake this approach and the value it provided preferably using a practical example of how you have applied your approach to an investment (security/issuer/sector/asset class/portfolio)

Social inequality can have detrimental economic impacts. It not only deprives companies of potential talent, but growing income gaps reduce both social mobility and future prosperity. This observation led to BNP Paribas Asset Management placing equality and inclusive growth at the heart of its approach. In its Global Sustainability Strategy, published in 2019, equality and inclusive growth was identified as one of the three critical pre‐conditions for a more sustainable and inclusive economic system.

The firm’s approach relies on an innovative proprietary Inclusive Growth scoring model: Derived from its internal ESG data model, the firm developed a proprietary scoring model to construct its Inclusive Growth investment universe that is specifically designed to identify inclusive companies.

There are many ways for corporates to address inequality while at the same time contributing to long-term profitability. Within BNP Paribas Asset Management’s Sustainability Centre, the first stage of the analysis was to identify five main pillars of action for companies to contribute to inclusive growth: safety nets for the most fragile; social mobility; access to primary goods; business ethics; and decarbonisation. The analysts then translated these pillars into relevant common and sector specific ESG metrics, using a combination of external and internal data sources.

With the help of its Quantitative Research Group, the firm’s analysts tested the quality, coverage and differentiating properties of each metric to focus on the most insightful ones. This included customised analysis on some metrics, for example the ratio of women in management to overall employment, tax disclosure or CEO to average pay ratio. On average, the firm used 14 social metrics, four governance metrics and four environmental metrics per sector. In addition, it factored in controversies for each pillar.

The final Inclusive Growth score emphasises the predominance of the social dimension, which has a 65% weight. In addition, the construction of the Inclusive Growth score enabled the firm’s analysts to shed light on the availability of social data. Indeed, the firm’s ESG analysts and portfolio managers will engage with companies for which social data is not available.

BNP Paribas Asset Management’s philosophy is aligned with the UN Sustainable Development Goals (SDGs). The SDGs recognise that ending poverty and other hardships must go hand‐in‐hand with strategies that improve health and education, reduce inequality and spur economic growth. This means these SDGs are addressed by its proprietary methodology.

The firm applied this approach to build a portfolio of Inclusive Growth leaders: from a global investment universe of more than 1,600 companies in developed and emerging markets, including small/mid cap stocks, it first selects companies based on their Inclusive Growth score. Companies with a score below 20 are excluded from the investment universe, leaving an Inclusive Growth universe of about 1,000 companies. Next, in the idea generation process, quantitative screens and internal and external expertise are applied to obtain a more focused list of investment candidates. This is followed by in‐depth fundamental research, assessing the growth prospects and the sustainability of each company’s strategy, and other aspects. The portfolio comprises 40 to 60 stocks.

This ESG incorporation process helped the firm to construct a portfolio of Inclusive Growth leaders whose practices contribute to diversity and inclusion. This portfolio has a more favourable ESG score than its benchmark and a lower carbon footprint. Lastly, the approach, which combines both financial and extra financial analysis, allows BNP Paribas Asset Management to select companies with the aim of making a better social contribution than the benchmark.

Outcomes, benefits, challenges and next steps: provide an example of the outcomes, outline the benefits and challenges associated with the introduction of this initiative and what you have learned from this approach that can be applied more broadly. How might you intend to develop the process or practice?

BNP Paribas Asset Management’s Inclusive Growth assessment allows it to identify companies that have the most inclusive practices. Applied to a fund, it offers an investment product which targets inclusive businesses. This contributes to reorienting capital towards socially‐positive pathways.

The firm’s incorporation initiative not only focuses attention on the social pillar, which is often underrepresented in investors’ capital allocation, but it also addresses broader social issues to tackle diverse sources of inequality. Moreover, this ESG incorporation helps to highlight the link between inclusive practices, corporate long‐term targets and financial performance.

BNP Paribas Asset Management is convinced that companies with an Inclusive Growth mindset have opportunities to achieve better results. And there is proof: organisations with greater diversity beat their less‐diverse counterparts on a range of measures. For example, Fortune 500 companies with at least three female directors have achieved a 53% higher return on equity, the Peterson Institute for International Economics found, while companies with above‐average diversity in their leadership team have been able to generate 9 percentage point higher earnings, the Boston Consulting Group found. Inclusive practices can contribute to achieving corporate long‐term targets in a number of ways, for example by making it easier for firms to attract employees and by reducing turnover.

The main challenge BNP Paribas Asset Management faced was access to relevant data. On company training, for example, there was a lack of concrete information to enable the quality of corporate programmes to be judged. To tackle this challenge, the firm’s Quantitative Research Group tested the quality, coverage and differentiating properties of each metric to focus on the most insightful indicators. Its analysts also developed customised analysis for some indicators.

The firm learned a great deal about what collaboration between different teams can bring to the accuracy and the effective implementation of a project, as this work results from the collaboration between its Sustainability Centre, the Quantitative Research Group and its investment teams. In addition, it found considerable investor interest in social topics. According to a recent survey by BNP Paribas Asset Management and Greenwich Associates, 80% of investors think that taking social criteria into account in their investment policies has a positive impact on risk management and long-term performance.

BNP Paribas Asset Management now intends to incorporate Inclusive Growth analysis in its social bond funds and social bond analysis. It also plans to improve data coverage and data quality through the use of artificial intelligence, with the help of the firm’s quantitative analysts.

Introduction: provide a short overview of the practice, process or product that is being proposed for the award

The GMO Emerging Country Debt team has incorporated ESG-related factors into its investment process since its founding in 1994. In recent years, the team sought to formalise its use of ESG metrics in sovereign risk analysis and bolster the consideration of ESG in its investment decisions.

The firm knew this task required an innovative and thoughtful approach, since its strategy has no explicit ESG mandate and is focused principally on generating alpha for its investors. Thus, simply skewing the portfolio towards countries with stronger ESG performance without consideration for other factors may not be supportive of that main goal, especially given that sovereign borrowers with better ESG scores also tend to offer lower bond yields.

GMO established three main principles to guide it: continuity (keeping the main structure of its investment process intact); relevance (creating proprietary ESG metrics directly connected to its asset class and investment approach); and performance (leveraging ESG data to improve its ability to analyse emerging sovereign borrowers).

The result was a rigorous econometric approach that allowed the firm to integrate ESG as an additional systematic risk factor, enhancing its ability to assess the countries in its portfolio and deliver alpha for its investors.

Process, practice or tool: Provide a description of the innovative approach to ESG incorporation, its coverage within your firm, why you decided to undertake this approach and the value it provided preferably using a practical example of how you have applied your approach to an investment (security/issuer/sector/asset class/portfolio)

The aim of GMO’s sovereign risk assessment process is to compare emerging sovereign borrowers to one another based on their fundamentals, aiming to identify which appear ‘rich’ or ‘cheap’ at any given point in time. The firm has traditionally approached this task by distilling various economic variables into three main systematic risk factor (‘pillar’) scores – Economic Structure, Fiscal Sustainability and External Liquidity – each of which contributes toward establishing a single score for credit quality.

Econometric analysis plays a large role. GMO’s analysts regress sovereign spreads on each of the sets of variables within each category which are ‘rolled up’ into a pillar score, before regressing sovereign spreads on the pillar scores to arrive at the final result. To meaningfully integrate ESG into this process, GMO elected simply to establish a fourth pillar wholly dedicated to ESG, such that the final score would be based on four broad categories of risk, rather than three.

This strategy allowed the firm to keep the structure of its approach intact and stay focused on alpha, but its execution was far from straightforward. Its first attempt involved the use of third-party country scores for E, S and G, which failed to materially improve the overall process’s performance. GMO’s analysts suspected this was due to the uniqueness of its asset class – that is, certain ESG-related phenomena might be more relevant to, say, equities markets than to debt – suggesting a one-size-fits-all approach may not be useful.

Thus, the firm then used granular ESG variables (eg. climate-related risk or infant mortality), coupled with its analysts’ own best judgment on assigning weights to each, and created its own E, S and G scores. Somewhat puzzlingly, this second approach performed only slightly better.

The final resolution was to rely on the econometric approach that is the backbone of the process itself. GMO let each granular variable’s statistical relationship to sovereign spreads determine its weight in the process, rather than relying on the analysts’ judgment. This approach proved much more successful and yielded much more robust results. GMO began testing a beta version of its new, four-pillar process in June 2020, and fully migrated in November 2020.

The case of the Bahamas serves as a useful example of the process in action. Previously the Bahamas’ sovereign debt appeared ‘cheap’, offering bond spreads significantly beyond what the fundamentals suggested. GMO’s analysts knew, however, that a good portion of this premium was explained by the country’s significant exposure to hurricanes and other climate-related risks, which were not explicitly contained within GMO’s systematic process at the time. The firm elected to be overweight, but knew the position entailed considerable uncertainty.

After GMO’s switch to an ESG-inclusive process, Bahamas’ score worsened, thanks in large part to the presence of climate risk within its environmental score. Yet, even as the country’s residual had narrowed, GMO felt more comfortable with its position, given that a significant source of uncertainty had been removed, and that the Bahamas still appeared to offer a significant premium.

This likely reflects a key area where GMO’s move to integrate ESG within its analytical framework has improved its overall process, namely by bringing certain matters that are critical to the measurement of sovereign risk from the qualitative to the quantitative domain, allowing them to be more accurately measured and assessed.

Outcomes, benefits, challenges and next steps: provide an example of the outcomes, outline the benefits and challenges associated with the introduction of this initiative and what you have learned from this approach that can be applied more broadly. How might you intend to develop the process or practice?

As mentioned above, one of the three core principles of GMO’s approach to integrating ESG has been generating performance. From the start, GMO has asserted that the presence of ESG in its process would need to do more than signal its hopes and priorities or satisfy a technical requirement for inclusion. Rather, it would need to advance its capacity to analyse the countries in its investment universe and thus help provide alpha to its investors. The results thus far have exceeded expectations in terms of performance.

In looking at the gaps between its modelled ‘fair value’ spreads for each country and their actual spreads, a majority of the most significant residuals tightened rather than widened, meaning the new, ESG-inclusive approach performed better than its standard approach in terms of assessing country risk. Meanwhile, only a handful of countries flipped from looking ‘cheap’ to ‘rich’ and vice versa, meaning the change in approach did not bring about a dramatic shift in directional results. GMO finds this outcome highly encouraging, as it provides strong evidence that ESG can be involved meaningfully in sovereign credit analysis without compromising returns.

Going forward, GMO sees enormous opportunities for further research on ESG and sovereign risk, highlighting two areas in particular. The first is how ESG factors – or trends in ESG factors – might be predictive of future sovereign credit returns, rather than current spreads. While GMO believes its static, cross-country approach is appropriate for its buy-and-hold investment philosophy, further investigation into the dynamic relationship between countries’ ESG performance and sovereign credit returns is worthwhile.

The second is how ESG factors might influence sovereign restructurings (that is, what happens after countries find themselves in default). Analysis of default recovery values often tends to, quite sensibly, centre on pure fiscal and economic considerations. Nonetheless, the relevance of ESG factors deserves exploration. What is the level of likely policy continuity from one governing regime to the next? How strong is a country’s level of social cohesion and trust? What is the risk that environmental catastrophe might suddenly change countries’ ability to service debt? These issues matter for default recoveries and warrant further investigation.

Lastly, significant challenges and opportunities remain relating to engagement and impact. Somewhat counterintuitively, GMO believes its approach – which establishes ESG metrics through an econometric process, and thus on the basis of how the world is versus how we wish it to be – can be a powerful tool in this regard. Emerging country debt investing lends itself naturally to engagement, not only with governments seeking to build their cases as sovereign borrowers but also with multilateral institutions. GMO believes its framework is well equipped to deliver feedback to both national policy makers on the ESG performance of their countries as well as to international policy makers on the key ESG-related findings of its analysis, with the latter having the potential to powerfully influence rules and standards at a global level.

Provide a short overview of the research innovation being proposed for the award

Sustainalytics’ flagship thought leadership report, 10 for 2021: Investing in the Circular Food Economy , aims to support investors interested in gauging ESG risks and opportunities in the global food value chain. With investor interest building around many systemic ESG risks, including COVID-19 impacts and strengthening ESG policies around the world, this report focuses on the food value chain because of a confluence of factors: critical concern about global food security, heightened by the pandemic, alongside the growing environmental and social footprint of food production, distribution and consumption.

The authors of the report survey key subindustries – from agrochemicals, agriculture and aquaculture, to packaged food, food retail and restaurants – in search of solutions that may support circular economy principles. These principles include minimising waste and pollution, extending the use-phase of products, and ecosystem regeneration. The report identifies 10 publicly traded companies in the space that are taking steps to manage the ESG impacts of their operations, supply chains and product offerings while also developing related solutions. Finally, the authors assess a set of circular economy-themed investment funds and discuss approaches to portfolio construction, engagement and financing strategies.

Provide a description of the research innovation or report your organisation has introduced or published, and why you decided to undertake this approach

The UN Food and Agriculture Organization forecasts that the world’s population will reach 9.7 billion by 2050. Meanwhile, a recent study published in the journal BioScience estimates an increase in demand for food of between 25 and 70% over the next 30 years. This growth may suggest that portfolio exposure to the food economy can present an upside. However, meeting this growing demand while limiting negative environmental and human health impacts remains challenging.

Taking a deep dive into key industries directly connected to the global food economy, 10 for 2021 explores practical cases of circular economy-themed funds and related strategies in asset management. The authors take an innovative approach to addressing ESG risks and solutions by drawing on key components of Sustainalytics’ ESG Risk Ratings, including Material ESG Issue (MEI) analysis, management indicators, controversy records and solutions research.

The findings shed light on how companies in this space manage risks and pursue opportunities supportive of the circular economy. For example, agrochemical products play a significant role in assuring food production worldwide. As agricultural land is limited, pesticides and fertilizers are valuable inputs to increase land productivity. However, Sustainalytics’ research indicates that agrochemical manufacturers are underprepared to manage key environmental and social risks linked to product production and application. Material risks include carbon intensity, emissions, effluents and waste and the environmental and social impacts of products and services.

Similarly, farming, fisheries and aquaculture play a vital role in feeding the world’s population and supporting economic and social development. However, as societies have moved from traditional to industrial modes of production, negative environmental and social impacts have reached unprecedented magnitudes. Material impacts include emissions, water use, deforestation and biodiversity loss. While mitigating the negative impacts of industrial agriculture remains crucial, solutions on offer include certified sustainable coffee, cocoa and sugar and certified organic food and animal feed.

Solutions in the seafood industry, meanwhile, include steering away from wild stocks and moving from monoculture aquaculture to integrated multi-tropic aquaculture. Seafood production on land can exploit new technologies and approaches, such as recirculating aquaculture systems, that help maximise energy and water efficiency while avoiding the risks of operating in open water.

Food and packaging waste present both environmental problems, such as over-exploitation of natural resources, water stress, biodiversity impacts and climate change, and social issues, such as world hunger and inefficient resource use. These issues pose risks for investors because they can affect portfolio companies’ costs, revenues and reputations. On the positive side, businesses can tap into opportunities to integrate circular approaches into their value chains. With regulations around waste emerging around the world, firms at the forefront of addressing these issues through strong waste management programmes and solutions will be well positioned.

Outcomes, benefits, challenges and next steps: provide an outline as to:

1. why you believe the report, process or approach is different and the aspects you believe are innovative;
2. the value this approach has provided or a summary of the key conclusions;
3. what you have you learned from this approach or report that can be applied more broadly.

1. 10 for 2021 offers four significant innovations to the field of responsible investing:

   • It represents a systematic analysis of a crucial topic by applying key data points that contribute to companies’ overall ESG risk ratings, including MEI analysis, management indicators and controversy records.
   • It draws on solutions research to identify and measure company offerings and revenues from solutions. By assessing the percentage of revenues that companies derive from sustainable solutions, the report provides a quantitative analysis of companies with upside exposure.
   • It presents an original analysis of key investment funds. Beyond looking at companies directly exposed to the food value chain, the authors assess related funds on the market, focusing on fund growth, returns, volatility and other fundamental criteria for comparing portfolios.
   • The authors develop ideas for investors to consider when constructing ESG strategies. This contribution is a practical example of how ESG data can be integrated into financial analysis and investment processes, including portfolio construction, engagement and financing.

2. 10 for 2021 offers a wealth of specific findings and conclusions across the sectors it analyses. For example:

   • Agricultural Chemicals: Pesticides, Fertilizers and Preservatives – firms offering biological pesticides stand to benefit from growth in this market, which is poised to reach US$7.1bn in 2025, up from US$2.8bn in 2018. The precision agriculture market is expected to grow from US$3.9bn in 2018 to US$9bn by 2025. The natural food preservatives market, valued at US$796m in 2018, is on course to reach US$1.06bn by 2028.
   • Agriculture and Aquaculture – Agricultural intensification is set to continue as demand for food grows. Momentum is building for organic food producers, with the global organic food market surpassing US$110bn in 2018, up from US$15bn in 2000. The aquaculture industry, valued at US$230bn, has enjoyed average annual growth of around 6% since 2000. Fish oil and fishmeal feedstock prices are set to increase from 72% to 92% by 2030 from 2010, partly due to supply constraints.

   The report also provides insights into asset management, engagement and financing strategies. Eight circular economy funds investing in the sector outperformed the FTSE All World Index by an average of 18 percentage points in the year to end-December 2020 with similar levels of volatility. There are clear opportunities for engagement – for example, the beverage and food subsectors accounted for less than one-fifth of signatories to the New Plastics Global Commitment in 2019. Meanwhile, the sector could take advantage of growing investor demand for green, social and sustainable financial products.

3. Key learnings from this exercise include that, despite circular economy-themed funds remaining relatively concentrated in certain sectors, investors can achieve a diversified portfolio using strategies covered in the report, such as the core-satellite approach. They can also develop engagement programmes by addressing a set of key risks and opportunities associated with a circular economy thesis. The rise of green and sustainability bonds suggests companies are progressively incorporating circular activity in their approaches to corporate financing.

Provide a short overview of the research innovation being proposed for the award

The Climate & Nature Sovereign Index (CNSI), jointly developed by conservation group WWF and investment manager Ninety One, responds to the urgent need for a single framework through which to assess climate and nature risk at the country level. The index is designed to help investors in sovereign debt assess environmental risks and to help nations develop policy and institutional mechanisms to make their borrowing more attractive and sustainable in the long term.

A pilot of the CNSI was launched in July 2020, alongside a research paper co-authored by Ninety One and WWF entitled Climate & Nature Sovereign Index: Introducing a framework for a clear assessment of environmental risk . The research paper describes how the CNSI enables investors to integrate environmental factors into their overall risk management and investment-decision-making processes. This, in turn, is intended to incentivise countries to establish environmentally responsible institutional and policy mechanisms to make inward investment and lending more attractive to the international investment community. The CNSI thus aims to help ensure that the vast amounts of capital invested in sovereign bonds – about US$50trn in 2020 – contribute to efforts to transition our planet on to a sustainable pathway.

Provide a description of the research innovation or report your organisation has introduced or published, and why you decided to undertake this approach

The natural world is in steep decline, creating systemic risks for economies globally. Between 1970 and 2014, human activity caused a 60% reduction in populations of mammals, birds, fish, reptiles and amphibians. The deterioration of biodiversity is strongly linked to climate change: the warming of the planet stresses ecosystems, changing habitats and lifecycles.

There is an urgent need for a coherent framework through which to assess long-term climate and nature risk at the country level – both to enable investors to manage those risks, and to encourage countries to adopt policies and mechanisms that, by safeguarding their natural assets and protecting the climate, make their debt more attractive to investors and hence ease their access to funding.

In 2020, Ninety One and WWF developed the CNSI, which covers both developed and emerging countries, to respond to this need. The index takes advantage of developments in geospatial modelling and remote sensing to incorporate real-time data and forward-looking projections. These datasets, which have only recently become obtainable and which are improving rapidly, provide the best insights yet into environmental trends and the condition of natural assets.

Using this data, the CNSI generates a broad range of risk indicators for constituent countries across four categories: biodiversity and natural capital; physical risks (chronic and acute); transition risks; and financial and socio-economic resilience. The CNSI has broad coverage, spanning developed and developing economies, and is forward-looking, using the most complete environmental datasets and models.

It also has several features that its creators believe make it an innovative addition to existing environmental-risk analytical approaches. The index:

• Covers nature- and transition-risk exposures, as well as the climate risks traditionally measured in indices;
• Makes explicit the economic and financial links to these exposures; and
• Focuses on indicators based on modelling from the CMIP5 IPCC climate-model ensemble, where relevant, avoiding indicators based on older climate models.

Ninety One and WWF decided to take this approach because they saw a clear requirement for such an index among both sovereign-debt investors and national policymakers. For investors in sovereign debt, the relationship between a country’s natural resources and its economic performance is especially material. That is because natural-capital management influences ‘sovereign health’ – a country’s capacity to issue and repay debt.

Careful stewardship of natural resources can therefore improve a country’s ability to sustain revenues; conversely, growth at the expense of widespread natural degradation can have high economic and social costs. Those countries that can demonstrate effective natural-capital management should therefore enjoy lower borrowing costs and increased inflows into their government bonds, since more sustainable economic growth translates into lower risk for bond investors. The most progressive countries will permanently embed environmental factors into their monetary and fiscal policies and see the environment as inexorably linked to future prosperity.

Outcomes, benefits, challenges and next steps: provide an outline as to:

1. why you believe the report, process or approach is different and the aspects you believe are innovative;
2. the value this approach has provided or a summary of the key conclusions;
3. what you have you learned from this approach or report that can be applied more broadly.

1. Uniquely, the CNSI combines the economic and financial factors that inform risk-modelling for sovereign debt investments with the risks related to natural capital and climate change. The resulting indicators are used to construct an index that facilitates cross-country comparison across developed and developing nations.

   The index makes explicit the economic and financial linkages to environmental risks, with the aim of making the CNSI useful to investors and policymakers. It employs a taxonomy aligned to investors’ needs and is also complementary to policy-oriented indices such as the Yale Environmental Performance Index. It includes a greater breadth of economic and financial indicators than that benchmark, so that the CNSI reflects the factors that are material for investors.

   The index incorporates real-time data and forward-looking projections. Thanks to ongoing work in geospatial modelling and remote sensing, these are now available for use by analysts. The CNSI also expands on existing environmental-risk analytical approaches by incorporating nature- and transition-risk exposures, as well as the climate risks traditionally measured in indices. Its creators believe there is growing recognition (not least because of COVID-19) that the earth’s natural systems are inextricably linked.

2. The CNSI’s unified nature-related risk framework can help multiple groups contribute to the ultimate objective of protecting the natural world. It can help:

   • Governments attract investments and safeguard the natural world, and hence sustain economic growth;
   • Rating agencies to develop a more comprehensive view of sovereign risk by integrating factors related to climate change and nature loss into rating processes;
   • Sovereign debt investors improve the long-term resilience of portfolios and identify areas for investments in natural capital;
   • Other investors gain a full picture of risk, given that it is impossible to fully gauge company-level environmental risk exposure in frameworks such as the Task Force on Climate-related Financial Disclosures (TCFD) or the Bank of England stress tests. This is because individual company risks can be overwhelmed by broader risks to inputs, fixed assets and markets, and by sovereign financing shocks; and
   • International financial institutions and donors identify impact-based interventions that foster countries’ long-term transition to a sustainable economic pathway and highlight which countries are likely to find it harder to borrow or secure investment, and hence most need alternative sources of finance to support conservation.

3. This project highlights that the new field of spatial finance, which harnesses the rapid evolution of satellite technology, computing power and machine learning, has an important role to play in enabling the financial system to facilitate the transition to a more sustainable global economy. As well as giving investors more real-time indicators to monitor habitats and protected areas (among many other uses), it is facilitating forward-looking forecasts and projections based on models that can be updated annually.

   It is thanks to developments in this field that Ninety One and WWF have been able to create the CNSI, but its potential application is far broader. With the increase in satellite observations, better computers and machine learning, we can expect the datasets to expand further. In the next couple of years, a wide range of open and commercial global datasets are to be published on relevant topics such as global oil spills, shipping activity, surface water change, agricultural performance, land cover change, biodiversity and heatwaves. These datasets will potentially be of high value to all those considering the environmental health and climate exposure of nations.

Provide a short overview of the research innovation being proposed for the award

MioTech has incorporated a set of remote sensing data to its ESG data and risk monitoring platform AMI, which provides geospatial estimations of key environmental phenomena. Remote sensing has enabled MioTech to identify and compare observational environment-related risks as well as actions on climate change adaptation at both national and sub-national levels for more than 50 countries. This allows for standardised, reliable and intuitive environmental data to be made available for ethical or sustainability-minded investors.

Investors can use data on regional distributions of greenhouse gases (GHGs), air pollutants and landcover types, retrieved by remote sensing, to re-evaluate investments, especially those in energy-intensive sectors, in accordance with location and environmental contamination standards.

MioTech initiated this project in July 2020 and officially launched it the following December. Since then, the company has focused on improving source continuity of remote sensing data, refining image quality and expanding its scope of observations. Satellite imagery and statistics for air pollutants and vegetation (the normalised difference vegetation index, or NDVI) became available in January 2021, while night-time light imagery data is under development. As a result, enormous progress has been achieved in three main areas: GHGs, atmospheric pollutants including nitrogen dioxide and carbon monoxide, and particulate matter.

Provide a description of the research innovation or report your organisation has introduced or published, and why you decided to undertake this approach

MioTech’s Remote Sensing tool is designed to enhance the application of technology in the ESG sector to compensate for some longstanding drawbacks of existing data. These include:

• Continuity: Traditional environmental data is often desultory and disjointed. In contrast, remote sensing data is continuous across both time and space, which can make up for the lack of readings where in-situ data is inaccessible.
• Comparability: Current ESG benchmarks vary by agencies’ preferences. In contrast, remote sensing metrics are based on common physiochemical properties, which can reduce potential biases and boost comparability across the globe.
• Frequency: In recent years, the rapid expansion of commercial satellite penetration has greatly increased satellite temporal resolution, thus supporting frequent updates of satellite imagery. ESG data from corporate annual reports or media reports can appear outdated compared with real-time remote sensing data. MioTech has defined meaningful environmental and climate metrics based on raw Earth observation data for nowcasting and ESG evaluation.

The Remote Sensing tool offers the following innovative features:

• Reliability: Raw data sources include internationally recognised platforms such as ESA Sentinel-5P, Sentinel-2, NASA Landsat, etc. These satellites not only have stable service periods but also wide coverage. The statistics and satellite imagery are also processed with MioTech’s optimised remote sensing algorithms before being displayed.
• Promptness: MioTech’s remote sensing data are updated monthly for time-variant metrics like air pollutants or annually for less sensitive parameter such as NDVI.
• Scalability: For data from Greater China, Europe and the US going back two years, a two-tier remote sensing data taxonomy has been applied within this timeframe: Tier-1 for national level data and Tier-2 for sub-national level data. The satellite imagery and extracted statistics can be freely customised by users to either track countries’ commitments to tackling climate change, or to measure regional environmental risks.
• Intuitiveness: The tool is user-friendly and functional. Unlike the usual satellite imagery products offered for geographic information system (GIS) analysts, MioTech’s remote sensing data are displayed on an intuitive interface; the tool offers useful functions such as time-series analysis, horizontal comparison, quantitative ranking and image auto-play to offer users valuable analysis of geospatial data.

MioTech’s remote sensing tool offers new insights into three main topics:

• Global warming: Early identification of GHG emissions prior to disclosures is now possible with the GHG estimates (for methane and ozone) this tool provides.
• Environmental pollution and protection: A new source of air pollution data is provided in addition to self-reported corporate data, allowing users to supplement or verify existing pollution information.
• Vegetation conservation and biodiversity: Evidence shows a correlation between vegetation conservation and biodiversity. Landcover type reflected in the NDVI index can be adopted as an ESG metric when evaluating macro- or corporate-level sustainable investments.

Outcomes, benefits, challenges and next steps: provide an outline as to:

1. why you believe the report, process or approach is different and the aspects you believe are innovative;
2. the value this approach has provided or a summary of the key conclusions;
3. what you have you learned from this approach or report that can be applied more broadly.

MioTech’s integration of remote sensing data is cutting-edge because it adds macro insights above the corporate level, inspired by the concept of “Spatial Finance”, which involves the application of geospatial data to investment processes. As more remote sensing metrics become available, they will enable growing analysis of corporate behaviour in the context of the macro ESG information from the locations in which they operate.

The tool facilitates easy access for data-tracking. For example, it allows users to trace environmental footprints in regions where in-situ or self-reported data are unavailable.

Remote sensing data can be more reliable and consistent than self-reported data. With the implementation of new regulations such as the EU Taxonomy, remote sensing data can offer a means of detecting greenwashing activities hidden behind corporate sustainability and ESG reporting.

At the same time, MioTech’s analysis of remote sensing data has led to three specific insights:

• Remote sensing data indicates correlations between regional economic development and environmental quality. Areas with stronger economies often exhibit higher pollution levels, whereas underdeveloped regions are associated with lower levels of pollution.
• Remote sensing metrics can reveal the environmental and social impacts of different events. During the COVID-19 lockdown, a plummet in the atmospheric density of NO ₂ (a major air pollutant commonly associated with transport and industrial activities) was observed in most metropolitan areas, while NO ₂ concentrations rebounded quickly when the lockdown ended.
• Remote sensing data can support investment decision-making. Detecting areas with higher pollution levels can allow investors to consider possible economic consequences and act before companies are subjected to environmental penalties or tightening regulations.

The further development of remote sensing data for ESG purposes is expected to lead to a number of outcomes. For example, easy access to remote sensing data could galvanise the media to more widely cover ESG issues. It could be applied to tracking progress towards carbon neutrality, whether at the corporate or national level. And night-time light radiance will be the next key remote sensing metric that MioTech will elaborate on, which can identify the patterns of the activities of manufacturing plants, potentially alerting investors to underlying issues, while it could also be applied to estimating carbon emissions.

Provide a short overview of the research innovation being proposed for the award

Fixed income is the world’s largest asset class. In 2017, Insight Investment created the first climate risk assessment of fixed income corporate bond issuers aligned with the Task Force on Climate-related Financial Disclosures (TCFD). Its new Prime climate risk ratings, launched in 2021, collects information from 1,700 issuers of corporate debt, covering 200 metrics and 14 climate-related themes, and generates multiple rating signals. Insight believes this makes it the most extensive and detailed evaluation of fixed income corporate issuers’ physical and transition climate risks.

The Prime climate risk ratings support portfolio construction and investment decision-making, allowing users to:

• Pursue climate risk strategies without simplistic sector-based exclusions that do not distinguish between leaders and laggards;
• Isolate company weaknesses and use the information to support engagement and monitoring;
• More accurately identify the worst-performing issuers and actively screen them from investment portfolios;
• Consider material climate risks and build dedicated strategies; and
• Visualise company risks using detailed company maps and rating assessments.

Provide a description of the research innovation or report your organisation has introduced or published, and why you decided to undertake this approach

The Prime climate risk ratings expand upon the principles of the TCFD, set up in 2015 by the Financial Stability Board to develop voluntary and consistent financial climate risk disclosures. The Prime climate risk model analyses and quantifies the investment risk due to climate change for more than 1,700 credit issuers. Its methodology harnesses information sourced from direct company responses, open-source data and third-party data providers, before overlaying sector and location-adjusted weightings to give an overall climate risk measure. The model encompasses both transitional and physical risk factors within its framework and is paired with a broad-based dataset designed to inform investment decision-making and guide portfolio construction.

Climate modelling in fixed income is critical to ensure investment portfolios more accurately and reliably reflect the climate risks that companies face. Aligning with the principles behind TCFD, the Prime ratings include forward-looking scenario analysis, which in turn rests on key performance indicators Insight has curated, weighted and scored. The Prime climate risk ratings create two scores for each company: one each for its transitional and physical risks. Multiple scores help to prioritise risk analysis and the investment process. Each key issue, theme and pillar is independently evaluated to support a more complete interrogation of company performance and to enable comparison with peers.

Insight has gone beyond restructuring and enhancing its climate methodology. The company has complemented the data modelling with several interactive dashboards that visualise climate data and more effectively compare performance.

The challenge facing investors is managing the plethora of data and prioritising amongst the noise created by model outputs and their inputs. Insight has introduced a system to avoid black-box analysis. A physical risk analysis page can review company assets against fire, water, flood, heatwave and hurricane climate issues.

Meanwhile, the Prime climate risk ratings more accurately and reliably reflect the transition risks companies face by appraising them against their climate metrics and overall governance. The analysis can help analysts efficiently identify laggard issuers and why they are flagged.

Climate change is the most critical sustainability challenge, and Insight believes more informed analysis will support investment portfolios over the long term. The extensive ratings and modelling system deployed, complemented with data analytics, demonstrate that climate analysis for fixed income is not only practical, but has tangible benefits to portfolio construction, stewardship and investment processes.

Outcomes, benefits, challenges and next steps: provide an outline as to:

1. why you believe the report, process or approach is different and the aspects you believe are innovative;
2. the value this approach has provided or a summary of the key conclusions;
3. what you have you learned from this approach or report that can be applied more broadly.

Within fixed income, default risk is the prism through which Insight’s credit analysts consider every issue; climate risks are a necessary element in determining the relative risk of default loss. For active fixed income portfolios without explicit investment criteria linked to climate change, climate risk is a material but not central risk factor in most sectors. However, for portfolios with a longer-term time horizon, such as strategic credit portfolios, and for portfolios with explicit sustainability and climate change investment criteria, a more advanced assessment of climate risk can shape better portfolio allocations. For bond issuers with meaningful climate impacts, Insight uses the climate risk ratings to understand their risks and how they are managed; engagement with such companies can play an important role in helping its analysts monitor and challenge climate activity (or inactivity).

Prime can also help Insight’s ESG team identify potential issues that need to be accelerated and the companies where there is existing bond exposure but inadequate demonstration of climate management.

Insight’s experience suggests that all companies manage climate issues in different ways. The investment winners and losers from the climate transition are unknown, with company strategies at a nascent stage. Excluding entire sectors is not in clients’ interest – the sectors with the greatest climate impacts are also amongst the largest issuers of debt securities. A more intelligent way of responding to climate change is required, and the sophisticated management of data, combining millions of data points to appraise issuers, is the most advanced way investors have today to systematically manage the issue. Advanced modelling techniques are critical to deliver the right signals to guide investment analysis.

However, ratings are not enough. Insight’s innovation has been to use the data inputs and model outputs to create highly useful and adaptive dashboards to guide the investment team. This puts a marker down for the responsible investment community: it is not enough to have proprietary scores – they must be useful and open to scrutiny. One of the principal criticisms of external ratings, especially climate ones, is that they are a black box, where no investment analyst can be sure how or why a company scores in a certain way. Insight’s methodology can show precisely why a company is a climate leader and how laggards can improve their performance.

When Insight introduced its climate ratings in 2017, the use-case was basic: it supported select engagement priorities. Today, advanced modelling and credible outcomes has meant it has the broad support of the investment team and is actively used to support portfolios. This has had tangible results that go beyond initial expectations. For example, select issuers have been sold from portfolios for having the lowest climate risk rating and others have been identified for engagement. This shows that innovative climate tools do not have to sit in a silo – they can and should be part of the investment process.

The value of Insight’s approach includes:

• Independent thinking on how climate issues impact sectors;
• Objective analytics that use quantitative inputs that avoid having to make moral decisions;
• Transparency over company behaviour and what is driving performance;
• Adaptability to change as data improves and companies act;
• Incorporation of broad data inputs to capture multiple perspectives; and
• Providing a complement to investment processes, neatly fitting into credit research notes and engagement priorities.

Give a brief overview of your initiative, its objectives, and why you decided to undertake it.

The Christchurch terror attack on 15 March 2019 was a defining point in New Zealand’s history. The premeditated attack on two Christchurch Mosques took the lives of 51 New Zealanders and severely impacted many more. By capturing an act of terror live on social media and by using the internet as a tool to boost exposure to the killings, the gunman ensured his hateful agenda was maximally amplified. The company’s algorithms had failed to recognise the nature of the damaging content. Copies of the live-stream went viral despite attempts to shut diffusion down. The video, in its various forms, reached millions of viewers and can still be found online today. The safeguards in place were drastically inadequate.

The terrorist attack came at a time of escalating levels of investor discomfort relating to social media platforms. Investors had been concerned for some time about poor corporate governance practices, with dual-class share structures leading to heavily skewed voting control and ineffective boards. More recently, concerns had focused on issues such as the Cambridge Analytica scandal, allegations of electoral manipulation and the spread of misinformation.

For New Zealand government-owned investors, enough was enough. Facebook, Alphabet and Twitter had betrayed their users, breached their duty of care and severely damaged their social license to operate. Led by CEO Matt Whineray and responsible investment strategist Katie Beith, the Guardians of the New Zealand Superannuation Fund rallied like-minded investors to join together and engage these three main social media companies with a single focus: to strengthen controls to prevent the livestreaming and dissemination of objectionable content.

Starting locally and expanding internationally, the Guardians approached their peers. To successfully engage with these multinational giants, a large collaboration was needed, speaking with a united voice, on an issue that represented both a moral imperative and a business case. More than 100 global investors, representing assets of approximately NZD$13.5trn, joined the Social Media Collaborative Engagement.

Describe how your initiative is aligned to Active Ownership 2.0, including:

1. The significance of the systemic, real-world outcomes it seeks.
2. How the initiative uses a variety or combination of stewardship tools/activities to achieve outcomes.
3. The theory of change for the initiative (making clear how the initiative intends to drive real world outcomes through use of the selected tools/activities).
4. The ambition, ingenuity and/or effort of the initiative.
5. How collaboration was used to drive outcomes.
6. Any challenges associated with the initiative and how these were overcome.

The issue of objectionable content being disseminated through social media platforms has severe and wide-reaching implications for investors, companies and the general public. Technology stocks are a significant part of many global indices and ESG risks in the sector – which include regulatory, reputational, litigation, data privacy and cyber risks – pose material consequences for global equity portfolios. These risks are compounded by the serious societal consequences of allowing such material as the Christchurch attack to be shared across social media platforms.

Globally, NZ Super is a relatively small investor, meaning it had to be creative in using a combination of stewardship tools and activities. Following the Christchurch attack, the first lever the NZ Super’s Guardians pulled was to speak out publicly on their intention to engage the social media companies on this issue. This was a deliberate step-change from their usual approach of confidential engagement with investee companies.

Second, the Guardians sought to build a global investor collaboration. One of the key factors in enabling such a large group is to establish a single, clear objective. This helped to break down barriers for those investors who had not joined a collaboration before and ensured there was a clear and uniting goal for the engagement.

Third, as the global collaboration grew, the Guardians announced the support of the Christchurch Call, a joint initiative by the governments of New Zealand and France which outlines collective, voluntary commitments from governments and online service providers intended to address the issue of terrorist and violent extremist content online. The Guardians also created and distributed an investor resource for shareholders not part of the collaboration who sought to engage on the same issue. This ensured the social media companies felt pressure from a range of investors.

Engagement letters were then sent to the chairs of the boards of the three companies on behalf of the collaboration, and the Guardians sought to secure engagement meetings to discuss each of the social media companies’ response to the Christchurch attack. They assured the collaboration they were making changes to strengthen controls. However, none of the companies agreed to a board-level meeting.

Despite the large group of influential investors behind this agenda, the Guardians did not feel there was enough commitment from the companies to let the matter settle. As the first anniversary of the Christchurch terror attacks approached, the collaboration had become frustrated with progress and the inability to discuss concerns directly with the different boards. To compound this frustration, two more terror attacks (in Germany and Thailand) had been live-streamed across the social media platforms, showing that the platforms were still open to abuse.

In response, the collaboration published an open letter, distributed via global press, calling for:

• Clear lines of governance and accountability to ensure social media platforms cannot be used to promote objectionable content such as the live-streaming and dissemination of the Christchurch terrorist attack; and
• Sufficient resources to combat the live-streaming and spread of objectionable material across the platforms.

Other tools considered were raising a shareholder resolution or campaigning to vote against a particular director; these were ruled out because of voting control issues and the inability to influence via these key investor tools. However, the Guardians did signal their voting intent to the collaboration and social media companies in advance of their annual general meetings and exercised NZ Super’s voting rights as follows:

• Withholding votes or voting against directors who were up for re-election and had not carried out their responsibilities as they relate to the live-streaming and dissemination of content; and
• Supporting shareholder resolutions which in some way drove progress towards meeting the objective of the engagement.

The collaboration has continued to hold meetings with key executives and to seek meetings with board directors. It has used a range of tactics to try to overcome this barrier, including using the whole power of the collaboration to request a meeting, using a subset of influential investors to engage, offering the NZ Super CEO Matt Whineray to meet with the board, and using the influence of a top 10 shareholder who is a member of the collaboration to reinforce its message. This is an area the collaboration remains focused on to achieve open and active engagement.

The results achieved in the initiative to date, including evaluation of its success against the objectives; any adjustments to plans going forward; any insights learned from this project that can be applied more broadly?

A key highlight of this initiative, and an improvement that is directly attributable to a specific request made by this collaboration, was the announcement by Facebook late last year that it has strengthened its audit and risk oversight committee charter to explicitly include a focus on the sharing of content that violates its policies. It also included a commitment to not only monitor and mitigate such abuse but also to prevent it. This is a major win for the collaboration and a real strengthening of governance and accountability for the Facebook board on this issue.

Without doubt, the platforms have all moved to strengthen controls to prevent the live streaming and distribution of objectional content. However, it is difficult for investors to assess if these changes are equal to the scale of the problem. Therefore, the collaboration has commissioned external research to help with this assessment.

The platforms’ success or failure in moderating content and preventing abuse is likely to determine whether users stay on the platforms or move towards alternatives. In addition, if the platforms are perceived as unable or unwilling to effectively moderate user-submitted content, regulation is likely. The research will have some core recommendations for the companies. The plan is to distribute it to the companies and regulators and hold a further (and final) round of engagement meetings.

Insights for future engagement

The Social Media Collaborative Engagement was the first global engagement initiative the Guardians led. Key insights include:

• Research in advance of engagement is crucial.
• Be persistent.
• Take time to build trust in order to have an authentic conversation where both parties understand motives.
• Using a CEO or a top 10 shareholder helps level the conversation and can help secure meetings with the right people.
• Be very explicit in your asks; seek out who the decision maker is and put deadlines on expectations for responses.
• Be clear in your responsible investment strategy and know what your organisation stands for. This allows you to be agile when a significant event occurs.
• Speaking publicly about engagement efforts helps to hold everyone to account.

Give a brief overview of your initiative, its objectives, and why you decided to undertake it.

Cross-industry climate initiatives have primarily focused on climate change mitigation. Launched at the UN Climate Action Summit in 2019 – and now a flagship COP26 initiative – the Coalition for Climate Resilient Investment (CCRI) is the first of its kind in bringing together industries and leaders across the finance and investment value chain to complement these efforts and develop practical solutions to advance climate change adaptation and resilience.

A key objective of the private sector-led CCRI is to help investors better understand climate risk and create opportunities to build a network of resilient infrastructure in the most vulnerable and advanced economies, enabling us to better prevent future human and financial disasters. Central to this is CCRI’s commitment to the development and testing of solutions that address a recognised mispricing of physical climate risk in investment decision making and asset valuation processes.

The initiative has been endorsed by both former Bank of England Governor Mark Carney and UK Secretary of State for Business, Energy and Industrial Strategy, and COP26 President Alok Sharma, who have recognised the role it can play in helping to finance climate-resilient infrastructure.

Describe how your initiative is aligned to Active Ownership 2.0, including:

1. The significance of the systemic, real-world outcomes it seeks.
2. How the initiative uses a variety or combination of stewardship tools/activities to achieve outcomes.
3. The theory of change for the initiative (making clear how the initiative intends to drive real world outcomes through use of the selected tools/activities).
4. The ambition, ingenuity and/or effort of the initiative.
5. How collaboration was used to drive outcomes.
6. Any challenges associated with the initiative and how these were overcome.

In 2019, 215 of the world’s biggest companies reported US$1trn was at risk from climate impacts. There is a clear and urgent need to support key incentive structures, such as regulation and credit ratings, to ensure efficient integration of physical climate risk in investment decision making, and with that inform a more efficient allocation of capital towards more resilient investment decision making, economies and societies.

The lack of climate risk standards has resulted in an inefficient allocation of capital when protecting assets from physical climate risk. These are often mispriced, lacking transparency and understanding around climate-related impacts. However, investors, lenders, insurers and ratings agencies need this information to make informed decisions. There is already higher demand for transparency, while improved data analytics and societal pressure will ultimately lead to mandatory disclosure of climate risks. It is only a matter of time before climate risk sits at the centre of all decision-making processes.

CCRI aims for the majority of investments to be resilient by 2025. By 2025, CCRI aims to implement solutions to manage social and economic value at risk and maximise investment in up to 30 OECD and non-OECD economies, through a League of Investment Funds for Resilience. For example, it plans to develop tools and metrics to help governments and decision makers prioritise investment and identify key locations of social, ecosystem and economic value at risk within a given infrastructure network.

CCRI’s Systemic Resilience working group has launched two pilot projects in Jamaica to develop an investment prioritisation tool to enable governments and local policy makers to protect and maximise socio-economic value within infrastructure networks.

Meanwhile, CCRI’s Asset Design and Structuring (ADS) workstream is developing frameworks for risk-informed cashflow modelling practices based on data from a diverse pool of infrastructure assets. CCRI is set to deliver a methodology that integrates physical climate risks in infrastructure asset valuation practices, including cashflow modelling adjustments. CCRI has been developing a set of guidelines to incorporate physical climate risk into infrastructure investment that significantly enhance the availability of climate data and the understanding of physical climate risk exposure by infrastructure asset developers, design and engineering experts, managers, investors and lenders. Their implementation will lead to a repricing of infrastructure assets, with more resilient infrastructure that is able to raise lower cost finance.

CCRI is also developing an innovative financial instrument that recognises and rewards integration of physical climate risks in the investment decision-making process. CCRI members are working closely to structure financial instruments that will mobilise capital towards resilience. Other initiatives supported by CCRI include FAST Infra, the Coalition for Disaster Resilient Infrastructure, and the Task Force on Climate-Related Financial Disclosures to ensure close alignment for a common goal.

Fundamentally, a more accurate pricing of climate risk will create opportunities to build a network of resilient infrastructure globally, enabling us to better prevent future human and financial disasters.

Co-convened by the Global Centre on Adaptation, the World Economic Forum, the World Resources Institute, the UK Government and Willis Towers Watson, and with a growing participant base, CCRI’s membership stands at 95 institutions – including institutional investors, banks, MDBs, insurers, the State of California, and governments of Antigua and Barbuda, Australia, Canada and Jamaica – representing over US$16trn in assets.

Collaboration is at the heart of CCRI’s working groups. The ADS workstream includes 34 private and public sector organisations, collaborating to deliver outcomes in engineering, revenue impact, insurability, cost of capital and asset valuation. CCRI has also achieved impressive cross-collaboration between industries where engineers, climate data providers, credit rating agencies, asset owners and asset managers come together to bring their own views and intellectual property into discussions to advance CCRI outcomes.

Developing a methodology to quantify the economic, social and financial benefits of resilience offers a substantial and critical incentive for financial markets to embed resilience upfront. The main challenge was to mobilise support from CCRI’s founding members by presenting the high commercial potential of specific public good deliverables and, as a result, open up a new market for institutions and industries focused on climate resilience solutions.

To create meaningful research outcomes, CCRI worked with a diverse pool of infrastructure assets representing different classes, geographies and climate hazards. A requirement for full access to engineering studies and financial data has led to confidentiality concerns of case study data providers. To mitigate such concerns, the initiative developed a MOU signed by all participants specifying how data can be used and the legal terms for breach of confidentiality.

The results achieved in the initiative to date, including evaluation of its success against the objectives; any adjustments to plans going forward; any insights learned from this project that can be applied more broadly?

CCRI’s ADS workstream, in collaboration with Mott MacDonald, has developed a physical climate risk assessment methodology that species the required climate analysis, the impact of climate hazards on the asset and the quantification of impacts on the asset’s ley performance indicators. As a result of the analysis, resilience interventions will be developed and assessed. The methodology is developed through six real case studies, to be validated through additional case studies later in the year. In future, the methodology will be published with open access.

Resilience credit quality drivers have been developed by CCRI in collaboration with S&P Market Intelligence, ratings teams and other CCRI supporters, to provide guidance on key risk factors to be considered when calculating the impact of physical climate risk in credit quality assessments of individual projects.

In CCRI’s Jamaica pilot project, systemic resilience and prioritisation tools are being developed in collaboration with the government’s Planning Institute. The tools will help jurisdictions prioritise climate resilient investments based on social and economic value. Key lessons from the project include the criticality in engaging with the right institutions to garner local stakeholder buy-in and the importance of ensuring tools are tailored to the needs of the jurisdiction and that projects contribute to long-term capacity building.

Give a brief overview of your initiative, its objectives, and why you decided to undertake it.

Phasing out coal from the electricity sector is one of the most important steps to achieve the goals of the Paris Agreement. However, over 1,000 coal-fired units are currently in a construction or a pre-construction phase globally. Nordea Asset Management (NAM) has a critical position on any of its investments being involved in the construction of new coal-fired power plant projects, which it believes to be inherently inconsistent with limiting global warming to below 2°C.

The construction of a new coal-fired power plant in Vietnam, Vung Ang 2, would further contribute to the world’s continued dependency on coal. Furthermore, the project is located near to the Vung Ang 1 coal plant and the Formosa Steel plant, which have already caused major environmental pollution accidents in the area. The Vung Ang 2 project poses high climate-related, financial and reputational risks.

NAM therefore initiated a collaborative engagement to urge its owners, financiers and constructors to withdraw and to make commitments to end all future involvement in new coal projects. Its request to the companies involved is based on three facts. First, the Paris Agreement and the UN Sustainable Development Goals set clear targets for addressing climate change. Research, such as that carried out by Climate Analytics, concludes that coal power must be phased out globally by 2040 to meet the Paris objective of limiting global warming to 1.5°C. Any new coal-fired power plant is inconsistent with the goals and timelines of the Paris Agreement.

Secondly, Vung Ang 2’s economic viability is uncertain. A September 2019 report by the UK think tank Carbon Tracker concludes that the cost of constructing new renewables will be lower than operating costs of existing coal-fired power generation in Vietnam by as early as 2022. Lastly, analysis by the Environmental Law Alliance Worldwide found that key aspects of the project’s 2018 environmental impact assessment did not meet internationally accepted standards.

Describe how your initiative is aligned to Active Ownership 2.0, including:

1. The significance of the systemic, real-world outcomes it seeks.
2. How the initiative uses a variety or combination of stewardship tools/activities to achieve outcomes.
3. The theory of change for the initiative (making clear how the initiative intends to drive real world outcomes through use of the selected tools/activities).
4. The ambition, ingenuity and/or effort of the initiative.
5. How collaboration was used to drive outcomes.
6. Any challenges associated with the initiative and how these were overcome.

NAM chose to approach this important issue via a collaborative engagement method because it enables it to leverage knowledge and expertise from other investors and because it increases the ownership share in the companies tied to this project, consequently elevating the likelihood of a successful outcome. Its invitation for collaborative engagement was positively received. The collaboration comprises 25 investors, with NAM as the lead investor, representing approximately €4.8trn in assets under management. The scale of the engagement effort not only put great pressure on the companies involved, but was also heavily covered by global media and even discussed in national parliaments.

This collaborative initiative highlights the importance of engagement as a tool to change behaviour and enhance investee companies’ performance. NAM believes that divestment is ultimately a passive acceptance of suboptimal standards. This means that sometimes, instead of directly excluding companies with exposure to unsustainable practices, investors should choose to engage to enable real-world impact.

On 22 October 2020, NAM officially initiated a collaborative engagement against the construction of the planned Vung Ang 2 project. The consortium sent a letter to the 14 companies associated with the construction project, urging them to withdraw from the project and to commit to end all involvement in new coal projects worldwide, without exceptions. NAM issued a press release and also encouraged other participants to do so, to garner media attention.

In addition, when deemed relevant, NAM uses its voting rights to support climate resolutions that it considers as contributing to aligning its portfolios with the goals of the Paris Agreement. One voting example associated with the companies involved in Vung Ang 2 came in 2020, when NAM voted in support of a climate resolution at Mizuho’s AGM.

Since sending the letter, NAM has held follow-up meetings with the companies involved to discuss the topic. Depending on how the discussions evolve and what measures the companies take, the engagement may entail a dialogue with the companies’ executive bodies, and/or voting at AGMs. Citing contractual agreements, some companies have informed the collaboration that they are unable to withdraw from Vung Ang 2. However, several have recognised the importance of ending their involvement in coal and committed to withdraw from all future coal projects.

The results achieved in the initiative to date, including evaluation of its success against the objectives; any adjustments to plans going forward; any insights learned from this project that can be applied more broadly?

Media interest in this engagement has been extensive and has contributed to growing public opposition to coal in general and Vung Ang 2 in particular. As a response to the collaborative engagement, several of the companies involved in the project have committed to exit coal. NAM also believes that the initiative has contributed to decisions by a number of Asian governments to adopt new climate targets.

A few highlights of the success of the engagement include Samsung C&T’s commitment to withdraw from all future coal projects, stating that shareholder pressure has played a key role in in its decision to exit the coal industry, as well as decisions from KEPCO, Mitsubishi Corporation and Sumitomo Mitsui Financial Group to end involvement in future coal investments. In addition, Mitsubishi Corporation has informed the collaboration that it is withdrawing from Vinh Tan 3, a sister project to Vung Ang 2, while KEPCO has decided to cancel or convert to gas several of its overseas coal power projects.

The engagement can also claim some part of the credit for the Korean government’s decision to announce a net-zero target: leading up to the parliamentary vote, the engagement was heavily publicised by pro-climate members of parliament.

Despite progress, challenges remain, especially in terms of the geopolitical forces that are encouraging companies to remain involved in coal, even though the financial case may be weak. However, the tide is turning. Japan, China and South Korea, where many of these companies are located, have all recently made net-zero commitments. There is now momentum, both in terms of companies withdrawing from this specific project and also for committing to exit the coal business. NAM will continue to urge the companies involved to withdraw from the project and to commit to ending involvement in new coal projects, in line with the recommendations of the United Nations Secretary General.

Give a brief overview of your initiative, its objectives, and why you decided to undertake it.

The National Aboriginal Trust Officers Association (NATOA) and the Shareholder Association for Research and Education (SHARE) are partners in the Reconciliation and Responsible Investment Initiative (RRII) – an innovative project that is mobilising institutional investors as allies with Indigenous peoples in contributing to reconciliation and in building a vibrant Indigenous economy.

The initiative is grounded in the Canadian Truth and Reconciliation Commission’s Principles of Reconciliation and Call to Action 92, which urged businesses to adopt the UN Declaration on the Rights of Indigenous Peoples as a reconciliation framework and to apply its principles, norms and standards to corporate policy and core operational activities involving Indigenous peoples and their lands and resources – including equitable access to jobs, training and educational opportunities in the corporate sector.

Its vision is one where institutional investors, led by Indigenous investors and organisations (e.g. the growing number of Indigenous-owned investment trusts), use their capital and voices to promote positive economic outcomes for Indigenous peoples including through employment, support for and investment in Indigenous entrepreneurs, increased partnerships with Indigenous communities and respect for Indigenous rights and title.

The initiative mobilises investor engagement with investee companies to enhance diversity, equity and inclusion efforts focused on Indigenous peoples, targeted procurement opportunities, governance changes and policies that align with the UN Declaration on the Rights of Indigenous Peoples.

Most importantly, the initiative has sought to re-define the relationship of investors with Indigenous peoples from a risk management-focused approach (“this project requires better relations or may experience delays or regulatory problems”) to one that considers a more holistic set of opportunities that engages Indigenous worldviews, concepts of fiduciary duty and Indigenous leadership in order to fully include Indigenous people in economic decision-making and opportunities.

Describe how your initiative is aligned to Active Ownership 2.0, including:

1. The significance of the systemic, real-world outcomes it seeks.
2. How the initiative uses a variety or combination of stewardship tools/activities to achieve outcomes.
3. The theory of change for the initiative (making clear how the initiative intends to drive real world outcomes through use of the selected tools/activities).
4. The ambition, ingenuity and/or effort of the initiative.
5. How collaboration was used to drive outcomes.
6. Any challenges associated with the initiative and how these were overcome.

Addressing systemic racism and exclusion may ultimately benefit individual holdings but it is fundamentally focused on redressing deep flaws across the entire economy. It does not ask of institutions – whether investors or issuers – whether there is a positive net present value for Indigenous inclusion, but rather whether structures that systematically exclude Indigenous people from economic participation can ever be considered acceptable in a sustainable economy.

Indigenous populations in Canada are the fastest growing and youngest populations in the country, and their rate of entrepreneurial new business development is higher than the national average, and yet they are systematically under-represented in employment opportunities, investment and financing, corporate leadership and board seats.

Early research from SHARE found a profound lack of interest in or attention to Indigenous inclusion from both issuers and investors, except as a possible risk factor for major resource extraction projects. The purpose of RRII was to turn that on its head and re-define Indigenous inclusion as an opportunity.

The programme was designed not just to address investor risk, but to design actions that address the systemic problem at the root. Having benefited from a continuing public conversation on the means of addressing historic exclusion and dispossession, RRII has identified specific actions across the whole investment chain that different actors can take to participate in building an inclusive economy.

Further, RRII involves Indigenous leaders directly. RRII’s theory of change is built on the principle that addressing systemic racism has to start by empowering those who have traditionally been excluded from investment decision-making. The initiative is not a standard “human resources”-led approach to diversity, equity and inclusion, but a comprehensive anti-racist programme to mobilise capital market actors to address real-world outcomes that affect millions of Indigenous people on the ground.

The initiative’s work is centred on three pillars, which exemplify its theory:

1. Awareness and leadership: To raise awareness and deepen leadership among Indigenous trusts and other Indigenous investment decision-makers in responsible investment implementation;

2. Allyship: To deepen commitments from non-Indigenous investors, regulators and other capital market players in aligning policies and practices with the broader goals and principles of reconciliation, thus expanding their contribution to Indigenous economic opportunities and growth of the Indigenous economy; and

3. Accountability: To support greater accountability from the investment community and corporate Canada on reconciliation including the adoption of policies and practices that align with Indigenous rights and title, the Truth and Reconciliation Commission’s Call to Action 92, and the United Nations Declaration on the Rights of Indigenous Peoples.

Activities to support this work include:

• Ground-breaking research that collected and articulated Indigenous legal systems perspectives on fiduciary duty which deepen the very definition of responsible investment, and convening discussions with legal experts, Indigenous leaders and investors on the issue;

• Regular workshops for Indigenous trustees across Canada on taking control of investment policies and practices and stewardship activities;

• Guidebooks, tools, video resources and other materials for both Indigenous and non-Indigenous investors to incorporate reconciliation into investment decision-making, available at www.reconciliationandinvestment.ca ;

• Regular investor conferences to bring together Indigenous leadership and business leaders with mainstream institutional investors;

• Focused shareholder engagement campaigns to promote changes at the issuer level related to community relations, Indigenous employment targets, board and leadership diversity targets, and targets for procurement from Indigenous-owned businesses;

• Successfully lobbying for changes to Canadian corporate law creating an obligation for issuers to report on Indigenous diversity policies and actual results at the board and executive level;

• Promoting inclusion of Indigenous issues and presentations by Indigenous leaders at mainstream investor events across North America; and

• Development and promotion of new proxy voting guidelines for institutional investors that include criteria on Indigenous rights and participation.

The initiative is grounded in a partnership between NATOA and SHARE, two non-profit associations created to support trustees in investor stewardship, and is enhanced through collaboration with a wide variety of Indigenous organisations.

The results achieved in the initiative to date, including evaluation of its success against the objectives; any adjustments to plans going forward; any insights learned from this project that can be applied more broadly?

To date, the initiative has succeeded in:

• Involving hundreds of participants in Indigenous-focused educational and training activities, and bringing Indigenous leadership and issues to many hundreds more through conferences and panels for mainstream investors;

• Creating awareness of both the opportunity and the scope of investor action on reconciliation to public attention through media outreach;

• Creating investor-focused tools as discussed above that help Indigenous and non-Indigenous institutions incorporate the “I” into “ESG”;

• Motivating policy and practice changes at investee companies through direct investor engagement, including new Indigenous rights due diligence and community engagement measures, and new corporate Indigenous employment, advancement and procurement goals;

• Bringing Indigenous leadership into direct engagements with investee companies;

• Engaging new partnerships between Indigenous organisations and key capital markets actors (such as the new relationship between the Toronto Stock Exchange and the Canadian Council for Aboriginal Business); and

• Creating changes to corporate law in Canada requiring disclosure on Indigenous diversity policies and results.

While RRII has been focused on Indigenous inclusion as an imperative in the North American context, the model it has adopted can be effectively applied to other efforts to address systemic racism and economic exclusion through capital markets actions. Lessons learned include that:

• Efforts needs to be grounded in the experience and leadership of the people that are affected by investor action or inaction;

• Partnerships need to be built and fostered between investor organisations and leading organisations in the field; they cannot be outsourced to investment data providers; and

• Work needs to encompass the whole investment chain and ecosystem: anti-racist actions must go beyond a human resources approach in the asset management industry, to be directed at producing anti-racist outcomes in the real economy.

Give a brief overview of your initiative, its objectives, and why you decided to undertake it.

In 2020, ACTIAM launched the satellite-based engagement towards no-deforestation. The initiative has been set up jointly with Satelligence, a satellite imaging company using the latest radar satellite imagery, advanced machine learning and data analytics to detect forest cover changes. Currently, the initiative is supported by a coalition of nine financial institutions representing €1.8trn in assets under management: Achmea Investment Management, Aegon Nederland, a.s.r. Asset Management, Aviva Investors, Fidelity International, Nomura Asset Management, Robeco and Zwitserleven, as well as as ACTIAM.

Through this stewardship initiative, the parties are urging companies to take action to end deforestation in their supply chains and enhance supply chain traceability. What is unique about the initiative is that it tackles the challenge the financial sector faces when it comes to detecting and quantifying cases of deforestation within their investments.

To date, the lack of supply chain transparency has been a major barrier to understanding whether and to what extent investees are involved in deforestation. With the help of Satelligence, this engagement initiative is able to use satellite imagery and artificial intelligence to link deforestation directly to the individual companies that source commodities from specific areas.

This goes beyond the current data and tools available that merely track deforestation to certain areas and commodities, without making links to specific companies, or that merely look at policies rather than actual company behaviour. Plus, it allows for an independent assessment of a company’s performance in mitigating deforestation. The initiative therefore generates more accurate data, enables investors to monitor whether companies are meeting their no-deforestation promises, and helps to develop methods to improve transparency in company supply chains.

The first phase of the initiative covers palm oil producers in Malaysia and palm oil consumers at the end of the supply chain. This will be extended step by step to beef and soy in Brazil and Indonesia. Starting small, the initiative aims to develop methods that can be scaled up to better monitor deforestation, link deforestation cases to individual companies, and show supply chain involvement. This not only helps the financial institutions involved in the initiative, but also data providers to improve their deforestation assessments and soft commodity producers and users to provide evidence of their efforts to prevent deforestation.

Describe how your initiative is aligned to Active Ownership 2.0, including:

1. The significance of the systemic, real-world outcomes it seeks.
2. How the initiative uses a variety or combination of stewardship tools/activities to achieve outcomes.
3. The theory of change for the initiative (making clear how the initiative intends to drive real world outcomes through use of the selected tools/activities).
4. The ambition, ingenuity and/or effort of the initiative.
5. How collaboration was used to drive outcomes.
6. Any challenges associated with the initiative and how these were overcome.

The initiative provides investors with greater transparency in the supply chains of companies they invest in and helps reduce deforestation risks in their portfolios. More importantly, it aims to drive change among soft commodity producers and consumers. Specifically, it aims to tackle systemic barriers that hamper change by facilitating: better data and methods to trace deforestation back to the soft commodity producer; better disclosure and mitigation efforts by soft commodity producers; better disclosure and monitoring methods by soft commodity users; and better information for investors to reduce deforestation-related risks and improve supply chain transparency.

As indicated, the initiative currently focuses on soft commodity producers and users. The soft commodity users, in sectors such as food processing, nutrition, fast food or retail, are requested to publicly disclose supplier lists for soft commodities. Disclosure of supplier lists enables investors to better monitor no-deforestation promises and policies by these companies. This information is used by the stewardship partners to discuss with companies their possible involvement in deforestation incidents. This evidence gives these companies the tools and data to better monitor their soft commodity supply chains and meet their no-deforestation policies .

Soft commodity producers, meanwhile, are asked to respond to satellite-based evidence of deforestation in their production areas. They are also requested to set out possible steps to address their contributions to this deforestation. The engagement gives producers the tools and data to improve their deforestation monitoring and disclosure. In addition, and in collaboration with producers, the satellite imagery methods used by the stewardship partners can be improved so that deforestation incidents can be better linked to individual companies based on publicly available data.

The main philosophy of the stewardship initiative is that prevention of deforestation is hampered by a multitude of systemic barriers. The problem is not that companies are unwilling to stop deforestation, but that it can be difficult for individual companies to change the system. Cooperation can help to lift these barriers by learning how monitoring methods can be improved, which mitigation actions are most effective, and what information is most relevant for different parties in the supply chain.

Another innovation of this engagement initiative is that it enables the financial sector to understand the effectiveness and impact of engagement with companies. Thus far, few engagement initiatives have set clear impact objectives and tracked and monitored progress on impact over time. The impact aimed for by this engagement is clear: zero deforestation by 2030, measured in hectares of deforested land. The initiative is able to track progress toward that target with the deforestation data provided by Satelligence.

Similarly, it is also believed to be the first to measure progress on a significant driver of biodiversity loss and climate change at the most detailed level currently possible. Again, the initiative goes beyond measuring progress on typical ESG engagement objectives that track policy or management improvements, but instead reveals whether companies are really effecting change on the ground.

Ultimately, the engagement initiative will help to close an ESG data gap the financial sector is struggling with, namely to quantitatively measure the impact of climate change and biodiversity loss. As more companies publish supplier lists, it becomes easier to link locations to independent satellite data on deforestation. By doing so, both companies and the financial sector will be better able to mitigate risks from deforestation. In addition, as better data becomes available, companies can more effectively demonstrate the efforts they are taking to tackle the deforestation problem.

The results achieved in the initiative to date, including evaluation of its success against the objectives; any adjustments to plans going forward; any insights learned from this project that can be applied more broadly?

The initiative has been successful at engaging companies sourcing from or producing palm oil in Malaysia. The soft commodity producers have been cooperative. In contrast with some other stewardship initiatives, they will not be stigmatised for a lack of action, but will instead be encouraged to find ways to improve monitoring and mitigate against possible incidents.

However, it has proved difficult to encourage palm oil users to disclose their supplier lists. This can be a complex process for those that are at the end of the supply chain, with large numbers of suppliers.

One success of the initiative is that companies that were linked to deforestation cases detected through satellite imagery were open to checking with their partners on the ground and providing information about the actions they had taken to mitigate incidents. These companies will be followed for the next few years, and the stewardship partners will report on changes in deforestation by the companies engaged.

More investors are joining the engagement initiative, driven by the urgent need to address climate change and biodiversity loss, as well as by commitments such as the Finance for Biodiversity Pledge. This allows the initiative to extend its scope to deforestation linked to palm oil in Indonesia and other soft commodities such as soy in Brazil. Beyond that, the initiative has also started to look into the role of companies and other stakeholders in restoring and conserving forests.

Give an overview of your sustainability outcome targets and explaining the methodology for establishing them. This should include information on:

1. The sustainability outcomes, positive or negative, that you are seeking to shape.
2. The specific targets you have set, and relevant related policies you have established to implement action on sustainability outcomes.
3. Any additional context relevant information – that have influenced your choice of sustainability outcomes and targets – including links to global goals and thresholds.
4. % of AUM to which these targets apply.

As the UK’s development finance institution (DFI), CDC invests to deliver a positive economic, environmental or social impact and to support the commercial sustainability of businesses it invests in. Its mission is development-focused: to promote sustainable, long-term growth in Africa and South Asia by building strong, resilient and profitable businesses that create jobs, improve lives and deliver lasting impact in some of the world’s poorest places. It seeks to alleviate poverty, grow responsible businesses, be additional (i.e. supplement rather than substitute what private capital can provide), make a difference, mitigate market failures and achieve sector transformations.

CDC champions the UN Sustainable Development Goals (SDGs), the framework of which describe its impact objectives, including women’s economic equality and climate action. CDC has set targets for the following sustainability outcomes:

• SDG 8: Decent work and economic growth: CDC aligns all its investments with SDG 8 by assessing the difficulty of investing in the country where the investment is to be made, and the propensity of investments in the relevant business sector to generate employment. The investment difficulty of each country and Indian state is measured by an equally weighted index combining five indicators: (i) market size (GDP by purchasing power parity); (ii) income level (GDP/capita PPP); (iii) credit to the private sector (as a percentage of GDP); (iv) ‘Doing Business’ rankings; and (v) a composite measure of fragility designed by the UK’s Department for International Development. These targets apply to 100% of its assets under management (AUM).
• SDG 13: Climate action: In 2020, despite the pandemic, CDC set a target of 30% of its commitments within its broad sector investment mandate to be in climate finance-qualifying subsectors in 2021. It tracks climate finance according to the Multilateral Development Bank climate finance methodology for mitigation finance and the principles of the EU Taxonomy for adaptation finance. Its climate change strategy is aligned to the 1.5°C temperature goal of the Paris Agreement and SDG 13. Furthermore, CDC seeks to have net-zero portfolio emissions by 2050, which will be tracked by attributed portfolio GHG emissions. These targets apply to 100% of AUM.
• SDG 5: Gender equality: CDC seeks to increase investment capital for women through joint commitments with fellow development finance institutions. This is done through identifying a number and value of new commitments made that qualify for the 2X Challenge (an initiative by G7 development finance institutions to support the economic empowerment of women). Metrics include the percentage of shares owned by women, female CEO or founder, percentage of women in senior management, percentage of female employees, and products or services that disproportionately benefit or serve women. CDC’s target for qualification is 25% of AUM.

With the emerging COVID-19 crisis early in 2020, CDC recognised that, within its mandate, it needed to provide critical support as a counter-cyclical investor, providing immediate liquidity to businesses, while also taking a long-term view to support economic recovery. As all CDC’s regions have been impacted by COVID-19 in different ways, it recognised the need to step up and support its portfolio to preserve its impact.

In this context and as an impact investor, its response was built on three pillars:

• ‘Preserve’ supported its partners to safeguard impact and navigate the crisis. With investments in over 1,200 companies in South Asia and Africa employing over 800,000 people, its impact outcome focus for its investees was to save jobs, safeguard companies’ impact and build resilience.
• The ‘Strengthen’ pillar looks to scale its response to the economic and health challenges of the crisis. Beyond assisting its current investees, it looked at how to extend support – whether through working with local banks to provide the working capital that businesses need or by exploring investments that could scale up access to healthcare and basic services. Impact priority sectors under the Strengthen pillar include COVID-19 and other healthcare, sanitation and basic needs.
• Through ‘Rebuild’, CDC seeks to be a long-term partner to the countries where it invests. Finance and support from institutions like CDC will be critical to the rebuilding process.

These pillars span its entire portfolio, but CDC also identified vulnerable and high (ESG and business integrity) risk targets for additional support.

Explain how you have sought to shape sustainability outcomes through investment allocations, stewardship of investees and/or engagement with policy makers and key stakeholders. This should include information on:

1. Which levers you have used to achieve your targets, and why you have chosen them.
2. If and how you are working collectively with other investors or collaboratively with other stakeholders to achieve your targets.

In setting up its three pillars to prioritise investments for its COVID-19 response, CDC focused on blending pools of capital with different risk profiles (e.g. taking on greater risk for enhanced impact) and technical assistance (TA) funding.

Through its Preserve pillar, it provided $37m of liquidity to support its existing portfolio of companies, projects and fund managers through the crisis. It also set up an emergency TA facility which approved £820,000 of funding to 19 projects across its portfolio for projects ranging from job protection to credit risk management and health and safety improvements.

Under the Strengthen pillar, it provided $540m for systemic liquidity and to meet healthcare and basic needs to scale-up the response the economic and health challenges of the crisis. This meant proactive investments in companies, projects and partnerships (at scale) to directly mitigate some of the adverse impacts of the crisis.

Under the Rebuild pillar, CDC prepared a robust c.$1bn pipeline to be a long-term partner to the countries it invests in. This made CDC one of the first investors to re-enter the African and South Asian private equity and debt markets to support rebuilding economies and mobilising capital. In addition to investment capital, CDC offered a wide range of guidance and support to portfolio companies and networks of other DFIs and investors.

Describe how you are tracking performance against your sustainability outcomes targets (short, medium and longer term). Include details of any progress achieved to date, any lessons learned, and how strategies or implementation approaches have shifted as a result of experience thus far.

Early outcomes show CDC’s portfolio has proven to be resilient with no measurable increase in write-offs and good job retention (outperforming its International Labour Organization benchmark) because of these efforts. Against a more challenging environment, CDC increased the number of investments it holds, supporting more companies during a time of difficulty in order to sustain impact in its markets, and notably increased commitments in its high-impact portfolio.

Under its Strengthen pillar, impact-led commitments ensured scale and reach to its target populations. Its investments were distributed across priority groups, balancing the need for urgent liquidity at scale, and targeted investments to reach more vulnerable groups. Healthcare and basic needs were top impact priorities.

The other impact priorities inform its “Rebuild” pillar as the crisis evolves from an acute to a chronic situation. CDC’s DFI collaboration initiatives created a coherent response for the market with tangible results. CDC partnered with 14 organisations to commence and complete initiatives – nine with European DFIs, two with multilateral institutions and two with other groups. Matters approved ranged from emergency facilities, guidelines and standard legal documentation for repayment deferrals, guidelines for sector-specific issues, principles for TA and guidance on environmental and social monitoring. The need for alignment with a multitude of stakeholders was clear and valuable, adding credibility and robustness to its decisions.

The impacts of crises are rarely gender-neutral and COVID-19 is no different. CDC has sharpened its approach to gender-smart investing through the crisis and led the way for other investors, continuing to be a key member of the 2X Challenge. More than $200m of its 2020 investments qualified under 2X criteria.

The crisis also focused attention on the importance of responding to the threat of climate change. CDC launched its Climate Change Strategy in 2020 and has shown leadership, alongside other DFIs, by: making commitments to ensure its portfolio reaches net zero by 2050; supporting a ‘just transition’ to a low-carbon economy; and strengthening resilience in its markets to the effects of climate change.

CDC played a leading role in TA by approving a total of £5.2m of COVID-19 assistance through 65 projects and leading the European DFI collaboration. All projects in the facility were aligned with the response pillars and streamlined for quick and flexible approvals. Over 70,000 workers were supported through the Worker Engagement and Protection Facility. An example is its work on retrenchment planning, through which CDC supported 1,507 workers across five companies with a focus on vulnerable workers including women, migrants, and gig economy workers.

CDC is now assessing the results of its interventions using its impact assessment framework, which will be reviewed under each of the three pillars, aggregating data on employees supported, jobs created, jobs protected, improved working conditions, customers reached and protected, customer service improved access to basic goods and services, and COVID-19 patients screened and treated. Its combined response of capital, technical assistance, advisory and capacity building resulted in portfolio resilience, safeguarded impact and led to very real examples of impact at the level of individual investments.

Give an overview of your sustainability outcome targets and explaining the methodology for establishing them. This should include information on:

1. The sustainability outcomes, positive or negative, that you are seeking to shape.
2. The specific targets you have set, and relevant related policies you have established to implement action on sustainability outcomes.
3. Any additional context relevant information – that have influenced your choice of sustainability outcomes and targets – including links to global goals and thresholds.
4. % of AUM to which these targets apply.

Norsad Finance Limited (Norsad) has been investing for impact in the Southern African region (across the Southern Africa Development Community) for over 30 years. The principal objective of Norsad is to contribute to private sector development in its markets by providing funding to enterprises that are financially, socially and environmentally sustainable and which create jobs with decent working conditions, adopt good governance practices, and contribute to economic growth and poverty alleviation. Norsad provides direct debt financing of US$5m to US$10m to financial institutions and to mid-market companies for growth and development, and it is currently invested in 26 companies across 12 African markets in high impact sectors.

Norsad recognises that the growth it supports can have unintended negative outcomes on local communities, workers and the physical environment. Norsad is committed to ensuring that the costs of economic growth do not fall disproportionately on employees or those who are disadvantaged or vulnerable, that the environment is not degraded in the process, and that natural resources are managed efficiently and sustainably. Norsad Finance’s core purpose is “Building a Better Africa”, which reflects its intended impact and unrelenting commitment to ‘’make sure no one is left behind’’ in its impact investment.

The key themes and UN Sustainable Development Goals (SDGs) that are aligned with its impact mandate are:

• Promoting sustainable livelihoods (SDG 1: No poverty and SDG 8: Decent work and economic growth, SDG 9: Industry, innovation and infrastructure);
• Financial inclusion (SDG 8: Decent work and economic growth);
• Gender equality (SDG 5: Gender equality); and
• Investing in climate and clean energy (SDG 7: Affordable and clean energy and SDG 13: Climate action).

To alleviate negative outcomes of its investing, Norsad considers ESG factors as a crucial part of the decision-making process and incorporates sustainability criteria into all its business processes and financing activities. To achieve this, all its investments go through a rigorous ESG and impact screening assessment, and it helps investee companies to formulate and implement adequate internal social and environmental policies. Through systematic monitoring and measuring of impact and ESG compliance, Norsad tracks performance and the financial returns and sustainable impact of its investments.

To ensure it does not invest in activities with the potential to negatively impact on society and the natural environment, Norsad also requires investee companies to apply the following international principles and standards when applicable: International Finance Corporation Performance Standards and any relevant accompanying Guidance Documents; International Labour Organization (ILO) Core Conventions and recommendations, and ILO’s Basic Terms and Conditions of Employment; and European Development Finance Institutions’ Principles for Responsible Financing.

To drive continual improved performance, and to build and maintain trust amongst its stakeholders, Norsad considers the measurement and reporting of impact performance as critical. It recognises that only when performance is measured can it be effectively managed, and only when performance is reported internally and externally are stakeholders able to glean a clear understanding of its work, including its key successes and challenges.

Norsad has set the following targets and KPIs in this regard:

• An aspiration to positively impact the lives of 100m Africans by 2030; and
• 25,000 direct Jobs supported, of which 11,250 are female and 3,750 are young people.

The Norsad Impact Policy outlines its goals, objectives and commitments in relation to impact, the standards, principles and guidelines that underpin these objectives, and the way in which the organisation’s impact aspirations align with and contribute towards Norsad’s broader objectives.

Norsad has selected the SDGs to which it aligns its activities as its impact investment thesis of promoting inclusive growth and addressing inequality in its markets. In addition, the Norsad Social and Environmental Sustainability Policy expresses its commitment to incorporating sustainability criteria in its financing activities and communicates the expected standards of performance to its clients and other stakeholders. Its impact and sustainability principles and targets are applicable to 100% of its US$175m of AUM.

Explain how you have sought to shape sustainability outcomes through investment allocations, stewardship of investees and/or engagement with policy makers and key stakeholders. This should include information on:

1. Which levers you have used to achieve your targets, and why you have chosen them.
2. If and how you are working collectively with other investors or collaboratively with other stakeholders to achieve your targets.

Norsad is a private debt provider, providing financing where loans from banks are unavailable or unaffordable due to perceived risk. It works with its investee company partners to manage and mitigate risk while maximising opportunities. Its impact investing thesis and mandate is integrated throughout its business and financing activities, with its approach to sustainability enshrined in its Social and Environmental Sustainability Policy and its Social and Environmental Management System, which acts as its Sustainability Handbook.

Norsad’s impact goals and objectives have been carefully selected to closely align with regional development priorities for the countries within the Southern African Development Community region, and with the SDGs. Any impact outcomes achieved should be appropriate to the local context and country needs. Its impact investment thesis of promoting inclusive growth and addressing inequality in its markets is closely aligned with the core mandate of the SDGs, while its partner investee companies’ activities align closely with several of the SDGs and their associated targets.

Norsad adopts a gender lens when identifying and assessing potential investments and subscribes to the 2X Challenge. The 2X Challenge is based on the premise that women in developing countries reinvest approximately 90% of their income into their families and communities, whereas men reinvest only 30-40%.

Norsad publishes an annual impact report and is an advocate of the Principles for Responsible Investment (PRI) through its media, communication and reporting strategy, reflecting its commitment to accountability. In 2020, it set out to increase its reach in responsible investing through various approaches, including regional and global media engagement, ESG speaking engagements, and increased contact points with recognised bodies such as PRI and the Global Impact Investing Network (GIIN). Its membership of GIIN allows Norsad to contribute to knowledge exchange, highlighting innovative investment approaches, building the evidence base for the industry, and engaging in producing valuable tools and resources.

Describe how you are tracking performance against your sustainability outcomes targets (short, medium and longer term). Include details of any progress achieved to date, any lessons learned, and how strategies or implementation approaches have shifted as a result of experience thus far.

Short and medium term: Norsad’s investments have supported 10,366 jobs during the 2020 reporting period, including 40% women (in alignment with its commitment to the 2X Challenge and investing with a gender lens) and 10% youth employees (in alignment with its commitment to substantially reduce the proportion of youth not in employment). Women occupied over 40% of management positions across Norsad’s portfolio in 2020, compared with 29% of managerial positions worldwide. While this achievement is aligned with the targets of SDG 5, we are continuing to identify measures to improve on its gender-related targets in coming years.

Norsad’s investments in the food security sector contributed to a sold product value of US$49.4m and supported SDG 2.

Longer term: Norsad aims to positively impact the lives of 100m Africans by 2030. To date, it has impacted 40m.

In terms of lessons learnt, the COVID-19 pandemic has highlighted the need for sound ESG management and practices and turned the spotlight on the materiality of the ‘S’ factor. Norsad believes that ESG management results in sustainable businesses that are resilient, adaptable and able to recover from shocks.

Looking forward, Norsad plans to sign up to the Task Force on Climate-Related Financial Disclosures to enable reporting on climate-related financial risks. It also intends to lead by example and build capacity within its portfolio, and is optimistic that, with its resilience, strong partnerships, committed and diverse team, it will prevail over challenges and contribute to extending its impact.

Give an overview of your sustainability outcome targets and explaining the methodology for establishing them. This should include information on:

1. The sustainability outcomes, positive or negative, that you are seeking to shape.
2. The specific targets you have set, and relevant related policies you have established to implement action on sustainability outcomes.
3. Any additional context relevant information – that have influenced your choice of sustainability outcomes and targets – including links to global goals and thresholds.
4. % of AUM to which these targets apply.

Novaxia R is a real estate investment company predominantly focused on developing socially responsible housing in France and other OECD countries. It primarily targets two SDGs:

SDG 11: Sustainable cities and communities: The main objective of Novaxia R is to address the housing shortage in metropolitan areas in France. The French government has estimated a shortfall of some 800,000 dwellings, a figure which is growing every year. Affordable housing in metropolitan areas is therefore scarce. The fund helps address this by recycling obsolete tertiary sites into housing. Novaxia R buys properties (obsolete offices, industrial wastelands, etc.) to transform them into residential property by building new complexes or, if technically feasible, by rehabilitating existing ones.

By subscribing to Novaxia R, the first residential and responsible real estate vehicle to focus on urban recycling, investors support with up to 5 to 10% of their investment the fight against poor housing, supporting companies approved by the French government as being of social utility to develop social housing. Through this fund pocket dedicated to solidarity impacts, investors can, for example, support Habitat & Humanisme, a real estate company which acquires and renovates real estate to rehouse socially excluded people.

SDG 15 : Life on Land: A second key objective, closely related to urban regeneration, is to preserve biodiversity and natural spaces by avoiding real estate projects on undeveloped land. In France, 70% of land conversion is the result of housing construction. Novaxia R aims for net-zero land conversion. This means that profitable opportunities will be rejected by the investment committee if they result in unacceptable levels of land conversion. This helps avoid the destruction of biodiversity and the production of construction waste.

SDG 11: Sustainable cities and communities: A feature of the management company Novaxia Investissement is to temporarily enable occupation of empty premises during the vacancy phase between acquisition and the launch of the works (which on average lasts 18 months), making them available rent-free to local associations or by creating emergency accommodation. This approach is known as transitional urban development or temporary urbanism. It seeks to foster a model of urban development more closely aligned with appropriate use, local resources and the needs of residents.

Novaxia R’s targets include reducing potential negative outcomes and/or increasing positive outcomes, namely:

• Addressing the housing shortage, by creating 4,000 households by 2023;

• Developing 100% net-zero land conversion real-estate projects to preserve biodiversity and natural spaces;

• Developing transitional urban development during the vacancy of the building before construction work to increase social cohesion; and

• Providing up to 5-10% of investors’ commitments to companies developing social housing; for every €40,000 invested in the Novaxia R fund, a family can be housed.

The objectives apply to 90% of AUM. Novaxia R is the first responsible and solidarity-based real estate fund in France. In 2021, it was awarded the SRI and Finansol labels. The fund’s investment strategy received SRI certification on 2 March 2021, and the Finansol certification in May 2021.

Explain how you have sought to shape sustainability outcomes through investment allocations, stewardship of investees and/or engagement with policy makers and key stakeholders. This should include information on:

1. Which levers you have used to achieve your targets, and why you have chosen them.
2. If and how you are working collectively with other investors or collaboratively with other stakeholders to achieve your targets.

The objective of Novaxia R is to offer authorised investors the opportunity to acquire an interest in a diversified real estate portfolio with a majority exposure to real estate assets and projects participating in a responsible and socially responsible urban recycling dynamic, located mainly in France and other OECD countries, and offering prospects of yield and value generation over the recommended investment period. It aims to deliver an overall annualised performance of 5% over a recommended investment period of eight years.

The fund also aims to ensure an extra-financial objective consistent with the French SRI label of responsible and solidarity-based urban renewal relating to 90% of its net assets. These so-called ‘solidarity’ assets are part of the social and solidarity economy, which consists of production, transformation, distribution, exchange and consumption activities of goods or services implemented, in particular, by commercial companies seeking a social utility (such as support for vulnerable people, fighting against social and economic exclusion, the preservation and development of social ties, maintenance and reinforcement of territorial cohesion, contribution to education and citizenship, sustainable development, energy transition, cultural promotion or international solidarity, etc.). Investee companies are selected according to their activities and coherence with Novaxia Investment’s mission and key objectives, with management interviewed as a matter of due diligence.

The creation, implementation and commercialisation of the Novaxia R fund is the result of several collaborations with both financial and non-financial stakeholders. Financial partners include insurance companies AG2R LA MONDIALE, Generali, Suravenir and Spirica, which have agreed to commercialise Novaxia R via their life insurance contracts. The fund manager aims to extend this partnership to all life insurers in the market as well as to savings players in general (banks and institutional investors). The bank Socm, part of the BPCE group, has also announced that it is joining the initiative.

Among non-financial stakeholders, the fund works with public and government institutions. The Novaxia R fund is innovative and unique both in its investment strategy and in the manner in which it was created. It was launched on 19 January 2021, as result of a joint and unprecedented collaboration to recycle offices into housing between Novaxia and the French Minister in charge of Housing, Emmanuelle Wargon, the Secretary of State for the social, solidarity and responsible economy, Olivia Grégoire, and the First Deputy Mayor of Paris, Emmanuel Grégoire.

The fund also works with NGOs including Finansol, an association whose aim is to promote solidarity in the savings and finance industry. Finansol connects Novaxia Investissement with socially responsible enterprises with whom it will collaborate in order to full its mission.

Novaxia R is the first private initiative to be consistent with the draft law resulting from the Citizens’ Convention on Climate Change, which aims to halve the net conversion of land in France by 2030.

Describe how you are tracking performance against your sustainability outcomes targets (short, medium and longer term). Include details of any progress achieved to date, any lessons learned, and how strategies or implementation approaches have shifted as a result of experience thus far.

The progress of real-estate projects against Novaxia Investissement’s sustainability targets is followed and updated on a regular basis by the team in charge of project development. The sustainable development team attends weekly investment committee meetings and is responsible for monitoring the ESG targets. It ensures that the ESG investment criteria are met when choosing where to invest, and identifies which buildings can be occupied before construction begins.

Novaxia Investment publicly discloses the sustainability performance of Novaxia R in reports to investors. To date, Novaxia R has invested €2.5m euros in Habitat Humanisme, which equates to the construction of 200 homes for vulnerable families in the Paris region. The fund has also invested in a project to transform obsolete offices into 400 apartments close to Paris, which accounts for almost 10% of the first objective of the fund.

It has proved very important for Novaxia Investment to work closely with Finansol, which helped its managers understand and identify the right partners to enhance its investments in companies approved by the French government as being of social utility.

Give an overview of your sustainability outcome targets and explaining the methodology for establishing them. This should include information on:

1. The sustainability outcomes, positive or negative, that you are seeking to shape.
2. The specific targets you have set, and relevant related policies you have established to implement action on sustainability outcomes.
3. Any additional context relevant information – that have influenced your choice of sustainability outcomes and targets – including links to global goals and thresholds.
4. % of AUM to which these targets apply.

The KEHATI Foundation believes in the critical role of financial investors, as the ultimate providers of capital to economic activities, in advancing the sustainability agenda. In 2009, KEHATI Foundation, a leading environmental NGO, pioneered ESG in Indonesia’s capital market by launching the SRI KEHATI Index, the first ESG equity index in Indonesia. Its goal is to raise awareness of sustainable investment in Indonesia and help channel financial resources to address socio-environmental challenges in the country.

Its activities related to ESG and sustainability in the capital market are two-fold. First, it aims to encourage investors in Indonesia to embrace sustainability. Second, it helps to connect investors with social and environmental projects across Indonesia.

On the first objective, the foundation approaches and encourages asset managers to start their ESG journey. This includes by providing the SRI KEHATI index, which was first benchmarked to an ESG fund product (an Index ETF), launched by Indopremier Investment Management, in 2014. Since the appointment to the foundation in 2018 of executive director Riki Frindos, the former CEO of an asset management company, it has been more aggressively promoting ESG principles among fund managers.

Over the last three years, it has signed agreements with nine asset managers, helping them launch their first ESG funds by benchmarking to its SRI KEHATI Index. The total AUM of SRI KEHATI-based funds has grown around tenfold since 2018, from an admittedly very low base.

However, the foundation also provides opportunities to investors to make real-world impacts. As part of the collaboration with fund managers, it uses the index licensing fees to support its conservation projects, especially in Flores island, in the second poorest province in Indonesia and where child malnutrition is among the highest in the country. To help the local people adapt to the impacts of climate change, the foundation is re-introducing sorghum, which used to be the main staple food for the indigenous people for many generations until it was replaced by rice. Sorghum can tolerate the dry climate much better than other crops. The programme works with more than 500 farmers in over 30 villages, strengthening food security and increasing household income. As many as 60% percent of the farmers that it engages are female. As well as addressing climate adaptation, the programme also “rediscovered” 14 local seeds, helping to further improve food security.

The programme in Flores island focuses on SDG 2: Zero hunger and, specifically, 2.1: Universal access to safe and nutritious food; 2.2: End all forms of malnutrition; 2.3: Double the productivity and incomes of small-scale food producers; 2.4: Sustainable food production and resilient agricultural practices; and 2.5: Maintain the genetic diversity in food production. The programme targets the entire sorghum production and consumption supply chain, from developing seeds, cultivation, post-harvest management, developing various sorghum-based foods, developing local markets, promoting sorghum consumption locally and helping farmers to export excess production (e.g. to Bali, Java island, etc.).

Explain how you have sought to shape sustainability outcomes through investment allocations, stewardship of investees and/or engagement with policy makers and key stakeholders. This should include information on:

1. Which levers you have used to achieve your targets, and why you have chosen them.
2. If and how you are working collectively with other investors or collaboratively with other stakeholders to achieve your targets.

The SRI KEHATI project is a collaborative programme which engages a variety of stakeholders. On ESG investing, the KEHATI Foundation works with the Indonesian Stock Exchange (IDX). Officially, the SRI KEHATI Index is maintained by both KEHATI and IDX. In practice, the KEHATI foundation controls the index construction process. Given that the foundation is an environmental NGO, the collaboration with IDX brings credibility to its standing in the financial markets. However, its reputation as a leading environmental NGO also plays an important role in gaining market acceptance.

In addition, the foundation leverages the capital markets background of its executive director to reach out to the financial markets. It also cooperates with a local university (Universitas Prasetiya Mulya) to maintain the index, undertake research and develop new ESG products. It also engages with OJK (the Indonesian financial regulator) and other stakeholders to promote ESG investing in Indonesia.

On the impact side, using the index fees to help local communities strengthen their food security and adapt to climate change, the foundation works closely with local organisations, especially the local Catholic church network. (The majority of Flores islanders are Catholic.) Most of the foundation’s programmes there are executed via a local foundation established by the Catholic church. From there, it also cooperates with community groups and other local organisations. The collaboration with and endorsement from the Catholic church are critical to the success of the programme.

The foundation also works closely with government institutions. For instance, it cooperates with a government research centre to discover and develop local seeds. It works with local Puskesmas (government-owned health clinics) to promote sorghum consumption to local children from an early age and help combat widespread malnutrition. It also helped to persuade the head of the local district to issue a regulation that supports food security strength by diversifying away from rice to locally produced sorghum.

Describe how you are tracking performance against your sustainability outcomes targets (short, medium and longer term). Include details of any progress achieved to date, any lessons learned, and how strategies or implementation approaches have shifted as a result of experience thus far.

On the ESG investing side of the programme, the foundation monitors a number of target indicators:

• The number of asset managers partnering with KEHATI Foundation, which currently stands at 11;
• Total AUM of ESG funds benchmarking to its SRI KEHATI Index, which has grown to around IDR2.5trn.

Given that ESG was a relatively new concept in Indonesia three years ago, and the KEHATI Foundation was barely known among investors, few big asset managers were interested in working with the foundation. However, it has since secured partnership with two top-10 firms in the local markets, including BNP Paribas Asset Management.

While the programme does not operate on a commercial basis, it does target sufficient index licensing fees to make a real-world impact, i.e. by funding its socio-environmental projects. With the recent surge in the number of asset manager partners, it now receives around $0.5m fees for its various projects, particularly the one in Flores island. It aims to increase this amount in the future, although it does not expect significant growth because, as ESG investing becomes more popular in Indonesia, commercial players are starting to enter the market.

To promote ESG further and to deliver potential growth for its programme, the foundation is working to develop new ESG indices. It plans to launch new indices in the third-quarter of 2021, along the same model of channelling any fees received to impact projects.

On the impact side of the programme, the foundation monitors and evaluates its outcomes against targets within SDG 2 (see above). These include:

• The number of farmers enrolled in the programme, which is currently more than 500 and growing;
• The percentage of female participants, which is currently around 60%. (The project manager and the field manager are both female.);
• Hectares of new sorghum planted, currently around 233 hectares and growing;
• The numbers of areas/district covered, which stands at 33 villages in five districts in Flores island and smaller nearby islands (Adonara, Lembata, and Solor island). The programme is also expanding to the neighbouring large island of Sumbar; and
• The number of local sorghum seeds (re)discovered and redeveloped (currently 14).

The foundation also tracks, as secondary impacts, the increase in household income from selling excess production (around a 20% increase to participants that have joined the programme for one full cycle), as well as the child malnutrition rate and sorghum mix in local consumption. On these latter two indicators, the programme is still collecting data.

Give an overview of your sustainability outcome targets and explaining the methodology for establishing them. This should include information on:

1. The sustainability outcomes, positive or negative, that you are seeking to shape.
2. The specific targets you have set, and relevant related policies you have established to implement action on sustainability outcomes.
3. Any additional context relevant information – that have influenced your choice of sustainability outcomes and targets – including links to global goals and thresholds.
4. % of AUM to which these targets apply.

UniSuper’s Sustainable Path to 2050 strategy consists of three targets and supporting actions to support and advocate for ambitious carbon emission reductions both within its portfolios and beyond.

The targets are: net-zero portfolio emissions by 2050; contribute to a 45% reduction in Australia’s emissions by 2030; and 100% of its portfolio companies (top 50 Australian investments) with Paris-aligned operational emissions targets by the end of 2021.

Supporting actions include: embedding decarbonisation as a core investment theme across its portfolios; meeting with and encouraging decarbonisation strategies in investee companies; incorporating a price on carbon in its investment analysis; divesting from thermal coal miners; and, where practical, setting portfolio net-zero 2030 targets. The investment department’s progress on these targets form part of the KPIs across the team.

UniSuper has a long history of ESG integration, has been monitoring climate risks for well over a decade and has produced a TCFD-aligned report since 2018. It has offered fossil fuel-free options to its members since 2014 and, in 2020, recognised members’ desire to see positive impact from their superannuation savings to meet the aims of the Paris Agreement.

Given the momentum in countries and companies setting net-zero targets, along with the ever-decreasing costs of zero-carbon technologies, UniSuper determined that not only was consideration of climate risks key to managing investment risks, but decarbonisation would be a key investment thematic that would link its fiduciary duty to the aims of the Paris Agreement over the next decade or two.

It has set its targets with a focus on real-economy emissions reductions. It deliberately did not include short- or medium-term portfolio emission or footprint targets, instead prioritising engagement on real-economy emission reductions in company investment and engagement. In setting its short- and medium-term targets, UniSuper aimed to best leverage its influence in its home market and encourage greater ambition across all sectors and industries.

For its short-term target, it focused on operational emissions targets, seeking Paris-aligned emission reduction targets, defined as either net-zero emissions by 2050 or earlier, a Science Based Targets initiative-endorsed target, or at least 45% reductions in emissions by 2030. This target covers approximately 65% of its funds under management.

Its medium-term target is to contribute to a reduction of Australian economy emissions by 45%, and the pension fund is working with its peers, through Climate League 2030, an initiative organised by the Investor Group on Climate Change. Approximately 80% of UniSuper’s investments are in Australian companies and bonds.

UniSuper’s long-term net-zero 2050 target relies on the broad-based decarbonising of the global economy and the success of the Paris agreement to provide a diverse investment universe without compromising the investment risk/returns to members.

Explain how you have sought to shape sustainability outcomes through investment allocations, stewardship of investees and/or engagement with policy makers and key stakeholders. This should include information on:

1. Which levers you have used to achieve your targets, and why you have chosen them.
2. If and how you are working collectively with other investors or collaboratively with other stakeholders to achieve your targets.

UniSuper sees engagement as the key lever to achieve its climate targets. Within Australia, it has good access to management and boards of the companies that it is targeting. Where companies do not meet its short-term targets, UniSuper will consider the follow escalation strategies, based on the company and materiality of climate risks and emissions:

• Further engagement with the board and management either directly, through service providers such as the Australian Council of Superannuation Investors, or through collaborative engagements such as Climate Action 100+;
• Supporting climate-related shareholder resolutions, and advocating for “Say on Climate” votes;
• Voting against a remuneration report;
• Voting against a director (or, in direct investments, changing directors to bring on more expertise); and
• Divestment where UniSuper does not see the company thriving in a low-carbon world.

Additional activities to meet its objectives include: incorporating a price on carbon in its investment analysis; measuring and reporting on the carbon footprint of each of its options; keeping the carbon footprint of its diversified options below their benchmarks; working with its unlisted investments to set net-zero targets; and divesting from thermal coal miners as it does not see that they will be able to transition their business.

Describe how you are tracking performance against your sustainability outcomes targets (short, medium and longer term). Include details of any progress achieved to date, any lessons learned, and how strategies or implementation approaches have shifted as a result of experience thus far.

UniSuper reports annually to members on its progress against its targets in its Climate risks and our investments report. This is a TCFD-aligned report that UniSuper has published since 2018. In 2020, UniSuper report the following progress: 52% (by funds under management) of its portfolio had set Paris-aligned emissions targets, up from 7% in 2018; out of 50 portfolio companies, 34 had met its requirements as of November 2020, rising to 39 six months later. While 11 companies were still to set targets by the end of the year, UniSuper is pleased with progress to date. Importantly, gas pipeline company APA, which represents half of UniSuper’s fossil fuel exposure, has set a net-zero 2050 target and is pivoting its strategy to seek low-/no-carbon opportunities.

UniSuper has been pleased with how responsive companies have been to its specific requests. For example, when its managers met with a supermarket chain that was in the process of setting targets, it welcomed UniSuper’s suggestions about the level of ambition and set targets that were aligned with that ambition.

Moving forward, the fund will track the emissions of companies and measure their progress against those targets. With respect to its medium- and longer-term targets, the impact of COVID-19 will make it difficult to determine true emissions reductions over the last year. UniSuper will continue to look for decarbonisation opportunities and will advocate more on national and state emissions targets and supportive policy, both directly and via its investee companies.

Give an overview of your sustainability outcome targets and explaining the methodology for establishing them. This should include information on:

1. The sustainability outcomes, positive or negative, that you are seeking to shape.
2. The specific targets you have set, and relevant related policies you have established to implement action on sustainability outcomes.
3. Any additional context relevant information – that have influenced your choice of sustainability outcomes and targets – including links to global goals and thresholds.
4. % of AUM to which these targets apply.

Norsad Finance Limited (Norsad) has been investing for impact in the Southern African region (across the Southern Africa Development Community) for over 30 years. The principal objective of Norsad is to contribute to private sector development in its markets by providing funding to enterprises that are financially, socially and environmentally sustainable and which create jobs with decent working conditions, adopt good governance practices, and contribute to economic growth and poverty alleviation. Norsad provides direct debt financing of US$5m to US$10m to financial institutions and to mid-market companies for growth and development, and it is currently invested in 26 companies across 12 African markets in high impact sectors.

Norsad recognises that the growth it supports can have unintended negative outcomes on local communities, workers and the physical environment. Norsad is committed to ensuring that the costs of economic growth do not fall disproportionately on employees or those who are disadvantaged or vulnerable, that the environment is not degraded in the process, and that natural resources are managed efficiently and sustainably. Norsad Finance’s core purpose is “Building a Better Africa”, which reflects its intended impact and unrelenting commitment to ‘’make sure no one is left behind’’ in its impact investment.

The key themes and UN Sustainable Development Goals (SDGs) that are aligned with its impact mandate are:

• Promoting sustainable livelihoods (SDG 1: No poverty and SDG 8: Decent work and economic growth, SDG 9: Industry, innovation and infrastructure);
• Financial inclusion (SDG 8: Decent work and economic growth);
• Gender equality (SDG 5: Gender equality); and
• Investing in climate and clean energy (SDG 7: Affordable and clean energy and SDG 13: Climate action).

To alleviate negative outcomes of its investing, Norsad considers ESG factors as a crucial part of the decision-making process and incorporates sustainability criteria into all its business processes and financing activities. To achieve this, all its investments go through a rigorous ESG and impact screening assessment, and it helps investee companies to formulate and implement adequate internal social and environmental policies. Through systematic monitoring and measuring of impact and ESG compliance, Norsad tracks performance and the financial returns and sustainable impact of its investments.

To ensure it does not invest in activities with the potential to negatively impact on society and the natural environment, Norsad also requires investee companies to apply the following international principles and standards when applicable: International Finance Corporation Performance Standards and any relevant accompanying Guidance Documents; International Labour Organization (ILO) Core Conventions and recommendations, and ILO’s Basic Terms and Conditions of Employment; and European Development Finance Institutions’ Principles for Responsible Financing.

To drive continual improved performance, and to build and maintain trust amongst its stakeholders, Norsad considers the measurement and reporting of impact performance as critical. It recognises that only when performance is measured can it be effectively managed, and only when performance is reported internally and externally are stakeholders able to glean a clear understanding of its work, including its key successes and challenges.

Norsad has set the following targets and KPIs in this regard:

• An aspiration to positively impact the lives of 100m Africans by 2030; and
• 25,000 direct Jobs supported, of which 11,250 are female and 3,750 are young people.

The Norsad Impact Policy outlines its goals, objectives and commitments in relation to impact, the standards, principles and guidelines that underpin these objectives, and the way in which the organisation’s impact aspirations align with and contribute towards Norsad’s broader objectives.

Norsad has selected the SDGs to which it aligns its activities as its impact investment thesis of promoting inclusive growth and addressing inequality in its markets. In addition, the Norsad Social and Environmental Sustainability Policy expresses its commitment to incorporating sustainability criteria in its financing activities and communicates the expected standards of performance to its clients and other stakeholders. Its impact and sustainability principles and targets are applicable to 100% of its US$175m of AUM.

Explain how you have sought to shape sustainability outcomes through investment allocations, stewardship of investees and/or engagement with policy makers and key stakeholders. This should include information on:

1. Which levers you have used to achieve your targets, and why you have chosen them.
2. If and how you are working collectively with other investors or collaboratively with other stakeholders to achieve your targets.

Norsad is a private debt provider, providing financing where loans from banks are unavailable or unaffordable due to perceived risk. It works with its investee company partners to manage and mitigate risk while maximising opportunities. Its impact investing thesis and mandate is integrated throughout its business and financing activities, with its approach to sustainability enshrined in its Social and Environmental Sustainability Policy and its Social and Environmental Management System, which acts as its Sustainability Handbook.

Norsad’s impact goals and objectives have been carefully selected to closely align with regional development priorities for the countries within the Southern African Development Community region, and with the SDGs. Any impact outcomes achieved should be appropriate to the local context and country needs. Its impact investment thesis of promoting inclusive growth and addressing inequality in its markets is closely aligned with the core mandate of the SDGs, while its partner investee companies’ activities align closely with several of the SDGs and their associated targets.

Norsad adopts a gender lens when identifying and assessing potential investments and subscribes to the 2X Challenge. The 2X Challenge is based on the premise that women in developing countries reinvest approximately 90% of their income into their families and communities, whereas men reinvest only 30-40%.

Norsad publishes an annual impact report and is an advocate of the Principles for Responsible Investment (PRI) through its media, communication and reporting strategy, reflecting its commitment to accountability. In 2020, it set out to increase its reach in responsible investing through various approaches, including regional and global media engagement, ESG speaking engagements, and increased contact points with recognised bodies such as PRI and the Global Impact Investing Network (GIIN). Its membership of GIIN allows Norsad to contribute to knowledge exchange, highlighting innovative investment approaches, building the evidence base for the industry, and engaging in producing valuable tools and resources.

Describe how you are tracking performance against your sustainability outcomes targets (short, medium and longer term). Include details of any progress achieved to date, any lessons learned, and how strategies or implementation approaches have shifted as a result of experience thus far.

Short and medium term: Norsad’s investments have supported 10,366 jobs during the 2020 reporting period, including 40% women (in alignment with its commitment to the 2X Challenge and investing with a gender lens) and 10% youth employees (in alignment with its commitment to substantially reduce the proportion of youth not in employment). Women occupied over 40% of management positions across Norsad’s portfolio in 2020, compared with 29% of managerial positions worldwide. While this achievement is aligned with the targets of SDG 5, we are continuing to identify measures to improve on its gender-related targets in coming years.

Norsad’s investments in the food security sector contributed to a sold product value of US$49.4m and supported SDG 2.

Longer term: Norsad aims to positively impact the lives of 100m Africans by 2030. To date, it has impacted 40m.

In terms of lessons learnt, the COVID-19 pandemic has highlighted the need for sound ESG management and practices and turned the spotlight on the materiality of the ‘S’ factor. Norsad believes that ESG management results in sustainable businesses that are resilient, adaptable and able to recover from shocks.

Looking forward, Norsad plans to sign up to the Task Force on Climate-Related Financial Disclosures to enable reporting on climate-related financial risks. It also intends to lead by example and build capacity within its portfolio, and is optimistic that, with its resilience, strong partnerships, committed and diverse team, it will prevail over challenges and contribute to extending its impact.

Introduction: provide a short overview of the research innovation being proposed for the award

As ESG investing becomes mainstream, Crea8-Cammillion’s pioneering all-in-one ESG investing platform aims to democratise ESG investing by providing ‘best-in-class’ institutional-grade tools to investors so that the lack of data, know-how and access are not impediments to pursuing ESG investing. It also enables personalised ESG investing, empowering investors to customise their portfolios based on their needs, risk preferences and values. Finally, it streamlines and automates ESG investing for an efficient rollout, offering a scalable solution with low operational costs.

Crea8-Cammillion’s platform is a one-stop platform to design, personalise, optimise, back-test and deploy any ESG strategy. This approach allows investment professionals to create strategy templates that can subsequently be personalised and re-optimised to suit clients’ needs. Automated portfolio rebalancing and straight-through order processing can also be added for seamless client interaction. Its processes can be digitalised to cope with COVID-19, offering multi-channel delivery via relationship managers, robo advisors and chatbots.

Research innovation: Provide a description of the research innovation or report your organisation has introduced or published, and why you decided to undertake this approach

Crea8-Cammillion offers an all-in-one ESG investing platform, from lead generation, portfolio personalisation, straight-through processing and client reporting to performance analytics. It aims to address several needs:

1. High quality and low-cost ESG investment advice : Accessing affordable, independent and good quality ESG investment advice remains a challenge, even in developed countries. To promote financial inclusion, Crea8-Cammillion’s platform is designed to be easy to use with low fees. Underlying Crea8-Cammillion’s platform are big data and algorithms backed by published academic research to utilise ESG signals or capture market anomalies. Users can toggle between Lite and Pro versions to suit their level of expertise and customisation. Users are guided by ‘how to’ educational videos and more detailed white papers.

2. Bespoke ESG products: Investors have different risk profiles and investable amounts. According to a 2019 study from Morgan Stanley, 84% of investors also want bespoke products to match their values. But it is unprofitable to create products or manage personalised mandates if the investible amounts are small. With Crea8-Cammillion’s platform, it becomes cost-effective to manage small, personalised mandates. The threshold to investing can be lowered further with portfolios constructed using ESG-themed ETFs instead of individual stocks.

3. Sustainable investments that don’t compromise returns: When it comes to ESG investing, 79% of investors are concerned about performance, Morgan Stanley found. Negative screening, the most common ESG style adopted, does not enhance returns, research shows. Thus, ESG integration in portfolio construction is needed to address investors’ concerns. Crea8-Cammillion integrates ESG factors into portfolio construction using an optimiser – maximising returns and ESG signals, whilst minimising risks and transaction costs. Such exercises are computationally intensive and hitherto accessible to institutional clients only. By using a digital platform, investors can gain access to the technology at a fraction of the cost, allowing them to invest sustainably without compromising returns.

4. A choice of ESG maximisation or compliance strategies: Clients might seek to maximise E, S or G factors (or their sub-pillars), or simply be ESG compliant. The difference is subtle but is significant in intent and in the resulting portfolios. By allowing significant customisation and the ability to overlay with thematic ideas, Crea8-Cammillion can offer personalised portfolios that are optimised and at low fees. The weighted ESG score of the portfolio can also be reported.

5. A response to COVID-19: The pandemic means that people are spending more time online. To engage users on social media and to disseminate ESG-related ideas, the platform’s chatbot utilises the Markowitz Nobel Prize-winning approach to personalising solutions. Social media leads can be channelled to client acquisition teams.

   Outcomes, benefits, challenges and next steps: provide an outline as to: a) why you believe the report, process or approach is different and the aspects you believe are innovative; b) the value this approach has provided or a summary of the key conclusions; c) what you have you learned from this approach or report that can be applied more broadly.

   Crea8-Cammillion aims to democratise ESG investing. The platform provides investors with easy-to-use institutional-grade tools, allowing ESG issues to be integrated into investors’ portfolios in a personalised and optimal manner. To achieve this, Crea8-Cammillion unbundles the ESG investing process. It offers:

1. A single platform to design, back-test, personalise, optimise and deploy: Crea8-Cammillion’s platform breaks down the investment process into six steps: namely; setting the investment amount and the rebalancing frequency; selecting the investment universe; determining the investment style (ESG maximisation, value, dividend or own customisation); managing risks (position size, market exposure, risk factors, cut loss/take profits); and specifying transaction costs. The client’s individualised parameters will then be used to create optimal portfolios and to back-test the strategy. The final version will be saved and linked to the broker account for straight-through order processing. There are significant time and cost savings as the whole process, from ideas origination, portfolio construction, strategy appraisal via back-testing and orders routing, can be completed quickly. Personalised mandates can therefore be managed profitably with consistency and high quality.

2. Portfolio optimisation : Portfolio optimisation is computationally intensive, as the advisor needs to maximise the expected portfolio value, whilst minimising risks and transaction costs. By simplifying it to the required parameters, the platform optimises both ESG factors and returns, ensuring that investing sustainably does not compromise returns. Alternatively, investors can pursue conventional strategies, yet remain ESG compliant. The platform’s algorithm is robust enough to cope with different cases. It is backed by published academic research to utilise ESG signals or capture market anomalies like value and dividend investing. Using the same investment universe, Crea8-Cammillion’s ESG maximised strategy outperforms a conventional balanced strategy by 2-6 percentage points annually, depending on the investment theme.

3. Realistic back-tests and weighted ESG scores: For investors to address the new risks and opportunities in ESG investing, they need to visualise how their personalised portfolios might have performed, what ESG impact it would have had, and the companies held within. Using historical point-in-time databases, Crea8-Cammillion reconstructs the performance of the strategy by re-optimising the portfolio, using the investor’s specified parameters, at every past rebalancing point. This provides investors with a realistic assessment of the strategy’s performance, risk metrics, trading behaviour and industry/country exposures. In addition to time-based performance, market-stressed period returns (e.g. the COVID-19 shock) are also reported. All results are graphically presented for easy interpretation. To assess ESG impacts, Crea8-Cammillion reports the weighted ESG score, breaking it down by E, S and G factors and their respective subpillars. Individual companies’ detailed ESG scorecards are also available. To ensure transparency, an audit trail of what would have been held in the strategy is disclosed. Crea8-Cammillion’s back-testing system is tuned for performance. It is capable of performing 130 simulations within 40-65 seconds on a sample of 260 stocks, offering investors timely appraisal.

4. Scalability and low costs: Tools for ESG investing must be affordable and scalable if they are to be adopted by mainstream investors. Crea8-Cammillion’s platform covers over 3,000 equities and 450 ETFs globally and is partnered with a global broker for electronic trading. Ideas generation can be centralised to investment professionals, with dissemination and further personalisation offered multichannel (online/offline).

   The wealth management industry faces many challenges – digitalisation, fee compression, the need for personalisation, accessibility, financial inclusiveness and COVID-19. Crea8-Cammillion offers innovative processes to ensure managers can thrive despite these challenges.

Introduction: provide a short overview of the practice, process or product that is being proposed for the award

Southern Asset Management (SAM) has implemented ESG investment across its equity and fixed income portfolios, establishing industry-leading multi-level ESG rating and risk monitoring systems. These measures are aimed at promoting green investment and sustainable development over the long term.

In China, ESG factors are not widely applied to fixed-income investment. ESG information disclosure by bond issuers in China is inadequate, and there is no mature ESG rating model nor research available in the market. SAM’s ESG rating system relies mainly on internal research complemented with external data and its analysts have overcome numerous difficulties to achieve full coverage of bond issuers.

The company now has one of the most comprehensive ESG systems in fixed-income investment. Its ESG credit ratings cover sovereigns, supranationals and agencies, corporate bonds and asset-backed securities. The rating system covers all three primary dimensions of ESG, 16 secondary ESG themes, 36 tertiary ESG themes and 104 indicators, including domestic ESG indicators to promote localised ESG investment. As of the end of 2020, the ESG rating system included 5,241 bond issuers. Each issuer’s ESG level is standardised to enable better cross-comparison and investment screening, while the rating system allows for monitoring of ESG factors at the portfolio level, which is better integrated with investment.

Process, practice or tool: Provide a description of the innovative approach to ESG incorporation, its coverage within your firm, why you decided to undertake this approach and the value it provided preferably using a practical example of how you have applied your approach to an investment (security/issuer/sector/asset class/portfolio)

SAM believes that integrating ESG factors into credit analysis offers a valuable tool to evaluate the default risk of bond issuers, especially in a market where default risk has recently been high. Such integration could effectively mitigate portfolio risk and improve long-term returns. All its credit analysts are required to communicate with issuers about ESG concerns and gather ESG information through daily research. Moreover, to help address issues of inadequate ESG information disclosure in China and to improve the coverage of the ESG rating system, scoring is complemented by AI data mining.

The process that the company has undergone involves:

•  Localised integration: SAM has constructed an ESG analytical framework integrating international practices into the local Chinese market.
• Active engagement: SAM engages with regulators and investee companies to promote and advise on various ESG issues in China, with the information gathered used to support credit analysis.
• Applications to risk management: ESG rating results are integrated into a risk management system to identify the ESG risks of investment portfolios and provide risk alerts.
• A focus on material issues: The analysis assesses which material factors are tolerated in Chinese markets and which are highly correlated with long-term risk and return.
• Enriching data sources with intelligent technology support: AI is applied to mine data, consistently capture and monitor ESG controversies, and increase efficiency, coverage and the diversity of ESG data collection.
• Full market coverage: As of the end of 2020, the ESG rating system includes 5,241 bond issuers, making it one of the local systems with the broadest coverage.

The ESG rating system has successfully revealed exposures, enabling SAM to avoid losses. For example, connected transactions can pose a significant governance risk in the Chinese market. In one case, the rating system identified a governance risk presented by one of the leading real estate firms in China.

‘Company A’ was originally rated C in terms of its ESG performance, demonstrating stable governance at board and management levels, satisfactory ESG disclosure and good social performance. In April 2020, it announced a related-party transaction involving its actual controller. The company sold its shares in a second company, ‘Company X’ to the actual controller at a price based on the paid-in capital. SAM’s researchers noticed that although Company X is engaged in property management, an industry which is attractive to investors, disclosures showed that a price/earnings ratio of around six times was used to price the transaction. By comparing this P/E ratio with those of other listed property management companies, SAM found that the transaction was apparently and unfairly undervalued.

Based on the above analysis, SAM’s researchers downgraded Company A’s ESG rating to F (making It ineligible for investment) in April 2020. The unfairly priced transaction soon aroused wider discussion, with investors questioning the corporate governance conduct of the company’s actual controller. Due to this and the impact of the COVID-19 pandemic on the real estate industry, the value of Company A’s bonds started to fall. In late May 2020, Moody’s downgraded its rating, leading to a sharp drop in the company’s bond prices. Since SAM’s fixed-income analysts closely tracked the ESG performance of Company A, it avoided the hit to its portfolio’s performance.

Outcomes, benefits, challenges and next steps: provide an example of the outcomes, outline the benefits and challenges associated with the introduction of this initiative and what you have learned from this approach that can be applied more broadly. How might you intend to develop the process or practice?

Rising concerns around ESG issues have given SAM alternative insights on investment and asset management. ESG factors will be one of its key drivers to boost long-term investment returns by managing potential risks. As the first asset manager to launch a carbon neutrality plan for mutual funds in China, and the first asset manager in the country to publish a sustainable investing report, SAM has demonstrated its concerns about climate risks and disclosure on ESG issues.

SAM plans to increase its focus on ESG, including by regularly holding committee meetings on material ESG issues, publishing internal ESG newsletters, and launching ESG-related training programmes.

To track the performance of the ESG rating system project, SAM has set a number of measurements and requirements:

1. Its primary key performance indicator is the rating system’s degree of completion, breadth, effectiveness and application;
2. SAM actively communicates and engages with investees about ESG issues, and gives appropriate advice to promote the development of sustainable investment;
3. The self-rating system is fully applied to the investment process and investment decisions;
4. All research reports must include an ESG evaluation and rating; and
5. The portfolio’s ESG rating score and impact is dynamically tracked.

To achieve the project’s goal of full coverage and effectiveness, SAM requires analysts to keep an eye on ESG-related issues in follow-up surveys, actively communicate with bond issuers, and vote on ESG proposals as proxy holders to protect the interests of its clients. All relevant information collected is integrated into SAM’s credit evaluation system to adjust ESG ratings accordingly.

In future, SAM will pay greater attention to ESG performance. A company does not exist in isolation. Its ability to deliver positive social and environmental externalities underpins its sustainable development, and enables it to gain extensive support from employees, partners, the government and wider society. In addition, SAM plans to explore wider sustainable investment opportunities, based on ESG research and its rating system across all asset classes in the international markets.

Introduction: provide a short overview of the research innovation being proposed for the award

Harvest has developed proprietary ESG scores covering the entire China A-share market, publishing them on China’s leading financial platform, Wind, and on Bloomberg, offering the broadest possible access to the investor community while also making them available for free to academia. Based on a globally aligned and locally adapted ESG framework, the scoring system is the first of its kind developed by a buy-side institution, and it has been provided as a public good to promote the systematic integration of ESG considerations into investment decision making.

Leveraging Harvest’s local investment expertise and thought leadership, its ESG scoring features a localised framework backed by solid investment research. Aiming to build an objective, transparent and consistent scoring system, the methodology is quant-driven and rule-based, and more than 80% of the underlying metrics are quantified. Harvest’s proprietary, cutting-edge ESG-neuro-linguistic programming (NLP), powered by Al technology, is constantly capturing massive volumes of alternative data, enabling timely alerts.

The scoring has provided monthly updates for 4,000-plus public companies since 2017. It reflects pure ESG metrics that are financially material. The scores effectively distinguish leaders from laggards, forming a close-to-normal distribution. Furthermore, the ESG factors have proven to be capable of generating alpha. Since its launch in 2020, the scoring system has received wide recognition in the market.

Research innovation: Provide a description of the research innovation or report your organisation has introduced or published, and why you decided to undertake this approach

Harvest ESG scoring is a quant-driven and rule-based system that leverages AI technology to capture the broadest possible relevant data, integrating fundamental insights in building the scoring framework to inform investment decision-making. First, Harvest has built a proprietary quantitative system, leveraging proprietary NLP and AI to capture data from diversified local sources. This helps overcome challenges in data discovery and quality assurance, given the current absence of regulatory disclosure requirements.

Corporate ESG data in China suffers from low levels of disclosure and low quality due to scattered, inconsistent and non-standardised reporting. Meanwhile, third-party databases vary in methodology and subjectiveness, although regulatory, media and other sources can complement them. The scoring system draws on more than 5,000 provincial and municipal governance and regulatory references and over 200 NGO and industry association sources, including all historical environmental violation notices for the past 10 years, as well as more than 2,300 credible local media. Drawing on these sources ensures, respectively, full coverage and timeliness. Harvest has undertaken extensive data cleaning and structuration, ESG tagging, and carries out daily monitoring of and alerts to ESG events and controversies.

ESG issues vary by market, and global ESG models often lack geographic granularity and market-specific considerations. For example, global models tend to regard the environment as the most financially material ESG pillar, while Chinese models have traditionally regarded governance as most material and the environment as an emerging issue. On governance, global models focus on board independence and female board representation, while their Chinese equivalents major on shareholder rights and accounting fraud. Harvest’s methodology therefore uses localised ESG factors and insights to capture the real ESG issues faced by companies in China. The scoring framework includes three themes, eight topics, 23 issues, and over 110 underlying indicators. The localisation considerations incorporate validation by academic research, internal investment research and regulatory bodies.

Harvest has adjusted its scoring criteria to adapt to local ESG regulatory standards and stages of market development. It incorporates global and local green taxonomy and green industry classification standards and aligns with SDG social goals. For governance, China standards treat majority independence as best practice while different voting rights are uncommon due to the one share, one vote requirement in A-shares.

Third, the scoring system has integrated fundamental research insights, combining top-down and bottom-up approaches to incorporate ESG investment insights with fundamental analysis, synthesised into ESG performance indicators, impact analysis and risk identification. It effectively captures alpha, connecting ESG materiality with long-term performance, enabling company ranking, valuation, factor analysis and fund evaluation.

Outcomes, benefits, challenges and next steps: provide an outline as to: a) why you believe the report, process or approach is different and the aspects you believe are innovative; b) the value this approach has provided or a summary of the key conclusions ; c) what you have you learned from this approach or report that can be applied more broadly.

Harvest’s ESG scoring system sets itself apart as a practical ESG tool to systematically guide sustainable investment in China. For the first time, investors can comprehensively decipher the impact of different ESG issues on risk and return in Chinese listed equities, and discover ESG investment signals.

The Harvest ESG system has comprehensive coverage and can facilitate ESG investment and integration. It offers wide application and use cases:

1) It is used in Harvest’s index and active strategies to enhance returns while achieving more sustainable outcomes. Harvest has launched seven sustainability-themed indexes on the Wind platform. For example, the Wind All China A Sustainability Index has outperformed Wind All China A Index by an annualised 3.3 percentage points in the past three years, as of 30 March 2021.

2) The scoring system has been adopted by some of the largest global and local institutional investors for ESG investing.

3) It is used to measure holding-based fund and portfolio ESG scores and performance, enabling retail investors to select funds based on sustainability criteria. Harvest is working with Wind and other broker platforms to launch fund ESG scores to enable broader market adoption.

4) The system is helping to advance academic research on sustainable investment in China. Harvest is working with the Harvest doctoral workstation to publish a sustainable investing-focused working paper and is collaborating with Renmin University for student training on sustainability and research projects.

As noted above, it bridges the gap between the global and local ESG frameworks and helps address shortcomings in local and international third-party ESG. Developing a globally aligned ESG framework adapted to China’s market condition is essential to enhance the granularity and investment relevance of the ESG signal in China.

The Harvest ESG scoring process stands out in the following five areas:

Data: it has improved ESG data quality, utilising proprietary alternative data which incorporates comprehensive local data sources and rigorous data cleaning, checks and standardisation.

Coverage: it has expanded China’s coverage of raw data and scores to all A-share companies, with monthly time series dating back to January 2017.

Metrics: it has enhanced local granularity with localised metrics and weighting, as well as rigorous investment validation. It utilises a globally assigned framework adapted to the Chinese market by adding China-specific metrics to improve investment relevance. It has undergone a rigorous quant analysis to test materiality. Moreover, it incorporates input from on-the-ground fundamental analysts, industry-specific materiality frameworks and a weighting scheme to reflect local industry norms and characteristics.

Scoring: it has ensured transparency, consistency, and objectivity by focusing on quantitative metrics and rules-based scoring, based on structured data.

Benchmarking: it ensures apples-to-apples comparison by providing home-market and industry peer sets. Its scoring criteria are based on local standards and industry norms and are compatible with various industry classification standards.

In summary, Harvest ESG scores feature a globally aligned and locally adapted ESG framework developed through rigorous modelling and validation. It is built upon compressive local data sources subject to stringent data checks and cleaning and a proprietary AI-powered ESG-NLP system to enable real-time monitoring. Furthermore, factor effectiveness is ensured through rigorous testing and proved by proprietary index and quant strategies. For the first time, investors can comprehensively decode the impact of ESG issues on investing in China.

Give an overview of your sustainability outcome targets and explaining the methodology for establishing them. This should include information on:

1. The sustainability outcomes, positive or negative, that you are seeking to shape.
2. The specific targets you have set, and relevant related policies you have established to implement action on sustainability outcomes.
3. Any additional context relevant information – that have influenced your choice of sustainability outcomes and targets – including links to global goals and thresholds.
4. % of AUM to which these targets apply.

The KEHATI Foundation believes in the critical role of financial investors, as the ultimate providers of capital to economic activities, in advancing the sustainability agenda. In 2009, KEHATI Foundation, a leading environmental NGO, pioneered ESG in Indonesia’s capital market by launching the SRI KEHATI Index, the first ESG equity index in Indonesia. Its goal is to raise awareness of sustainable investment in Indonesia and help channel financial resources to address socio-environmental challenges in the country.

Its activities related to ESG and sustainability in the capital market are two-fold. First, it aims to encourage investors in Indonesia to embrace sustainability. Second, it helps to connect investors with social and environmental projects across Indonesia.

On the first objective, the foundation approaches and encourages asset managers to start their ESG journey. This includes by providing the SRI KEHATI index, which was first benchmarked to an ESG fund product (an Index ETF), launched by Indopremier Investment Management, in 2014. Since the appointment to the foundation in 2018 of executive director Riki Frindos, the former CEO of an asset management company, it has been more aggressively promoting ESG principles among fund managers.

Over the last three years, it has signed agreements with nine asset managers, helping them launch their first ESG funds by benchmarking to its SRI KEHATI Index. The total AUM of SRI KEHATI-based funds has grown around tenfold since 2018, from an admittedly very low base.

However, the foundation also provides opportunities to investors to make real-world impacts. As part of the collaboration with fund managers, it uses the index licensing fees to support its conservation projects, especially in Flores island, in the second poorest province in Indonesia and where child malnutrition is among the highest in the country. To help the local people adapt to the impacts of climate change, the foundation is re-introducing sorghum, which used to be the main staple food for the indigenous people for many generations until it was replaced by rice. Sorghum can tolerate the dry climate much better than other crops. The programme works with more than 500 farmers in over 30 villages, strengthening food security and increasing household income. As many as 60% percent of the farmers that it engages are female. As well as addressing climate adaptation, the programme also “rediscovered” 14 local seeds, helping to further improve food security.

The programme in Flores island focuses on SDG 2: Zero hunger and, specifically, 2.1: Universal access to safe and nutritious food; 2.2: End all forms of malnutrition; 2.3: Double the productivity and incomes of small-scale food producers; 2.4: Sustainable food production and resilient agricultural practices; and 2.5: Maintain the genetic diversity in food production. The programme targets the entire sorghum production and consumption supply chain, from developing seeds, cultivation, post-harvest management, developing various sorghum-based foods, developing local markets, promoting sorghum consumption locally and helping farmers to export excess production (e.g. to Bali, Java island, etc.).

Explain how you have sought to shape sustainability outcomes through investment allocations, stewardship of investees and/or engagement with policy makers and key stakeholders. This should include information on:

1. Which levers you have used to achieve your targets, and why you have chosen them.
2. If and how you are working collectively with other investors or collaboratively with other stakeholders to achieve your targets.

The SRI KEHATI project is a collaborative programme which engages a variety of stakeholders. On ESG investing, the KEHATI Foundation works with the Indonesian Stock Exchange (IDX). Officially, the SRI KEHATI Index is maintained by both KEHATI and IDX. In practice, the KEHATI foundation controls the index construction process. Given that the foundation is an environmental NGO, the collaboration with IDX brings credibility to its standing in the financial markets. However, its reputation as a leading environmental NGO also plays an important role in gaining market acceptance.

In addition, the foundation leverages the capital markets background of its executive director to reach out to the financial markets. It also cooperates with a local university (Universitas Prasetiya Mulya) to maintain the index, undertake research and develop new ESG products. It also engages with OJK (the Indonesian financial regulator) and other stakeholders to promote ESG investing in Indonesia.

On the impact side, using the index fees to help local communities strengthen their food security and adapt to climate change, the foundation works closely with local organisations, especially the local Catholic church network. (The majority of Flores islanders are Catholic.) Most of the foundation’s programmes there are executed via a local foundation established by the Catholic church. From there, it also cooperates with community groups and other local organisations. The collaboration with and endorsement from the Catholic church are critical to the success of the programme.

The foundation also works closely with government institutions. For instance, it cooperates with a government research centre to discover and develop local seeds. It works with local Puskesmas (government-owned health clinics) to promote sorghum consumption to local children from an early age and help combat widespread malnutrition. It also helped to persuade the head of the local district to issue a regulation that supports food security strength by diversifying away from rice to locally produced sorghum.

Describe how you are tracking performance against your sustainability outcomes targets (short, medium and longer term). Include details of any progress achieved to date, any lessons learned, and how strategies or implementation approaches have shifted as a result of experience thus far.

On the ESG investing side of the programme, the foundation monitors a number of target indicators:

• The number of asset managers partnering with KEHATI Foundation, which currently stands at 11;
• Total AUM of ESG funds benchmarking to its SRI KEHATI Index, which has grown to around IDR2.5trn.

Given that ESG was a relatively new concept in Indonesia three years ago, and the KEHATI Foundation was barely known among investors, few big asset managers were interested in working with the foundation. However, it has since secured partnership with two top-10 firms in the local markets, including BNP Paribas Asset Management.

While the programme does not operate on a commercial basis, it does target sufficient index licensing fees to make a real-world impact, i.e. by funding its socio-environmental projects. With the recent surge in the number of asset manager partners, it now receives around $0.5m fees for its various projects, particularly the one in Flores island. It aims to increase this amount in the future, although it does not expect significant growth because, as ESG investing becomes more popular in Indonesia, commercial players are starting to enter the market.

To promote ESG further and to deliver potential growth for its programme, the foundation is working to develop new ESG indices. It plans to launch new indices in the third-quarter of 2021, along the same model of channelling any fees received to impact projects.

On the impact side of the programme, the foundation monitors and evaluates its outcomes against targets within SDG 2 (see above). These include:

• The number of farmers enrolled in the programme, which is currently more than 500 and growing;
• The percentage of female participants, which is currently around 60%. (The project manager and the field manager are both female.);
• Hectares of new sorghum planted, currently around 233 hectares and growing;
• The numbers of areas/district covered, which stands at 33 villages in five districts in Flores island and smaller nearby islands (Adonara, Lembata, and Solor island). The programme is also expanding to the neighbouring large island of Sumbar; and
• The number of local sorghum seeds (re)discovered and redeveloped (currently 14).

The foundation also tracks, as secondary impacts, the increase in household income from selling excess production (around a 20% increase to participants that have joined the programme for one full cycle), as well as the child malnutrition rate and sorghum mix in local consumption. On these latter two indicators, the programme is still collecting data.