Description of principal adverse impact on sustainability factors
As part of Norron’s sustainability analysis, the principal adverse impact of investment decisions on sustainability factors are taken into account. Consideration of principal adverse impact in the investment process can lead to benefits not only in the financial markets but also strengthen the resilience of the entire economy and the stability of the financial system. As a result, it can ultimately affect the risk and return of financial products.
The principal adverse impact on sustainability factors can be related to both the climate and the environment as well as social factors. In order to identify an investment’s main climate-, and environment-related impacts, the portfolio managers assess e.g. the investment’s greenhouse gas emissions and energy consumption/intensity, exposure to fossil fuels and non-renewable energy, waste management and the impact on biodiversity and water. Furthermore, important social factors include incidents or adverse events linked to employee relations and compensation structure, violations of international norms or deficiencies in complying with the UN Global Compact, deficiencies in corporate governance or in processes for incident monitoring etc.
Norron manages and takes measures related to the principal adverse impacts in accordance with the investment process for the funds.
Consideration of the principal adverse impact on sustainability factors in the investment process
The nature and extent of the principal adverse impact on sustainability factors can vary depending on sector affiliation, region, business type and financial instrument etc. In order to manage these sustainability factors and risks, consideration of potential investments’ the principal adverse impact on sustainability factors is an integral part of Norron’s investment process. The principal adverse impacts are taken into account in the investment process, together with the relevant financial risks and the relevant sustainability risks. All of these factors are essential for optimizing the risk-adjusted return for each fund in a methodical way.
Norron’s investment process is divided into three main areas that manage the fund’s exposure to the principal adverse impact on sustainability factors at different stages of the investment process and with different methods.
1. Investment universe
Norron’s investment universe is determined on the basis of factors such as geographical area, type of financial instrument, sectors and any further restrictions in each fund’s management mandate. These are stated in the pre-purchase information for each fund. In addition, the funds’ investment universe is determined by excluding certain sectors where Norron considers that the sustainability risks and the principal adverse impact on sustainability factors are, by nature, unjustifiably high and too significant. When it comes to this step, it is not the specific sustainability risks or principle adverse impact that an individual investment is associated with that are assessed, but the specific sector’s overall exposure to them. By excluding certain sectors from the investment universe in advance, the greatest sustainability risks and the most significant principal adverse impact on sustainability factors can thus be avoided. More information about which exclusion criteria are applied to Norron’s funds can be found on our website under the tab Exclusion criteria.
2. Investment analysis
The investment analysis consists of a fundamental and quantum-based analysis, subjective assessment of the investment’s conditions for generating a financial return, the financial instrument’s characteristics, the sustainability risks and principal adverse impact on sustainability factors that an investment is associated with. Norron uses both internally prepared and external analysis as a basis for the analysis. All of these factors affect Norron’s decision as to whether or not make an investment. Does Norron assess that the company’s financial prospects are not good enough, that the sustainability risks in the company are too high or that the investment is associated with too significant principal adverse impact on sustainability factors, whilst the company does not have a plan or process for how to address the problems or manage these risks, an investment in the company is not relevant.
3. Active ownership
It is through active ownership that Norron can influence a company’s change or improvement work, both concerning financial and sustainability-related factors. Norron believes that it is through an active management approach that the greatest possible sustainable and economic value creation is generated for the fund unit holders. The active management philosophy is divided into three main areas for active ownership; (i) interaction, (ii) structure and process and (iii) ongoing analysis.
As investors, Norron works together with the portfolio companies and follows a friendly ownership and change strategy where there is a continuous dialogue with the companies in which we invest. In this way, we can influence and follow up the portfolio companies’ sustainability work so that it meets Norron’s requirements and expectations. Interaction takes place through meetings with company representatives, conferences and workshops, meetings with third-party analysts, case studies and voting at general meetings on important issues. Norron’s employees also participate in various meetings to increase knowledge and understanding of the portfolio companies’ sustainability work.
- Structure and process
Norron has a structured process for how to work with the portfolio companies. This includes, among other things, gathering information about companies, documenting company interaction, screening the funds against sustainability factors, managing incidents in portfolio companies and the internal sustainability analysis. All sustainability data we have about companies is collected in an ESG database. In this way, we can follow up the companies’ sustainability work in an effective and clear manner and monitor the sustainability risks as well as the principal adverse impact on sustainability factors in the funds.
iii. Ongoing analysis
In addition to pre-investment analysis, companies in which Norron invests are also analyzed during the investment period. The analysis is based on the information we collect about the companies on an ongoing basis and on external analysis. In the ongoing analysis, sustainability factors are taken into account both for individual investments and on the overall fund level. The analysis then forms the basis for whether an investment should continue or be divested and what measures that may need to be taken to achieve the fund’s sustainability characteristics.
The fund applies an active management philosophy in order to be able to generate the greatest possible sustainable and economic value for the fund unit holders. The ownership strategy is to follow a productive ownership and change strategy and work together with the portfolio companies and have a continuous dialogue with them. As such, Norron can follow up and influence the portfolio companies’ sustainability work to ensure that it helps the funds’ achieve their sustainability characteristics. Interaction takes place on an ongoing basis through meetings with company representatives, conferences and workshops, third-party analysts, case studies and by voting on important issues voting at general meetings. More information about Norron’s principles for shareholder engagement can be found on the website under Legal information.
As part of our sustainability work, Norron has signed national and global initiatives for sustainable development. These are the UN PRI Principles for Responsible Investment and the UN Global Compact’s 10 principles based on the UN Declaration of Human Rights. Through these commitments, Norron undertakes to follows their principles and guidelines, which thus become binding for the business.
Limitations in relation to measuring and monitoring of sustainability characteristics
Norron always strives to have as comprehensive and reliable information as possible about the investments in the funds. Norron’s investment universe comprises about 400-500 companies in different sizes and with different market cap. The funds can also invest in unlisted companies. Norron seeks information about the portfolio companies from external data sources, third-party analysis and through its own internally prepared analysis. However, it cannot be guaranteed that the sustainability information obtained is always complete and correct. Particularly for smaller companies, relevant information for monitoring is not always available. In the event that significant information for Norron’s funds’ sustainability profile is lacking and there is a risk that the information might cause significant damage to each fund’s promotion of sustainability characteristics, Norron primarily seeks such information from external data providers. As an alternative, Norron seeks the specific information from the company concerned. However, Norron cannot guarantee that complete sustainability information is available for all funds’ holdings.