Sustainable, Responsible &/or ESG Policy:

Our verification process is designed to identify impact and to incorporate ESG criteria into the selection process for our investable universe. Our investment universe encompasses green, social and sustainable bonds—these are defined as bonds supporting environmental and social activities/projects—and we include generic bonds by highly sustainable and responsible issuers. The verification process is one of positive selection to identify and screen both issues and issuers for meaningful and measurable impact and we invest only in bonds that fulfil our stringent criteria. These include credit worthiness of the issuer, environmental/social benefits and the ability to determine that proceeds are dedicated to positive impact.

While our universe is wider than green bonds, they currently represent the most significant portion of our investable universe. Green bonds are conventional debt instruments whose proceeds fund projects that help the world mitigate or adapt to climate change. Mitigation reduces and stabilises greenhouse gas emissions, e.g. renewable energy and low carbon transit, while adaptation helps communities and ecosystems adjust to new climate extremes, e.g. resilient infrastructure and water management.

Process:

Our verification and credit teams build the SPECTRUM Bond® and SPECTRUM-Aligned universe of eligible bonds for the portfolios through positive selection:

Sustainable

Aligned with our purpose to support the UN SDGs and Paris Agreement on Climate Change.

Positive externalities

Positive environmental and/or social externality associated with their issuance. Criteria include: social and environmental sectors, geographical and socio-economic context, policy and strategy context.

Credit

Issuers must be creditworthy from both a financial and broader environmental, social and governance perspective.

Transparent

Clear and transparent investment policies and processes on reporting and disclosure. Criteria include: disclosure of project portfolio, project assessment disclosure, commitment to output reporting.

Responsible

Responsible issuers with strong integrity and standards, as well as a clear commitment to a sustainable business model. Criteria include business practice, motivation, action and affirmation.

Use of proceeds

Ability to determine use of proceeds to assure funded activities meet the AIM criteria. Criteria include separate accounting for impact bond proceeds, external review, and project alignment.

Measurable impact

All securities must offer mainstream market yields and provide reporting on the material and measurable environmental and social impacts. Criteria include impact KPIs, baseline and target disclosures, and impact reports to stakeholders.

Issuers and impact bond frameworks are assessed independently across this range of criteria and sub-criteria in order to rate and rank their potential impact. For monitoring and control purposes, we review the ratings on a regular basis, or when new ESG-related information comes to light. In the event of ESG controversies, we seek to engage issuers to determine their remediation efforts and whether the controversies are part of a pattern. The resulting insights help us assign new scores and decide whether the framework/issuer needs be excluded from the universe.

Credit check

Our credit review starts in verification in what is described as the ‘base credit check’. This is an initial view of the issuer to determine whether the verification team should embark on the full SPECTRUM process. The objective is to ensure we do not waste time on issues that are not going to qualify from a credit perspective.

If the issuer passes the ‘base’ check, it will be subject to the full SPECTRUM process, an important part of which is the ESG review, as well as the full credit review. We have had issues that passed either the credit or SPECTRUM impact review, but failed the other and these are not included in the SPECTRUM Bond® universe.

Credit is also important in the portfolio management process (after passing the verification tests). It is here the credit team works with the portfolio team on the approved credits and the relative value/outlook for spreads. An issuer that passes all credit and verification tests may not have a place in the portfolio if the current yield spread is not deemed to be attractive.

Portfolio management

View generation

Our portfolio management team focuses on fundamental research, market conditions and political environment. By analysing criteria such as valuation, marketing positioning and consensus expectations, alongside economic dynamics and interrelationships, we aim to ascertain where investment opportunities lie (both inter- and intra-regional).

Our portfolio management team uses a series of indicators/criteria as a framework for determining both the absolute and relative value of bond and currency markets. The indicators provide a structured framework for determining our view of the outlook for currencies and bond markets. These views then feed through to portfolio construction with a risk budgeting focus. The ranking given to each bond market or currency does not mean the top ranked will have the largest weight in the portfolio. Any over- or under- weight will be balanced by the risk associated with each position and with the portfolio as a whole.

Portfolio construction

The portfolio construction process starts with analysis of the differences between the SPECTRUM universe and the client’s benchmark. ‘Hot spots’ of difference in risk are identified and hedged, if not in accordance with our active views or risk tolerance.

In terms of portfolio construction, we adopt a risk-budgeting approach. If the client guidelines permit, this can include an allocation of the risk budget to active currency.

Our team will review market availability and construct the portfolio in accordance with our SPECTRUM Bond® universe and the input from our credit team.

The portfolio construction also adheres to specific weight limits assigned to credit ratings. Across our global intermediate duration funds we are permitted to invest in sub-investment grade securities up to a maximum of 15%. If securities were downgraded below investment grade to leave aggregate holdings above 15%, we would sell securities to move the holdings back within the permitted tolerance. We also manage credit rating exposures at an issuer and rating band level at time of purchase. If weights exceeded thresholds, as a result of security downgrades, we would seek to reduce positions at a time that was not disadvantageous to the fund. The sustainability and credit teams continually review the issuers in our SPECTRUM universe. If an issuer is no longer eligible, and is held in the portfolios, the portfolio management team have 30 days to sell the holding.

Implementation

We differentiate in terms of portfolio implementation in a number of ways:

• Our deep understanding of the impact fixed income market.
• Our use of ‘SPECTRUM-aligned’ as a risk management tool. This allows us to manage inflows or portfolio re-balancing with access to greater liquidity than is sometimes available in the secondary market for impact fixed income, especially when intermediaries are holding less inventory. A SPECTRUM-aligned issuer is defined as an issuer that delivers products or services in a range of sectors, where at least 50% of revenues are generated from sectors aligned with eligible sectors (sustainable, green and social), there is a clear commitment in the issuers’ strategy or mission to achieving UN SDGs, and they have strong transparency and commitment to impact reporting. Using SPECTRUM-aligned means we can buy any bond issued by this issuer, even when not a ‘use-of-proceeds’ bond.
• Reverse enquiry – a series of memorandums of understanding from issuers such as the World Bank to issue on request according to our needs.

Monitoring and reporting on impact

We actively engage with the issuers on an ongoing basis, as the transparency and issuer monitoring pillars are critical in order to guarantee the commitment to reporting by issuers. We perform an ongoing review of the SPECTRUM criteria to ensure the scores are kept accurate and capture any recent changes or controversies.

An important component of our investment philosophy is ensuring our investors receive transparent impact reporting. This allows our clients to monitor, on an annual basis, the impact their investments have made environmentally and socially. Our Annual Impact Report details an independent assessment of greenhouse gas reduction and our alignment with UN Sustainable Development Goals, while providing details of projects funded across the portfolio.

Exclusions

We would exclude investments in corporate issuers that:

• Have direct involvement in manufacturing tobacco products.
• Have direct involvement in the manufacture of weapons that are controversial or indiscriminate in use.
• Have significant or direct involvement in the manufacture or sale of conventional weapons.
• Manufacture or have significant and direct involvement in the sale of firearms and/or ammunition.
• Have significant and direct involvement in gambling operations.
• Have significant and direct involvement in coal mining, production and/or coal-fired power generation, in particular new greenfield sites.

For non-corporate issuers, such as sovereigns, states and agencies, we review sanctions lists and avoid poor ESG performers as characterized by international organizations, such as The United Nations, The World Bank Group, International Monetary Fund, World Economic Forum and others. Overall, we examine sovereigns, states and state-controlled institutions and agencies on a case by case basis under our SPECTRUM Bond® criteria rather than have a rigid exclusion checklist.

Research

All research is conducted in-house.

The sustainability and credit teams establish the investable universe through proprietary and independent verification of labelled and unlabelled impact bonds. Two data providers are used to supplement their analysis: ISS ESG, for norms-based screening, and S&P ESG data. These screening tools are not replied upon. Each issue and issuer that enters the universe is evaluated on a case-by-case basis.

In addition, the portfolio management team uses third party research which is in the public domain. This is used to inform macro views and positioning.

Resources, Affiliations & Corporate Strategies:

ESG/SRI teams

LOIM has over 20 in-house staff working on ESG/SRI as well as stewardship / responsible ownership activity.

The LOIM Sustainable Investment Research Strategy and Stewardship (SIRSS) team  is responsible for research and analysis regarding forward-looking sustainability challenges or traditional ESG issues, and for providing a centralised framework for our stewardship efforts. The team provides the data necessary to carry out appropriate climate-related risk oversight through engagement and voting.

Christopher Kaminker is the Head of the SIRSS team and reports directly to Hubert Keller, the Managing Partner of the Group in charge of LOIM. Maxime Perrin is the Head of the Sustainable Investment team and reports to Nathalia Barazal, Co-Head of LOIM (along with Jean Pascal Porcherot, the other Co-Head of LOIM).

In terms of organisation, the SIRSS team is responsible for identifying, analysing and mapping material sustainability challenges that are likely to affect the long-term viability of companies' business activities and models. The team analyses the exposure of different sectors and industries to sustainability challenges, and companies' susceptibility to those challenges, i.e. (1) zero-waste, (2) regenerative nature, (3) dematerialisation, (4) resource efficiency, (5) fair society, (6) secure society, (7) zero-emissions, and (8) adaptation and resilience.

The SIRSS team draws not only on third-party data suppliers but also develops and maintains proprietary, internal datasets to evaluate companies’ positioning with respect to sustainability challenges. The team also works to develop and launch new sustainable investment products and solutions and is responsible for internal verification of green, social and sustainability bonds. The team is also responsible for carrying out our strategic objectives on stewardship, working directly, or in industry collaborations, with investee companies to promote sustainable business practices and business models, and enhance long-term value for clients.

Within the SIRSS team there are 2 dedicated specialists, included and headed by Rebeca Coriat (Head of LOIM Stewardship), dedicated to proxy voting and engagement. In addition, the engagement team works closely with investment professionals in order to carry out engagements as this function is integrated. This refers to the complete engagement process, including engagement candidate identification, engagement research for internal memo, engagement program, with specific engagement objectives, conversations with investee companies, and engagement feedback into the engagement process

The ESG Solutions team (headed by Robert de Guigné) is a SIRSS sub-team that focuses on companies’ business practices and government sustainable policies.

The ESG Solutions sub-team is responsible for measuring various environmental impact metrics and the alignment of portfolios temperature with the Paris Agreement on climate change. It conceives, develops and distributes various ESG assessment tools such as business practices scorings, controversy indicators and impact metrics, including companies' carbon and water intensity. These tools are integrated by all our investment teams in their investment processes, through screenings, best in class, exclusions approaches for our systematic teams, and integration in the decision making process for our high conviction teams. The team collects comprehensive conventional and alternative data in order to assess companies’ sustainability through their business practices and their products/services offering. Our in-house scoring system verifies that companies’ business practices comply with the highest international ESG standards for their industry and measures their alignment with the United Nations Sustainable Development Goals (SDGs). Additionally, the team monitors the occurrence and severity of controversies with potential to affect companies and their stakeholders. Climate-related risk analysis is a cross-team collaboration between our investment teams and our dedicated sustainability experts, which allows us to blend systematic and fundamental analysis at all levels of the investment process. This collaborative approach and our innovative investment platform ensure that our investment team can make forward-looking investment decisions with the highest level of information and, therefore, conviction.

In addition, the Sustainable Investment team (headed by Maxime Perrin, and previously named CLIC Solutions team) works closely with the SIRSS team at the group level, helping to efficiently embed the relevant tools, metrics, and analysis in the LOIM’S investment products and solutions. The team was created by the LOIM CEO office as a unit responsible for supporting the LOIM’s ambition to be a leader in the sustainable investment field. The team supports this key strategic initiative across LOIM by providing leadership, coordination, and implementation support to all business units on sustainable investment.

The Sustainable Investment team has full responsibility on:

• investment processes: ensuring the integration of ESG/sustainability criteria and tools in the investment decision process;
• reporting: defining the most appropriate disclosures and reporting for each investment product and solution;
• regulation and internal organization & policies: collaborating in the definition of the internal organization and policies, in compliance with the evolving regulatory framework around sustainability;
• communication and content: narrating LOIM vision and strategy on sustainability; and product range, helping develop and launch new sustainable investment products and solutions.

SDR Labelling:

Not eligible to use label (out of scope)