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ESG integration

We have developed asset class-specific approaches to ESG integration that fit together within a single holistic framework but address the needs of each asset class.

Tailoring ESG integration to each asset class

The breadth and depth of our ESG approach is a key element of our value proposition. Drawing on more than two decades of experience, we have designed different ESG frameworks that are tailored to each asset class:

  • In our direct equity and fixed income portfolios, we focus on evaluating individual securities using our “ESG Cockpit”. This proprietary analysis tool integrates raw data from a range of ESG data providers into over 40 KPIs in order to assess the ESG profiles of different companies.
  • In our multi-manager portfolios – including private equity, private debt and hedge funds – we evaluate and engage with our underlying managers on ESG, encouraging them to raise the bar for ESG over time.
  • We also apply an ESG framework to less obvious asset classes, such as insurance-linked securities, based on our belief that it is possible to invest through a meaningful ESG lens.

For our direct investments, we evaluate a company’s ESG performance based on its operations, its products and services, and any ESG controversies. Viewed together, these different dimensions provide a holistic ESG perspective – allowing us to identify both risks and opportunities. This approach is crucial to avoid investing in any companies that generate positive outcomes through their products and services but are poorly managed, or vice versa.

Our ESG Cockpit is a key tool when analyzing the ESG performance of public companies. It enables our portfolio managers to score individual firms based on a range of KPIs and to measure their environmental footprint, impact on the SDGs and alignment with net zero. The ESG Cockpit also enables our team to continuously monitor the ESG attributes of an individual security or an entire portfolio.

We pursue a holistic approach when assessing the ESG performance of managers across asset classes, including private equity, private debt, hedge fund and long-only. Here, we focus on selecting the best managers that share our strong commitment and high standards in the area of ESG integration.

As part of our due diligence process, we assess the overall ESG commitment of managers and determine whether they have institutionalized ESG processes or demonstrated a willingness to improve in this area. In the assessment, we evaluate managers in four key areas of ESG practice: commitment, investment process, ownership practices and reporting. Managers are assigned a score of 1 to 4 (where 1 = excellent and 4 = poor) for each area, resulting in an overall rating for each manager that is then documented in our monitoring system. Managers who receive low scores on specific indicators are encouraged to improve over time.

For direct investments in private markets, we consider the ESG practices of managers, and we use an ESG matrix to review the company’s business model, as well as its products and services. We also carry out a materiality review of the various ESG factors, using SASB materiality maps for different industries and sectors. This analysis is combined with a consideration of any ESG controversies identified by our risk monitoring solution, which tracks more than 100,000 online information sources in 23 languages, flagging controversial ESG issues. Furthermore, we use the ESG Cockpit to assess the carbon footprint of the target company, leveraging public market industry averages as a proxy for the company’s actual footprint.

For private debt, we additionally assess whether companies are likely to have any positive or negative impacts on the SDGs, using data for the industry or sector as a proxy. This process is supplemented with an analysis of whether companies are aligned with the mandatory Principal Adverse Impact (PAI) indicators, as defined in the Sustainable Finance Disclosure Regulation (SFDR).

For ILS, we analyze whether the deal counterparty – typically an insurance or reinsurance company – meets certain minimum ESG standards as a firm using our ESG Cockpit.

In a second step, we assess the ESG impacts of the risks covered by the individual transaction. This involves a detailed review of the risk-transfer element of the underlying ILS position. From an ESG perspective, we favor transactions that only cover residential property or provide cover against climate-relate perils, as they help to protect people and communities over the long term.

By contrast, transactions that provide reinsurance cover for businesses active in the extraction, storage, transportation or manufacture of fossil fuels or other assets used for such purposes are classed as ineligible for investment on ESG grounds. Overall, we aim to take a holistic approach to ESG assessments, considering the ESG practices of counterparties and the ESG implications of risks underwritten by the transaction.

In connection with the management and operation of certain investment mandates, LGT Capital Partners (and/or the investors in such mandates) may be subject to laws that regulate the manner in which ESG considerations may be incorporated into investment processes. Where applicable and notwithstanding anything herein to the contrary, LGT Capital Partners intends to incorporate ESG considerations into the investment process in a manner that complies with such laws and regulations. Further, when required by any such laws and regulations, LGT Capital Partners intends to pursue risk-adjusted returns without concessionality to ESG considerations.