Sustainability risks are integrated into the investment decisions, but the fund does not promote environmental or social characteristics or have sustainable investments as its objective.
How are sustainability risks integrated into the investment decisions?
Pursuant to regulations, a sustainability risk is an environmental, social or corporate governance event or condition that, if it occurs, could cause an actual or a potential significant adverse impact on a company's value. The fund is an index fund that integrates sustainability risks into the investment decisions through its selection of an index, in which the underlying equities meet the exclusion criteria applied by the Management Company. The assessment of companies in the index is conducted based on data from an external ESG service provider. Sustainability risks are managed primarily by a regular control to ensure that the underlying assets meet the exclusion criteria applied by the fund, as well as through active stewardship with engagement dialogue and active corporate governance. Ultimately, the management of sustainability risks can mean that the Management Company chooses to change the index. Climate risks are of importance to most companies and the Management Company measures the carbon footprint of companies to identify those companies that require further analysis and engagement efforts. To facilitate the analysis with regard to a company's adverse impact on the climate, the Management Company also takes into account a more forward-looking measurement, such as whether the company has set objectives aligned with the Paris Agreement or whether the company's development is in line with the 2?C target. The Management Company conducts scenario analyses and stress tests for the fund based on climate risks at least once a year. The integration of sustainability risks is followed up regularly by the Management Company's risk control function. Monitoring includes a daily follow-up and control, as well as a more in-depth control of sustainability risks within a specific risk forum that focuses on sustainability. Representatives in this forum include senior decision-makers in the Management Company. Sustainability risks in the fund are followed up by applying a measurement that measures sustainability in the fund's holdings. External sustainability ratings are primarily used in these instances. As a result of the fund's index selection, the fund has a reduced climate risk due to its low exposure to those companies with the highest climate-related risks, i.e., companies with exposure to coal, oil and gas. Instead, sectors such as real estate, agriculture and basic materials are essential for the fund based on the climate stress tests conducted by Management Company. The Management Company concludes that the management of sustainability risks through its index selection, as well as active stewardship through engagement dialogue and active corporate governance will provide higher risk-adjusted returns over time. However, in the short term a composition of companies in the index can increase the fund's sector-specific risk and result in weaker returns with rising oil prices, for example.
Consideration of principal adverse impacts on sustainability factors
The portfolio management takes into account the principal adverse impacts on sustainability factors (PAI). This is conducted through the PAI tool developed by the Management Company, which identifies and analyses any adverse impacts. The measurement values for a number of different key figures are controlled based on defined rules and give an indication of their risk relevance and severeness in relation to each sector exposure. As a result of the analysis, identified risks for companies that are considered to have high risks linked to PAI may be managed through engagement in the form of active corporate governance and dialogue or, as a final measure, through an index change. The fund invests widely across several sectors. As a result, the PAI indicators that are relevant and the top priorities will therefore differ between the fund's investments. The quality and accessibility of the data also currently affects the integration of principal adverse impacts on sustainability factors in fund management, and this is managed by escalating a greater number of issues for a more in-depth manual analysis.