ESG INTEGRATION

INSIGHTS
INVESTORS IN THEIR OWN WORDS

2021 EDITION
 Contents
01 Introduction

SELL SIDE 02 Redburn

TRADE FINANCE 10 Federated Hermes

PROPRIETARY ESG SCORING 18 PSP

EMERGING MARKETS 24 Nordea Asset Management

VERSION 2021-12-06

ESG Integration Insights Disclaimer: The ESG Integration Insights series highlights interesting and innovative examples of how investors use SASB Standards to inform analysis and decision
making. The case studies are written by practitioners from around the world, covering a range of asset classes and strategic approaches to ESG integration. By sharing these examples on an
ongoing basis, the Value Reporting Foundation hopes to facilitate increased market awareness and understanding of emerging practices in sustainable investment.
The Value Reporting Foundation does not provide investment, financial, tax, legal, or other advice. This publication was prepared for informational purposes only and should not be relied on for
such advice. The Value Reporting Foundation is not responsible for the content of the case studies or any third-party resources that may be referenced in this or other ESG Integration Insights
publications. Any findings, interpretations, recommendations, conclusions, and opinions expressed in this publication are those of the contributors and do not necessarily represent the views
of the Value Reporting Foundation. The inclusion of case studies written by or about specific organizations does not in any way constitute an endorsement of these organizations by the Value
Reporting Foundation. To learn more or contribute your own case study, please contact us at info@thevrf.org.
 Introduction

It gives me great pleasure to share the 2021 Edition of ESG

Integration Insights.
Investor demand for higher quality ESG information is a
strong indication that investors – across markets and
asset classes – recognize that information historically
used to evaluate investment risks and opportunities no
longer provides a sharp enough lens through which to
evaluate 21st century investments. Increasingly, investors
understand that the management or mismanagement of
sustainability issues by companies in our rapidly changing
world can not only enhance or harm societal and environmental outcomes but also
risk-adjusted returns. Exploration and understanding of this nexus is exactly what
SASB Standards were developed to do.
The case studies in the 2021 Edition of ESGII provide insights into how SASB
Standards help inform sell-side equity analysis, an asset owner’s proprietary ESG
scoring methodology, one asset manager’s analysis of trade finance, and another’s
analysis of emerging markets equities. In each case, we see how SASB Standards
are used to sharpen investors’ focus on issues at the intersection of impact on the
environment and society with enterprise value.
Whether you are an investor in the early stages of integrating ESG factors in your
investment decision-making or very advanced along that path, we hope these
insights from fellow investors are helpful. To companies seeking insights into
investor interest in and use of ESG data—as well as why investors are seeking
improved ESG data via SASB-based disclosure – these cases are also for you.
We’re grateful to the contributors of these case studies, as well as to the thousands
of people who have contributed to the development and refinement of SASB
Standards over the years. We welcome feedback on these cases and our ongoing
work, as the Value Reporting Foundation and SASB Standards evolve and begin to
inform the work of the International Sustainability Standards Board, announced by
the IFRS Foundation at COP26.
I hope you enjoy the following perspectives.

Katie Schmitz Eulitt

Director, Investor Relationships; Head, APAC Outreach
 ESG INTEGRATION
INSIGHTS
INVESTORS IN THEIR OWN WORDS

Redburn
Integrating SASB Standards into Equity Research

BY ANGUS BAUER, PARTNER AND ESG STRATEGIST

Introduction ESG investing is an evolving discipline. Attention is increas-

ingly focused on the depth of company commitments,
Redburn is one of Europe’s leading providers of inde- expectation of verifiable change, and evidence of tangible
pendent equity research and agency execution. Our outcomes. The same questions come up time and again
environmental, social, and governance (ESG) research in our meetings with investment institutions: Is this a
includes fundamental, company-specific, and systematic sustainable business model? Will the company navigate
analysis, delivered by both dedicated ESG practitioners ESG risk effectively? Will the company create financial and
and the firm’s equity analysts. Our work is published societal value and so stand a chance of being re-rated?
under the “Redburn Purpose” banner, which also includes
We think the best way to answer these questions is with
strategic and thematic research. Redburn is investing in
a comprehensive analysis of a company’s practices to
its ESG expertise and is determined to play a role in this
navigate and mitigate material ESG-related risk.
market as a high-quality provider of research.

Why we believe in integrating ESG Redburn’s three-pronged ESG

into research research approach
As an independent equity research firm, our primary goal
Financial market participants operate from a position
is to help investors navigate industry dynamics and the
of significant importance. As arbiters of cost of capital,
myriad influences on company valuation, returns, and
investors hold the ability to influence corporate capital
cash flows. As such, we have thought hard about how we
allocation, and by implication, future performance. It is
should address the aforementioned questions in a way
axiomatic that to fulfill this role properly, investors require
that is additive to the equity investment process.
a fulsome understanding of a company’s risk profile, the
strategy being deployed by management to generate Redburn licences and applies the SASB Materiality Map®
value while navigating and mitigating risks, and the execu- and general issue categories in its work. In practical
tion that entails. terms, SASB Standards represent the first part of our
ESG research process, giving us a consistent baseline
For equity markets to operate as responsible investors in—
for building material risk profiles for the organisations
and distributors of—the wealth created by growth in capital
we care about, from which our forward-looking analysis
stock, integrating ESG considerations into the research
then begins. In the second step of our approach, we apply
process is critical. In this way, markets can drive progress
our proprietary Purpose, Strategy, People (PSP) model to
that is mutually beneficial across the triple bottom line of
interrogate a company’s ability to improve its performance
people, planet, and profit. Their ability to more effectively
against SASB Standards in the future, while creating value
price risk then allows them to act as stewards of sustain-
for societal and investment stakeholders. Finally, we seek
able growth. To carry this role out effectively, we believe
to monitor our convictions on an ongoing basis with an
materiality is central to the effort.

SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 REDBURN

ESG Sentiment indicator, that is again mapped to the a view from our quantitative and charts products (IDEAS
material risk factors. score and Technical score), and the fundamental rating. In
the Voltairian sense from the book, Candide, for our ESG
When testing different ESG approaches as we were
Strategy Champions, we look for the best of all worlds.
designing this methodology, we found that sustainable
(See Figure 2.)
business models (defined by comprehensive integration
of ESG risk navigation into the core strategic agenda), a Figure 2: Redburn ESG Strategy Champions
focus on societal value, and strong cultural and gover-
nance architectures tend to be found in organisations that Fundamental
Rating
deliver higher sector-adjusted returns. In equity markets,
these companies are rewarded with higher valuations for
PSP ESG
given levels of returns, growth, margins, and risk premia. To
Score Sentiment
us, they represent the types of organisation characterised
by sustainable competitive advantage—that is sustain-
able in both senses of the word: enduring and reflective
of good ESG practice. The methodology described above,
and depicted in Figure 1 below, is intended to identify such Quality Technical
firms.
The bottom line to our approach is that we are seeking IDEAS
to investigate where there may be incoherence that Score
might leave equity investors exposed to mispriced risk;
or conversely where strategic coherence may instead Company
Source: Redburn
create competitive advantage. The results of this meth-
odology are intended to help investors engage in ongoing
dialogue with their companies, identify ESG best practice
(or improvements), and in so doing, generate alpha. The
final stage of our process then sees the combination of
our PSP Score with our ESG Sentiment approach and
other factors such as company quality (returns profile),

Figure 1: Redburn’s ESG approach to identifying sustainable competitive advantage

ESG risk navigation

SASB standards and value creation Redburn ESG Sentiment
• We use SASB Standards to build a • Starting with TruValue Labs data,
picture of the evolution of a company’s mapped to SASB Standards, we
Redburn ‘Purpose, Strategy,
performance against its material risk calculate the market-neutral rate of
People’ (PSP) score
factors, and the strategy that is change in sentiment pertaining to a
deployed to address them. This creates • We analyse the purpose of the organisation and company and its material risks. This
the starting point for our objective its contribution to UN SDGs. We then assess the allows company, sector, and portfolio-
comparison of companies on both an degree to which the strategy delivers this, whilst based risk monitoring and screening for
inter and intra-sector basis. ensuring progress on its material risk factors, idea generation.
itself, and across its value chain. Finally, we
stress test strategic execution by analysing
Material ESG people and governance practices. Continuous
risk profile risk monitoring

Source: Redburn

3 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

We’re thinking about business models REDBURN

Figure 3: Redburn Purpose, Strategy, People (PSP) framework

Purpose (20%)
Company Purpose Strategy (30%)
Is this a purposeful company?
Core Strategy People (50%)
Societal Impact
Does the strategy create
Does the company contribute
sustainable competitive Culture & Inclusion
effectively to UN SDGs? advantage?
Does the culture enable delivery of the purpose
Materiality Strategy and strategy?
Is the company making progress Incentive
in addressing its material ESG
risks? Does the company motivate its people to
deliver its purpose and strategy?
Value Chain Strategy
Talent
Is the company ensuring
progress across the value chain? Does the company manage talent and training
to deliver its purpose and strategy?
Innovation
Does the company create the conditions for
sustainable innovation?
For each of the ten topics, we present company intent
(objective), analyse its execution (objective) and then Governance
provide interpretation (informed judgement). Does the company have sustainable
governance practice?
Source: Redburn

The Redburn PSP Score terms of impact on resources, society, and so on. That
decision making can be influenced by an array of situ-
The summary of our PSP framework is set out in Figure 3. ational context; stakeholder engagement, shareholder
As well as building on the SASB risk profiles, it also intro- activism, long-term incentive plan cycles, and the like.
duces additional components from the ESG ecosystem Seeking, therefore, to understand the way these decisions
that are accessible to different investors: the UN and relationships are guided by a purpose to create shared
Sustainable Development Goals (SDGs) and the recom- value, sets the scene for how we think about strategy and
mendations of the Task Force on Climate-related Financial then execution.
Disclosures (TCFD). For each of the 10 topics identified
In our strategic evaluation, we include both TCFD and
in our process, we seek to analyse company performance
SASB frameworks, and look specifically for governance,
in three ways by evaluating intent (what the firm says it
accountability, and evidence-based practice. The idea
does) and execution (what the objective evidence says
here is to look for coherence between what a company
it does), and then offering our interpretation (introducing
says, what it does, and what it seeks to do in the future.
opinion to take an informed view).
We are again thinking about human capital here, looking
We approach ESG in this way for a number of reasons. for people, partnership, and stakeholder engagement
Chief among them, we are big believers in the importance systems that are being managed coherently to deliver
of human capital. People on boards and management shared value. It’s also a helpful cross check of whether the
teams make strategic decisions that lead to capital allo- purpose and societal promise of an organisation is simply
cation and economic productivity, with all that entails in a hollow PR effort, or a commitment of more substance.

4 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 REDBURN

SASB’s qualitative standards are relevant to our evaluation and integrated reporting work being done by SASB and the
in the Strategy pillar of our PSP analysis, while the activity International Integrated Reporting Council (IIRC) together,
and quantitative metrics provide useful insight into past as the Value Reporting Foundation.
progress.
Finally, we assess a company’s People and Governance
practices, because these really define strategic execution. The added benefit of analysing
In each instance (culture, incentives, talent, etc.), we want people
to see systems that are reflected in workforce behaviours
that drive strategic delivery of the purpose, and that As noted above, while we were developing our approach,
become integrated into company DNA over time. It is in we stress-tested our metrics as part of the process.
no way revolutionary to assess company culture, innova- Beyond the results we have published to our investors
tion, or management incentives as an investor. However, that carry statistical significance, we believe there are
we take an evidence-based and objective approach to additional reasons to be optimistic about the relevance of
evaluating these qualitative topics, such that we can human capital analysis, both for investors and companies
draw future-sensitive conclusions about the likelihood of alike.
successful strategic delivery and add our interpretation
Globalisation, heightened inequality, and demographics
from a comparable set of evidence. An organisation with
are, as we see things, lasting drivers of people’s desire
the below profile (see Figure 4) is one in which we have
to invest, consume, and work in more sustainable ways.
considerable doubt over execution and strategic delivery
While estimates vary, Millennials comprise approximately
across the whole system, despite the Purpose and
a third or more of the developed market workforce. Gen-Z
Strategy pillars looking generally strong.
is broadly the same absolute sized population cohort,
Fig 4: PSP Score raising questions on delivery but yet to enter the workforce in full. By 2035, the two
PURPOSE combined are likely to represent over two-thirds of the
Company Purpose 80% workforce.
Societal Impact 24%
From an investment perspective, recent surveys have
found that over three quarters of millennial investors
STRATEGY
rank ESG as a top priority when assessing investment
Core Strategy 79%
opportunities. As the boomer to Millennial wealth transfer
Materiality Strategy 56%
plays out over the next 15 years, this investment prefer-
Value Chain Strategy 73%
ence is not insignificant. From a consumer perspective,
PEOPLE consistent research from consultancies, marketers, and
Culture & Inclusion 60%
the experience of companies themselves (Walmart or
Incentive 54%
Unilever, for example) has shown that taste preferences
Talent 60%
have shifted in favour of brands that look after their people,
Innovation 49%
notably during the pandemic, and that have a societally or
Governance 72%
sustainability minded purpose. Finally, from the perspec-
tive of actual work—and this matters given Millennial and
Source: Redburn. Generation Z-ers represent the engine room of the corpo-
rate economy over the next decade and a half—research
Note: The Redburn PSP Score for each topic is calculated as a
percentage. Where the analyst covering the stock has an alternative from the IZA Institute of Labour Economics has found
view, this is shown in red. that “meaningfulness” is a major factor behind enhanced
productivity of workers. Among those who perceive their
In an ESG context, we believe it is critical to apply the jobs to be meaningful, it is observed that they take fewer
credibility cross check, for companies are recognising the sick days, are more likely to participate in skills training,
need to make such promises, to boost marketing, help and become longer-tenured employees.
talent acquisition and help their investment narrative. In
this sense, we look forward to the ongoing human capital

5 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 REDBURN

Of course, tastes can change. However, the final dot to

E-COMMERCE
be joined here that we believe relevant is management The first in our case study, Company A, is an e-commerce
tenure. Applying the benefits of hindsight to stock selec- business, operating a fast growth online retail platform.
tion shows that one of the most successful, and lowest Redburn’s fundamental analyst has a buy rating on the
turnover, approaches to portfolio construction is to invest stock. Company B is a fast-moving consumer goods firm,
behind companies that have long CEO tenure. Had we a where the fundamental analyst is currently sell rated. Each
crystal ball, gone back 15 years into the past and bought organisation has at times in the last year commanded high
shares only in companies that would prove to have had valuations on its equity. Each has benefited from being
the same CEO a decade and a half later, we’d have outper- part of hugely successful investment baskets in recent
formed developed markets by comfortable margins. This years (growth). They have different material risk factors,
is not to say that all CEOs stick around when the going is and have very different human capital approaches along-
good (nor that this automatically has perfect implications side them, as surfaced in our PSP analysis, which implies
for ESG potential), but empirically there is strong coinci- potentially different outcomes going forward.
dence between the longevity of management and share
For the e-commerce company, Company A, SASB
price returns. With our ESG and human capital hats on,
Standards look to: energy and water management related
we hypothesise that identifying companies that have the
to hardware infrastructure; data privacy and security;
practices, strategies, and purpose to create truly mean-
employee recruitment, inclusion, and performance; and
ingful work for their people is likely to result in companies
the environmental impact of distribution.
that can harness talent for both the best financial and
societal returns. In this case, the company which was in a significant
growth phase, had seen energy consumption compound
at 21 percent CAGR over the last three years, and had seen
Applying our work with case Scope 1, 2, and 3 emissions up 18 percent, 32 percent,
and 20 percent respectively over that time frame. The
studies emissions and energy intensity of the business’ revenue
generation was also rising. Management had recognised
We often get asked whether our PSP approach is appli-
the need to counter this. The group had recently set
cable to companies across different sectors. The simple
scienced-based emissions targets, had joined the RE100
answer is that we believe it is because we are really asking
renewable energy initiative (with clear targets), and had
how a company manages its people, strategy, and value
committed to ensure that 90 percent of suppliers and
chain to navigate its material risks and deliver its purpose.
partners including packaging and last-mile delivery part-
Further, while personnel costs, as an accounting expense,
ners would have set science-based targets themselves by
can differ relative to sales across different industries, what
2025.
we’re really thinking about in our human capital analysis is
whether companies actually treat, invest in, and measure This sort of commitment is what we look for to give
the returns of their people as a productive intangible asset, confidence about future progression, even if the starting
scaled appropriately to the rest of the company’s capital point is questionable. It helps us gain comfort in the busi-
employed, and moulded to deliver material and strategic ness model’s ability to navigate possible ESG risk such
progress. Most firms would attest that their people are as emissions pricing, fuel price volatility or cotton and
their best asset. Few have the ability to substantiate that water regulation in the apparel supply chain while also
claim and, similarly, few actually develop that asset effec- offering potential reason to believe that consumers might
tively to help navigate their most material risks. recognise the sustainability behind these operations. It
was further supported by cooperation with independent
We can use case studies to explain how our three-pronged
and credible supply chain partners, as well as tangible
approach and our ESG Strategy Profile, can be used to
evidence of progress on packaging and waste.
interrogate whether a company is likely to navigate and
mitigate ESG risk effectively, while creating shared value However, as much as the direction of travel appealed, our
and making a compelling investment proposition. analysis fell short of revealing the type of accountability,

6 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 REDBURN

cultural, and innovation strength we seek to generate of the firm’s ability to deliver sustainability and financial
enough confidence to give the benefit of the doubt for goals together. Objectively, there were gaps that needed
strategic delivery. Management pay was exclusively filling before we could build confidence in the progress
focused on revenue growth, there was no real board-level on material risk factors. Culture, innovation, and talent
oversight of the climate (nor wider) ESG agenda, and we systems were all lacking, potentially undermining the
did not find satisfactory inclusion of material risks into credibility cross check. While our analyst’s interpreta-
the risk management framework (from climate analysis tion gave credit to management promises on certain
to cyber security). Further, the intensity and frequency of areas of focus, for investors wishing to engage with
supply chain audits was falling. the organisation, we sought to offer best practice from
technology and other leading human capital managers,
Looking to its material people risks, Company A had big
that have deployed tangible initiatives with the potential
headline targets for diversity and inclusion (D&I) that were
to reduce absenteeism (with positive consequences for
arguably the most cited of its sustainability ambitions. Yet,
margin), improve inclusion (with positive consequences
again, there was little to no accountability and the group
for employee satisfaction, which has further positive
had fallen short on progress in recent years, with double-
impacts on productivity), and improve supply chain over-
digit voluntary turnover and double-digit percentage
sight and collaboration (with positive consequences for
absenteeism, which had been rising over recent years.
environmental and societal risks). As can be seen from
Taken together, the trajectory of turnover and sickness
Figure 5, for Company A both PSP performance and
rates spelled out questions over future productivity as
ESG Sentiment, each of which contain mapping to SASB
well as the legitimacy of the company’s D&I targets. Such
Standards, contained room for improvement.
issues gave us concern about the firm’s ability to create
a diverse and inclusive workforce representative of the
markets and customers it serves, and created doubt over CONSUMER GOODS
future innovation. On the other side of the equation, Company B was doing
an awful lot right in an ESG context. Relevant SASB
The conclusion of our work was that execution risk was
Standards focus on: water management; environmental,
high, given people practices did not appear supportive
health and safety performance of products; packaging

Figure 5: Company A ESG Strategy Profile and ESG Sentiment

Fundamental
Rating

PSP ESG
Score Sentiment

Quality Technical

IDEAS
Score Company
Source: Redburn
Note that in this example, the fundamental rating is the most positive indicator overall. While quantitative (IDEAS) and technical measures
are mixed, the quality as determined by the returns profile is also high. However, the PSP analysis is only mid-range, with challenges in
the People pillar especially, implying possible execution risk, and ESG Sentiment is in almost the bottom quartile of the market. Could ESG
become a drag on share price performance?

7 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 REDBURN

lifecycle management; and the environmental and social sourcing policy also set out clear strategic interventions to
impacts of its supply chain. help its supply chain partners make progress towards the
company’s value chain net-zero targets.
Not only was this organisation operating from a stand-
point where its purpose and contribution to UN SDGs were Further, people practices at the firm were consistently
comprehensively built into its governance architecture strong, with an array of workforce monitoring, and
(sustainability was even included in its articles of incorpo- a detailed “people framework” that had resulted in
ration), but the degree to which managerial accountability record-high levels of employee pride in working for the
had permeated through the organisation was impressive, organisation. Voluntary turnover had come right down as
with sustainability impacting performance-related pay for a result, and training participation, internal promotions,
a variety of people within the organisation. and employee reskilling were all on the rise. Indeed, in the
company’s public responses to the investor-led Workforce
The group was also best-in-class on its value chain and
Disclosure Initiative, there was also evidence of detailed
materiality strategies, which had overwhelming share-
testing of the impact of training programmes, to ensure
holder support, specifically to reach net-zero across its
that money and time spent was done so as effectively as
value chain by 2039. For an organisation of such scale, with
possible.
upstream emissions comparable to those of a reasonably
sized global auto manufacturer, and use-phase emissions Pulling it all together, therefore, our ESG research conclu-
similarly large, the environmental impact of its supply chain sions on Company B were that we were confident in its
efforts was meaningful. Our analysis flagged the diligence abilities to deliver on its sustainability commitments and
with which the company had set up accountabilities for make progress on its material risks; all while generating
progress in its supply chain. For example, there was clarity good financial returns. With improving ESG sentiment, and
of reporting structure, and clear board-level and executive an attractive quality profile, the resultant ESG picture was
committee responsibility with the inclusion of supply chain compelling, per Figure 6, despite the fundamental research
sustainability in pay. Similarly, the composure of a supply recommendation finding near-term reason for caution on
chain leaders initiative to partner with peer organisations margins due to cost-of-sales inflation.
on issues of environmental impact as well as supporting
supplier D&I was also reassuring. The group’s responsible

Figure 6: Company B ESG Strategy Profile and ESG Sentiment

Fundamental
Rating

PSP ESG
Score Sentiment

Quality Technical

IDEAS
Score Company
Source: Redburn
Note that in this example, the fundamental rating and the quantitative measures (IDEAS and technical) were all weak. However, the returns
profile was almost market-leading, meaning high-quality, ESG Sentiment is improving, and the PSP Score is also verging on best-in-class.
Could ESG become supportive for share price performance?

8 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 REDBURN

Conclusion
We remain committed to the continuous refinement of
our fundamental analytical methodology to appraise
company ESG performance, potential, and the sustain-
ability of business models. In practical terms, that means
we consider all stakeholder feedback (from companies,
analysts, and investors) for its potential to enhance our
process. In our ESG research, we are not providing stock
recommendations, but rather offering an analysis of a
company’s ESG potential, and specifically, the coherence
with which it is being managed to navigate and mitigate
risk and generate shared value. We firmly believe that this
integrated approach has implications for investor returns.
Should you wish to collaborate or share thoughts and
feedback, please contact us.

9 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 ESG INTEGRATION
INSIGHTS
INVESTORS IN THEIR OWN WORDS

Federated Hermes
ESG integration in Trade Finance

BY CHRIS MCGINLEY, HEAD OF TRADE FINANCE,

MARTIN JARZEBOWSKI, DIRECTOR OF ESG & RESPONSIBLE INVESTING

At Federated Hermes, the incorporation of environmental, The benefits of incorporating ESG

social and governance (ESG) factors is a natural extension
of our primary research, providing unique insights into
factors in trade finance
a company’s long-term strategic direction and a more
With low correlation and the potential for attractive risk-ad-
comprehensive view of the risks and opportunities inherent
justed excess returns, investment vehicles involving trade
in a security. While there is little dispute that assessment
finance transactions in real assets and export receivables
of ESG factors can reveal important information about a
have become well-established strategies for investors.
company’s practices and leadership, one of the keys to
This is a preferred route to participate in commerce, as the
investors is what factors are considered and how they
complexities of the asset class make direct investment
are integrated into the investment process. A long-term
difficult for investors, even institutions, to pursue on their
responsible investment approach may be enhanced by
own. Credit research is challenging as it consists largely of
directly engaging with issuers of portfolio holdings and
private contracts that span multiple parties, often in global
assessing material ESG issues to better inform investment
emerging markets with differing regulations. Among the
decisions which can enhance value creation. We believe it
elements that must be understood are trade flow, exper-
is fundamental to the pursuit of risk-adjusted returns and
tise in goods traded and underlying documents, agent and
sustainable wealth.
supply chain participants evaluation, obligor performance
To this end, Federated Hermes’ global team of engagement and probability of default, currency and cross-border
and responsible investing specialists provide proprietary considerations. As information is not available to the same
ESG data and analytics, which our investment teams use degree as a publicly traded corporation, asset managers
to manage risk and identify opportunities. A key input of in this space must provide the resources and expertise
our data comes from our leading engagement and stew- necessary to perform rigorous top-down and bottom-up
ardship division, EOS at Federated Hermes. EOS’s direct research.
engagement with issuers is not only important to obtain
It is here that the intelligent inclusion of relevant ESG
insights into a company’s ESG practices, it can encourage
factors specific to a country, industry and transaction,
improvement in an issuer’s ESG profile which may help
can add critical information, perhaps more so than any
reduce risks over the longer term. Using our proprietary
asset class. Associated risks can expose a business
ESG data in combination with the SASB Standards, we
just as severely and swiftly as pure financial drivers. Yet
generate custom “materiality” assessments that focus on
third-party ESG data coverage is sparse in Trade Finance
long-term ESG considerations that are financially relevant
and reporting on ESG matters has not yet become part of
to each industry. Our investment teams distinctly use our
the standard package readily supplied to future lenders.
ESG data analytics, materiality assessments and engage-
It is therefore largely in the hands of lenders to ask the
ment for their specific strategies in order to seek better
right questions and request relevant information from
outcomes for our clients.
borrowers.
A firm that systematically integrates ESG analysis can
seek to uncover key risks and opportunities that may
have a material impact on transaction structure. Active

SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 FEDERATED HERMES

engagement with entities can offer even more infor- For the purpose of this exercise, we use an example of a
mational advantage. Federated Hermes believes that pre-export finance facility provided to an integrated metals
employing our own proprietary ESG assessments enables & mining business in Eastern Europe. Pre-export facilities
us to uncover underappreciated risk that can lead to are common structures provided to producers and/or
investment opportunities or mitigate transactions that processors with significant share of export sales. Such
may have undesirable attributes. structures are widely used in emerging markets. They
are linked to a specific export trade flow and focus on the
ability of the company to produce, process and export
goods. Export sales proceeds, in hard currency, are typi-
Trade finance is a unique asset
cally routed through offshore collection accounts, thus
class, so ESG integration requires
mitigating a number of emerging market-related risks.
a customized approach.
Based on the SASB Standards, key ESG factors we consider
When it comes to evaluating credit worthiness
in this transaction are primarily environment-related: GHG
from an ESG perspective, trade finance trans-
emissions, energy and water management, waste and
actions present a unique set of challenges and
hazardous materials management. Employee health
opportunities:
and safety and supply chain management are part of the
assessment as well. Additionally, we look at obligor-specific
• Trade finance transactions involve multiple
factors such as management of legal and regulatory envi-
parties:
ronment and transaction-specific factors including trade
» Obligor: borrower directly involved in the materiality, product type and transaction governance.
trade flow
Federated Hermes’ ESG framework for trade finance
» Agent: monitors the real asset collateral
is fully integrated into the credit assessment.
» Arranger: organizes and initiates the Our framework involves comprehensive
transaction evaluation of the following components:

• Each trade finance transaction has different

1. Transaction appraisal for ESG risk
risk factors
All trade finance transactions are evaluated with respect
» Each is customized for a specific trade
to an expected annual excess return. Excess return is
flow or asset conversion cycle
defined as the margin over the London interbank offered
» While loans may look similar on the
surface, the underlying details and risks
can be different
“ESG assessments for these transactions
» Each transaction must be addressed with
different types of collateral and/or risk require more than a one-size-fits-all
mitigants
approach. They must include evaluation
• Limited ESG data creates opportunity
of both the transaction details and
» Many businesses involved in project and
all parties involved to generate a
trade finance are privately held
comprehensive risk appraisal.”
» Third-party ESG coverage is sparse
-CHRIS MCGINLEY, HEAD OF TRADE FINANCE
» Proprietary research can provide an
informational advantage

11 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 FEDERATED HERMES

rate (LIBOR) after adjusting for the probability of default obligor. In addition to this standard analysis, key ratings
and loss given default. Our valuation framework helps drivers (strengths, weaknesses, opportunities, threats) are
identify relative attractiveness and an assessment of assessed and a credit outlook given.
being fairly compensated for the transaction risk.
Following the appraisal, the obligor receives an internal
2. Expected Excess Return (EER) Calculation and rating that follows a standard agency scale. These ratings
ESG Integration are mapped to published and adjusted annual probability
of default rates.
» Standard EER Calculation: All transactions
have an EER calculated based on the standard Probability of Default (PD) and ESG Integration
calculation without taking any adjustments
into account. 1. Governance
» Adjusted EER Calculation: Integration of ESG
• Sovereign Obligor
factors supports uncovering key risks and
The first pillar employs a macro front-end view. A
opportunities that may have a material impact
top-down country assessment reflects the legal,
on the risk/return profile of an investment. In
environmental, social and governance risks and
the Adjusted EER calculation, PD and LGD
opportunities to better understand the strength of
components are revised upwards or down-
domestic institutions. Our framework incorporates
wards depending on the ESG assessment of
leading third-party regulatory and ESG government
the covering investment analyst.
data to help delineate country-level risk exposures
» EER Comparison: The two EER calculations focusing primarily on governance and social/human
are presented in the investment committee capital.
and used as a tool when analyzing the overall
risk profile of the transaction. • Corporate Obligor
From a bottom-up vantage point, we evaluate the
governance structure, board effectiveness and trans-
Calculating Excess Return parency in ESG disclosure. Our corporate assessment
leverages proprietary ESG data analytics and active
engagement to better understand company-level risk
and debtholder stewardship.

2. Sector/ESG Materiality

ESG risks can expose a business just as severely and

swiftly as pure financial drivers. But the availability of
public ESG disclosure is often lacking in the trade finance
market. Therefore, it is largely up to lenders to proactively
3. Probability of Default (PD) ask the right questions and request relevant information
from borrowers. Using in-house ESG subject-matter
An appraisal of the ultimate obligor of a facility is deter-
insights from EOS engagers and the SASB Standards,
mined by the covering investment analyst and is generally
the investment analyst focuses their due diligence on
limited to the guarantor or borrower. It is calculated at the
ESG factors that are most relevant and material for the
obligor level and does not consider the facility type, an
transaction. After the most material factors have been
approach which conforms to Basel conventions.
identified, the analyst assigns a score to the transaction
This appraisal involves analysis of financial statements based on how the risks associated with that factor have
based on a standard credit agency rating methodology. A been identified and addressed and how that affects the
sovereign ceiling is normally applied when appraising an assumed PD.

12 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 FEDERATED HERMES

3. Active Engagement 4. Trade Finance ESG Score PD Adjustment

Federated Hermes is one of the largest active managers The combination of governance, trade materiality and
with a dedicated engagement and stewardship division: active engagement inform our proprietary ESG score and
EOS at Federated Hermes. EOS engagers are ESG subject- Probability of Default (PD) Adjustment. Regional analysts
matter experts who directly engage with thousands of assign each transaction under their coverage universe a
corporate issuers and government sponsored entities PD Adjustment of 1-5, with 1 signifying high quality (lower
around the world to assess ESG risk and advocate for risk) and 5 representing low quality (higher risk).
positive change. Equipped with a 17-year engagement
When assigning a PD adjustment, analysts take into
database affords the ability to measure ESG progress
account capacity, commitment and track-record of the
and momentum through a proprietary milestone system.
relevant obligor with respect to material ESG factors.
Our investment team has access to the quantifiable
For the obligors covered by the engagement team of
engagement insights on their desktop and workstation.
Federated Hermes, analysts maintain active dialogue
Portfolio managers and analysts directly interact with
with the EOS team to get better insight into the ESG
EOS engagers for a more in-depth analysis of specific
trajectory and practices of the relevant obligor. In this way,
ESG-related implications for the industries and entities
as an example, a poor environmental track-record could
that are involved in our secured transactions. [See visual
be balanced by commitment and concrete plan of the
below labeled: Federated Hermes approach to engage-
company to improve, as well as capacity and allocated
ment and stewardship]
resources to achieve that goal. The above factors could
indicate expected improvement in future performance,
which is incorporated in the risk/return evaluation as part
of the investment decision process.

Federated Hermes approach to engagement and stewardship:

13 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 FEDERATED HERMES

Loss given default and ESG integration

Trade Finance ESG scores are reviewed by the analyst
during their regular credit updates, monitoring and
Baseline recovery rates are derived from published and
by the investment team at regular meetings. The PD
adjusted recovery rates depending on instrument and
Adjustments are incorporated into the credit deal sheet
security type. In the adjusted EER calculation, this baseline
along with other factors such as structure, collateral,
recovery rate is adjusted based on a number of factors, as
legal, governance, documentation, multilateral agency,
summarized in the table below.
obligor strength, and transaction risk appraisal to deter-
mine the final lending decision.

PD rate adjustment

1 Full factor up
Governance
2 Half factor up
Trade Finance
Trade materiality 3 No adjustment
ESG score
4 Half factor down
Active engagement
5 Full factor down

Loss given default and ESG integration

Loss and recoveries are defined from published and adjusted recovery rates depending on instrument and security type. For our benchmark, we use
the Fitch Recovery Rate (RR) scale:

Fitch Scale Federated Hermes

Scale Definition Examples

RR1 Outstanding recovery prospects given default

RR2 Superior recovery prospects ↓ Secured transactions, where security is a combination of:
a) Real assets (fixed and current)
b) Future flows (export receivables)
c) Bankruptcy remote financial assets.

RR3 Good recovery prospects ↓

↓ Documentary credits
Trade loans
Receivables

RR4 Average recovery prospects ↓

↓↓ Clean risk

RR5 Below average recovery ↓

↓↓↓

RR6 Poor recovery prospects ↓

↓↓↓
↓

The assumed loss given default (LGD) of each transaction is then adjusted based upon our proprietary integrated ESG framework.

Structure Reflects the importance of the trade flow to an economy, and the ability
Well-secured transactions improve recovery prospects: to monetise collateral.

Recovery rate Recovery rate

adjustment adjustment

If coverage ratio for the life of the facility is > 100%. This ↑ Significant trade sector —
includes offtake contracts and fixed and floating assets. Other ↓
Domestic receivables ↓
↓
Country legal and governance risk
Data from World Trade Organization
Reflects the strength of the legal system, specifically rule of law, strength
of institutions and how foreign creditors have historically been treated Product type:
thereby
14 | SASBaffecting our abilityINTEGRATION
STANDARDS to recover assets.
CASE STUDY Primary/value added commodity productSASB.ORG/INVESTOR-USE
—
Based on MSCI Judicial & Penal Score
Other ↓
Recovery rate
Country score adjustment
 FEDERATED HERMES

Loss given default and ESG integration

Loss and recoveries are defined from published and adjusted recovery rates depending on instrument and security type. For our benchmark, we use
the Fitch Recovery Rate (RR) scale:

Fitch Scale Federated Hermes

Scale Definition Examples

RR1 Outstanding recovery prospects given default

RR2 Superior recovery prospects ↓ Secured transactions, where security is a combination of:
a) Real assets (fixed and current)
b) Future flows (export receivables)
c) Bankruptcy remote financial assets.

RR3 Good recovery prospects ↓

↓ Documentary credits
Trade loans
Receivables

RR4 Average recovery prospects ↓

↓↓ Clean risk

RR5 Below average recovery ↓

↓↓↓

RR6 Poor recovery prospects ↓

↓↓↓
↓

The assumed loss given default (LGD) of each transaction is then adjusted based upon our proprietary integrated ESG framework.

Structure Reflects the importance of the trade flow to an economy, and the ability
Well-secured transactions improve recovery prospects: to monetise collateral.

Recovery rate Recovery rate

adjustment adjustment

If coverage ratio for the life of the facility is > 100%. This ↑ Significant trade sector —
includes offtake contracts and fixed and floating assets. Other ↓
Domestic receivables ↓
↓
Country legal and governance risk
Data from World Trade Organization
Reflects the strength of the legal system, specifically rule of law, strength
of institutions and how foreign creditors have historically been treated Product type:
thereby affecting our ability to recover assets.
Primary/value added commodity product —
Based on MSCI Judicial & Penal Score
Other ↓
Recovery rate
Country score adjustment
Transaction governance
0-2.9 — Multilateral agency (MLA) status
3.0-4.9 ↓ Recovery rate
5.0-7.5 ↓
↓ adjustment

7.5-10 ↓
↓↓ Country presence – Local banking license or subsidiary. —
Global, regional or local bank

Collateral Trading company with real trade relationship ↓

Offshore collateral ↑ Others ↓

↓

collateral subject to local law — MLA exposure

Significant & continuing facility exposure —
Trade materiality
No facility exposure, significant other exposure ↓
Different sectors have diverse fundamental characteristics, vary in
importance to an emerging market economy and diverge in their Limited ongoing exposure ↓
↓
structural ESG profile. Trade finance regional analysts focus on the
financial materiality of the trade flow to the country. Preferred creditor
If lending alongside a preferred creditor ↑

15 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 FEDERATED HERMES

Hypothetical example
Expected excess return

All-in discounted margin over Libor 4.50%

Rating B 4.57% PD

Structure X% Export receivables

Recovery rate X%

EER 3.59%

Adjusted expected excess return

All-in discounted margin over Libor 4.50%

Rating B 4.57% PD

ESG score 2 ↑ PD adjustment

Adjusted PD 3.40%

Structure X% Export receivables

Structure adjustment ↑ Collateral coverage > 100%

Collateral ↑ Offshore collateral

Country ↓ Eastern European Sovereign, 5.48

Sector — Significant trade sector

Product type — Primary/value added

commodity product

Transaction governance

MLA status — Local banking license or subsidiary

global, regional or local bank

MLA exposure — Significant & continuing

facility exposure

Preferred creditor status — No

Adjusted recovery rate X%

Adj. EER 3.73%

Adj. EER less EER = 0.14%

This example is for illustrative purposes only. Expected excess return is not a guarantee of future performance.

16 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 FEDERATED HERMES

ESG integration: Our path forward International investing involves special risks including currency risk,
increased volatility, political risks, and differences in auditing and
other financial standards. Prices of emerging markets securities can
The Federated Hermes’ Trade Finance investment fran-
be significantly more volatile than the prices of securities in devel-
chise has built its reputation on rigorous, proprietary oped countries and currency risk and political risks are accentuated
transaction research that goes well beyond third-party in emerging markets.
research and includes detailed analysis of collateral, The ESG ratings assigned are one consideration among others as
country, sector, obligor, agent and arranger. We believe part of the security selection
that same level of experience and skill is essential in order process and do not represent an assessment of the investment port-
to fully discern the potential ESG risks and opportunities folio itself. The qualitative analysis described does not automatically
within the complex world of project and trade finance. result in including or excluding specific securities but is used as an
additional input to improve portfolio risk/return characteristics.
As a global leader in responsible investing, Federated
The Basel Convention is an international treaty that was designed
Hermes has incorporated our proprietary ESG toolkit to reduce the movements of hazardous waste between nations, and
across all asset classes. Trade finance is no exception, specifically to prevent transfer of hazardous waste from developed
with a tailored integration and engagement approach that to less developed countries.
aims to generate long-term value through prudent risk London interbank offered rate (Libor): The rate at which banks can
management and sound stewardship. borrow funds from other banks in the London interbank market. The
Libor is fixed on a daily basis by the British Bankers’ Association and
acts as a benchmark for other short-term interest rates.
There is no guarantee that any investment approach will be
successful.
Federated Advisory Services Company (10/21)

17 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 ESG INTEGRATION
INSIGHTS
INVESTORS IN THEIR OWN WORDS

Public Sector Pension Investment Board (PSP Investments)

Integrating SASB Standards into a Dynamic ESG Composite Score

ANNE-MARIE MONETTE, SENIOR DIRECTOR

Introduction have implications for investors and capital allocation

decisions.
Environmental, social, and governance (ESG) factors
are among the most significant drivers of change in the ESG at PSP Investments
world today, with major implications for businesses and
The Public Sector Pension Investment Board (PSP
long-term investors. Global markets are increasingly
Investments or PSP) is one of Canada’s largest pension
focusing on factors that drive long-term enterprise value
investment managers with CAD $204.5 billion of net
and intangibles now represent the lion’s share of this
assets under management as of March 31, 2021. We
value. Investors regard many ESG matters as critical
invest the assets for the retirement of more than 900,000
elements of corporate resilience, with a growing focus
current and retired members to meet the pension plan
on corporate behavior, climate change, technological
obligations of the federal Public Service, the Canadian
evolution, social equity, and human capital management.
Armed Forces, the Royal Canadian Mounted Police, and
In this case study, we highlight some examples of the the Reserve Force.
importance of human capital management in assessing
PSP Investments’ statutory mandate is to manage
corporate performance and making investment
amounts transferred to it by the Government of Canada
decisions.
for the funding of retirement benefits earned from April 1,
2000, in the best interests of the contributors and benefi-
ciaries, and to invest with a view to achieving a maximum
The Foundation of ESG Materiality rate of return, without undue risk of loss, having regard
to the funding, policies, and requirements of the pension
The academic literature on the relationship between
plans and the ability of those plans to meet their financial
ESG and financial performance is extensive. But it is
obligations.
only recently that concrete evidence has emerged on
the importance of materiality in determining which ESG As an organization, we believe that ESG risk factors must
factors are most integral to investment decision-making. be taken into account in every investment we make;
The analysis of ESG materiality has led to some innova- however, we also want to capitalize on the significant
tive findings on the dynamic nature of materiality, with investment opportunities that can arise as companies
some research suggesting that financial materiality put sustainability at the center of their strategies and
is not a “state of being” but a “process of becoming.”1 operations.
Therefore, it is critical for investors to recognize that ESG
PSP’s responsible investment approach is aligned with
considerations that may not be viewed as material today
our investment mandate and total fund perspective. At
can become material in the future. Understanding how
the center of our responsible investment approach is
sustainability issues become financially material can
the investment belief that identifying, monitoring, and
capitalizing on ESG factors is material to long-term
investment performance.
1 Pathways to Materiality: How ESG Issues Become Financially Material
to Corporations and Their Investors, David Freiberg, Jean Rogers, and
George Serafeim, 2019

SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 PSP INVESTMENTS

At PSP, we have put in place a robust ESG integration these emerging ESG risks and opportunities. The need to
framework, which we continually strengthen, to identify account for the dynamic nature of the materiality of ESG
emerging ESG risks and opportunities early and steer factors in our due diligence process was a key driver for
capital to investments best placed to deliver long-term the development of PSP’s proprietary ESG score.
value. Our agile approach is aligned with international
To garner insights into the ESG performance of PSP’s
best practices and enables us to adapt quickly to
public markets portfolio and identify opportunities
changing circumstances, as was the case this past year.
to mitigate risk and create value, the Responsible
Investment group leveraged the use of innovative data
solutions to develop a proprietary scoring methodology.
The ESG Composite Ideation The ESG Composite score can both systematically iden-
Journey tify material ESG risks and opportunities and dynamically
measure the relative importance of these categories
Responsible investment at PSP is an active process based on an artificial intelligence screening tool that
that addresses ESG factors across all asset classes. monitors the materiality of these ESG risks and oppor-
PSP’s investment teams evaluate ESG risks and tunities through an algorithm that captures stakeholder
opportunities in order to make more informed invest- sentiment. The ESG Composite score was developed in
ment decisions. They are supported by the dedicated concert with public markets to capture the need of the
Responsible Investment group, which is housed in our investment teams and translate them into a technology
Chief Investment Officer group and acts as a center of solution that could transform a desktop ESG review into
ESG expertise. The Responsible Investment group works decision-useful, data-driven insight.
collaboratively with the asset classes to oversee and
implement responsible investment activities across the
total fund, provide guidance on ESG themes and trends, The Launch of the ESG Composite
build internal capacity through ESG knowledge sharing,
and collaborates with industry peers to drive systemic Score
change on key ESG issues.
With the launch of PSP’s ESG Composite score, the
As a global investor on the cutting edge, technology and Responsible Investment group empowered public
data play a crucial role in our organization and act as markets investment teams to acquire an understanding
the backbone of our investment processes and a core of how ESG risks and opportunities are managed at the
part of what we do. This is particularly relevant in the company level in a context that is relevant to invest-
field of ESG with the proliferation of ESG data sources ment decisions. By using a data-driven scoring solution
and the significant market focus on driving progress designed to scale PSP’s ESG integration process and
toward consistent, comparable, and decision-useful ESG monitor portfolio holdings over time, the ESG Composite
information. PSP’s strong culture of innovation enabled score helped translate data previously available in
the Responsible Investment group to think outside the hundreds of pages in traditional research and sustain-
box and incubate a new solution that could enable the ability reports into quantitative data that could be
investment teams to integrate ESG information with centralized and aggregated.
data-driven insights.
By enhancing PSP’s ESG integration approach to quan-
Always striving to spot the edge, the Responsible titatively assess company performance on material
Investment group recognized that PSP’s responsible ESG factors, the scalability of ESG integration reached
investment framework must facilitate greater under- a whole new level. The first key benefit of this innova-
standing of not only the ESG factors driving enterprise tive solution was the ability to accelerate convergence
value today, but those most likely to do so tomorrow between fundamental and ESG analyses. The second
and into the future. Therefore, a data-driven solution advantage was to access real-time information on
must be designed to continually evolve to account for factors impacting intangibles and enterprise value for the

19 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 PSP INVESTMENTS

first time. A third benefit was to facilitate benchmarking, resilience. By leveraging a database that calls upon a
both at the issuer and portfolio levels to systematically library of over 200 governance factors across information
measure ESG performance and provide a complementary drawn from various sources of publicly disclosed corpo-
dimension to fundamental analysis, capturing trend and rate materials, the Responsible Investment group was
momentum akin to analysis traditionally performed on able to transform qualitative insights from PSP’s proxy
financial information. The ability to generate data-driven voting activities into critical input for our investment deci-
insights helped identify new investment ideas, support sion process.
issuer selection, and contribute to alpha generation, ulti-
The second building block of the ESG Composite score
mately delivering enhanced knowledge sharing across
is anchored on the SASB Standards classification. PSP’s
the organization.
Digital Solutions Team successfully integrated SASB’s
General Issue Category classification into a proprietary
coding system that can map public issuers with the ESG
Introduction to PSP ESG categories most likely to materially affect enterprise
Composite Methodology value in their industry. The coding system then extracts
data from two distinct third-party sources to generate a
The main objective supporting the development of weighted average score on the performance of the issuer
a proprietary ESG Composite score was to build an for each category of ESG risk identified by the SASB
industry-based ratings system informed by independent Standards. The weighted average score is composed of
standards and focused on an investor-centric materiality a dynamic materiality weighting (capturing stakeholder
definition across strategies and public markets. sentiment) and a risk management indicator (indicating
the risk level associated to a specific ESG category)
PSP’s proprietary ESG Composite score is composed
that rates the issuer’s performance on its relevant SASB
of two building blocks which first comprise a quanti-
General Issue Categories.
tative assessment of corporate governance practices
(Corporate Governance score) and a second building block In order to capture the issuer-specific nature of materi-
generating a dynamic measure of ESG performance (ESG ality in its unique context, the ESG Composite scoring
Materiality score). The score was designed to quantita- methodology builds on the dynamic weighting of each
tively re-create the Responsible Investment group’s ESG material ESG category based on an artificial intelligence
due diligence process. The foundation of the score rests screening tool. The dynamic weighting is updated daily
upon the building block of corporate governance quality, using data from the screening tool, thereby capturing
a key tenet of PSP’s Responsible Investment approach. real-time changes in stakeholder sentiment. Each issuer
Corporate governance can be viewed as a control mech- receives a unique Corporate Governance and ESG
anism safeguarding the interests of shareholders and Materiality score that can be analyzed separately and
can also provide a strong signal on corporate culture and combined in a single reading using the ESG Composite
score. The score calculations are then archived in a
database that can generate custom reports on each
investment portfolio relative to their respective bench-
Corporate ESG Dynamic
Governance Materiality Materiality mark. The scores can also be sliced and diced based on a
Score Score Signal
specific corporate governance pillar or based on SASB’s
five dimensions (Environment, Social Capital, Human
Capital, Business Model & Innovation, and Leadership
SASB General
Issue Categories & Governance) and 26 sustainability-related business
Governance
General Issue issues, or General Issue Categories.
Categories
Practices Weighting
Underlying Category
ESG Rating

20 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 PSP INVESTMENTS

ESG Composite Score in Action In our ESG review for a subset of industry peers, the
Responsible Investment group identified employee diver-
The Responsible Investment group and public markets
sity and inclusion as one of the highest categories of
soon implemented practical applications for the ESG
ESG materiality for issuers included in PSP’s Emerging
Composite and used the data in multiple ways to help
Markets benchmark scored for the industry. The cate-
identify new ideas and further inform investment theses.
gory weighting for Employee Engagement, Diversity &
The ability to analyze corporate performance through
Inclusion also increased by over 5 percent over the most
the lens of SASB’s five dimensions and 26 General Issue
recent year. Looking at individual issuers’ ESG scores
Categories in addition to traditional financial consider-
within the industry, we observed that issuers with higher
ations shed a new light on the pathways to enterprise
risk ratings (measured by the risk management indicator)
value creation using the lens of dynamic materiality.
on their employee diversity and inclusion scores tended
By tracking the ESG Composite score decomposition to have higher employee turnover rates than the average
for each of the five SASB dimensions, it became clear of the peer group and, in some cases, lacked employee
that Social and Human Capital were crucial in fully engagement monitoring and comprehensive diversity
understanding enterprise value. Over the most recent programs. One issuer was identified by the fundamental
fiscal year, we have also observed a significant investor research team as a potential candidate for inclusion in
focus on labor practices, employee health and safety as the portfolio based on its overall financial profile. As
well as diversity, equity, and inclusion, both in developed part of our ESG due diligence, we also observed that the
and emerging markets. The following two case studies issuer stood out from the peer group due to a notable
are examples of the applicability of the ESG Composite annual increase in its dynamic materiality weighting
score into our investment decision making process. for Employee Engagement, Diversity & Inclusion.
Further analysis and discussions with the fundamental
research team helped us surface that the issuer had
Case Study 1: New Idea for Emerging recently completed several acquisitions across various
jurisdictions that contributed to a significant growth in
Markets Strategy - Information its headcount, which can partially explain the increase
Technology Services Industry in stakeholder attention to this issue. Through its
geographic diversification, the issuer also leveraged the
Our public markets Emerging Markets team conducted benefits of its decentralized operating model, enabling
an in-depth review of the Information Technology access to a diverse talent pool based on regional reach
Services industry to identify a new idea for the portfolio. through offices located near academic and engineering

Figure 1. Dynamic Materiality Weighting for Material ESG Categories in the Emerging Markets Information Technology Sector

Distribution Water & Wastewater Management

by GIC
GHG Emissions
Customer Privacy
Competitive Behavior
Employee Engagement Diversity & Inclusion
Materials Sourcing & Efficiency

Product Design & Lifecycle Management

Energy Management
Data Security

Supply Chain Management

21 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 PSP INVESTMENTS

centers. This talent acquisition strategy helped support in particular. Interestingly, the issuer first identified for
the company’s culture of innovation that is strongly weaker momentum on its Corporate Governance score
anchored on valuing diversity of perspectives. Moreover, also had the highest frequency and severity of employee
through our review of the company’s practices, we found health and safety controversies. This track record trans-
that it had also increased its focus on continuous learning lated to a higher risk management indicator score for the
and employee communication throughout the pandemic, Employee Health & Safety category (indicative of a higher
thereby strengthening employee retention mechanisms risk level) and a higher dynamic materiality weighting
and improving its overall risk management indicator for the same category (indicative of greater stakeholder
score on Employee Engagement, Diversity & Inclusion. focus). The Responsible Investment group dug even
This example provides a snapshot of the collaborative deeper and then looked to identify potential performance
process between our fundamental research team and gaps versus peers and observed the same issuer had
Responsible Investment group. recorded substantially lower employee productivity and
reported a sale-to-employee ratio of half the level of one
of its higher-ranked competitors, as well as the lowest
Case Study 2: Idea Generation five-year ROE amongst the peer group. (See Figure
2.) The analysis helped the Responsible Investment
for Global Long Short Portfolio - group and Global Long Short portfolio team compare
Transportation Services and contrast issuers operating in the same industry to
identify relative laggards in order to support investment
Our public markets Global Long Short portfolio team was idea generation. This illustrates how the ESG Composite
evaluating an investment opportunity in a developed score can be a signal of where the investment team can
market. The Responsible Investment group first identi- more effectively focus its efforts on deep-dive research,
fied a sub-universe of issuers with declining governance analysis, and information gathering efforts.
momentum, measured by the highest decline in their
Figure 2. Transportation Sub-Universe Employee Health & Safety
three-year Corporate Governance scores. This first step
Category Performance and Employee Productivity Comparison
enabled the Responsible Investment group to identify
a corporate governance outlier in the transportation
Company Employee Employee Sales/
industry with one issuer standing out relative to its closest H&S Risk H&S Employee
peers due to a higher decline in its Corporate Governance Manage- Dynamic ($)
score. In our subsequent ESG review of the issuer, we ment Materiality
Indicator Weight
screened the same subset of industry peers using
PSP’s ESG Composite score to overlay the assessment Company A 65 48% 18,700,000
of corporate governance practices with performance Company B 43 21% 41,000,000
on material ESG categories. Based on the analysis of
ESG performance, we observed notable divergence in
the individual category weighting associated to each The Risk Management Indicator represents the unweighted category
issuer, particularly on their exposure to Employee Health score for a select issuer (where a higher number indicates higher risk
level measured on a scale of 0-100). The Materiality Weight indicates the
& Safety. This prompted the Responsible Investment percentage of an issuer’s ESG Materiality score attributable to a specific
group to conduct a more in-depth review of the peer General Issue Category (as defined by SASB Standards).
group’s health and safety practices which led to finding
prior incidents of unsafe labor practices for one issuer

22 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 PSP INVESTMENTS

Conclusion
PSP’s Responsible Investment group developed a propri-
etary ESG Composite score to systematically capture the
impact of material ESG factors on enterprise value. In
essence, this solution empowered PSP to use innovative
ESG data to capture dynamic materiality and transform
disclosure narrative into decision-useful insight. The
journey into the development of our proprietary meth-
odology showcased how the SASB Standards can help
investors develop new tools that can further support ESG
integration and we are confident that other investors will
also leverage the SASB Standards to inform their own
investment process.

23 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 ESG INTEGRATION
INSIGHTS
INVESTORS IN THEIR OWN WORDS

Nordea Asset Management

Materiality Assessment in Action – Samsung SDI

BY ARVINDER TIWANA, SENIOR ESG ANALYST

Executive Summary screened for potential violations of international norms

and have to follow the investment guidelines set forward
Materiality is a crucial concept within ESG, and the SASB in our responsible investment policy. Our active ownership
Standards and associated Materiality Map provides a clear activities – voting and engagement – also span across
foundation that can be used in different parts of the ESG all of our products, since being an active owner is central
investment process. At Nordea Asset Management (NAM) to our understanding of ESG and Responsible Investing.
the SASB Materiality Map is an important foundation of Currently, more than 60% of our AuM is in ESG or sustain-
both our proprietary ESG scoring and our engagement able funds.1
process. However, the following case study about NAM’s
In 2017, SASB invited NAM to write an ESG integration
engagement with Samsung SDI, a holding in Nordea’s
case study2 describing how NAM used SASB Standards
Emerging Stars Equity Strategy, illustrates how important
and their underlying materiality framework to inform
it is for users of SASB Standards and the SASB Materiality
fundamental analysis and identify attractive and respon-
Map to combine the comparable industry-based aspects of
sible investments for inclusion in a unique, ESG-informed
the Map with their own knowledge of company-specifics.
Emerging STARS Equity Strategy. This paper illustrated
NAM’s approach to ESG analysis and integration through
a case study looking at the Chilean mining company
Introduction Antofagasta. NAM has again been invited to write an ESG
integration case on the Emerging Stars Equity Strategy
Nordea Asset Management (NAM) is the largest asset
and this paper will look into how we have done it with South
manager in the Nordics with EUR 281bn (USD 325.7bn)
Korean company, Samsung SDI. We will not only focus on
in Assets under Management and a multi-cultural team of
how NAM is using the SASB Materiality Map in our ESG
approximately 900 FTEs present at 19 locations across
model, but we will also show how the SASB Materiality
Europe, Americas, and Asia.1 Since signing the PRI in 2007,
Map guides NAM’s engagement activities with a company.
as one of the early signatories, NAM has been on a respon-
sible investment journey where we have continuously
developed and enhanced our ESG model, increased our
ESG and sustainable product offering to clients, improved Nordea Asset Management’s ESG
our active ownership and engagement activities, and STARS Range
increased the penetration of ESG integration throughout
the organisation and our funds. NAM’s ESG STARS range is built on the belief that compa-
nies and issuers that integrate both ESG and financial
NAM has developed policies and procedures to ensure
metrics into their strategic decisions will be tomorrow’s
that the companies we invest in meet our expectations
winners. In these strategies, we aim to beat the bench-
of ESG performance, and that ESG and sustainability
mark by fully integrating ESG into our investment process
risks are managed in all our investment processes.
These include responsible investment approaches both
at the corporate- and product level. All of our funds are 1  Data as of 30.09.2021
2  https://www.sasb.org/knowledge-hub/case-study-nordea/

SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 NORDEA ASSET MANAGEMENT

and selecting companies or bonds that meet NAM’s not adequately making the transition to clean energy and
ESG standards. Within the ESG STARS strategies, every fossil fuel phase-out, while allowing the strategy to invest in
investment is examined through an ESG lens as well as companies that help accelerate the transition. Companies
on financial grounds. Our ESG analysts work closely with with a transition strategy that is aligned with the 2°C target
the investment teams to identify material risks and oppor- are put on a whitelist5. The ESEF is allowed to invest in
tunities relating to the companies’ medium- to long-term companies on the whitelist as long as the company also
operational performance and market positioning, and the has an investible NAM ESG score.
results of their analysis feed into proprietary ESG models
Every holding in the strategy undergoes a parallel funda-
that are integrated into the investment process.
mental and ESG evaluation before an investment is made,
Active ownership and engagement is an important part and this evaluation is continuously updated. Excellent
of the ESG STARS’ investment approach. We engage in ESG performance or unaddressed ESG risks will impact
productive dialogues with many of our STARS companies, the financial DCF model, which is the primary tool used for
executed in close collaboration by the ESG analysts and company valuation. The findings from the ESG analysis
portfolio managers. We believe this collaborative process that are deemed to have financial impact are reflected
creates value because it identifies companies that stand to either in the first 10 years of explicit financial forecasts,
improve strategically and financially from better managing and/or in the long-term fading of the profitability (ROIC-
and/or disclosing their key environmental, social and WACC spread), which takes place between year 10 and
governance opportunities and risks. Engaging directly with year 25. Companies with outstanding ESG profiles are
the companies gives us not only an insight into their ESG given a larger long-term profitability spread and vice versa.
risk management that goes beyond the standard external
communication, but also the ability to assess the progress
the companies have made on our previous ESG requests. SASB integration into the NAM’s
ESG model
Nordea’s Emerging Stars Equity NAM’s proprietary ESG scoring model attempts to identify
Strategy stakeholder risks at the company level and is conducted
from two perspectives. First, we assess alignment (or
NAM launched the Emerging Stars Equity Strategy (ESES) misalignment) of business models with the UN Sustainable
in April 2011, with the aim of creating a unique emerging Development Goals6 (SDGs). We assess whether the
market equity strategy in which the stock-specific analysis service or product the company offers contributes
and valuation fully integrate ESG factors, and therefore positively to society, how significantly aligned business
drive the level of conviction, the position sizing and port- activities are as a proportion of revenue, how much capex
folio construction. is directed into them, and whether they are a visible driver
of growth. This is relevant both because the SDGs present
The strategy has fully integrated NAM’s proprietary ESG
large and durable business opportunities, and because
scoring model, which is built around the SASB Materiality
SDG alignment – or the lack thereof – is an indicator of
Map. In addition to investing only in companies that
a company’s material ESG impact on the world around it.
have an investible NAM ESG score, the strategy has also
In this way, our research takes into account both sides of
implemented certain sector restrictions with a 5% revenue
the so-called “double materiality”, e.g. the effect of climate
threshold3. The strategy’s exposure to fossil fuels is
change on companies’ activities and the effect of compa-
governed by NAM’s Paris-Aligned-Fossil-Fuel Policy4 (PAFF).
nies’ activities on climate change alike. Our assessment
This policy prohibits investments in companies that are
of the business model is weighted at 30% in our internal
3  Sector restriction: coal mining, military equipment, gambling, nuclear power, scoring process.
adult entertainment, tobacco and power generation from Coal (10% revenue
threshold). For more information on the sector restrictions please see: https://
www.nordea.lu/documents/static-links/Equity_STARS_Sensitive_Industries_
Guidelines.pdf/ 5  https://www.nordea.com/en/doc/nam-fossil-fuel-policy.pdf
4  https://www.nordea.com/en/doc/nam-fossil-fuel-policy.pdf 6  https://sdgs.un.org/goals

25 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 NORDEA ASSET MANAGEMENT

Source: Nordea Investment Management AB. Note: For illustrative purposes only.

Second, we evaluate a company’s ability to manage material material topics according to the Materiality Map. However,
ESG issues in relation to stakeholders, such as employees, if the company has significant operations in other indus-
suppliers, customers, communities, regulators, and the tries, then several different topics may be included in the
environment. A key part of our process is identification of scorecard.
financially material ESG issues – those which are likely to
influence the financial performance of the company. We
weigh these issues flexibly, according to their materiality The role of engagement
for the specific sector. We use the SASB Materiality Map
as a guideline to determine materiality, but we supplement We believe that improved management of sustainability
it with our own insight into the workings of the company. risks and opportunities is vital to creating returns with
responsibility, and that engagement can result in a compet-
The SASB Materiality Map helps us to identify the key
itive advantage, increasing the likelihood of the companies
issues which are relevant for the company under the ESG
being successful in the long run – benefitting companies,
Scorecard columns of business ethics, environment, and
clients and society at large. Engaging with our investee
social. The company’s industry is used to identify the most
companies enables us to address material sustainability

26 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 NORDEA ASSET MANAGEMENT

risks and opportunities and provides us with the possibility material for Samsung SDI’s industry. The company’s
to contribute to real world impact. The dialogue allows us to sustainability reporting is aligned with the recommenda-
put forward our expectations on corporate behaviour and to tions set by the SASB Standards, which allows an easy
support companies in enhancing their sustainability perfor- review of the company’s performance. The issues iden-
mance. During the engagement period, we conduct regular tified by the SASB Materiality Map give a good direction
meetings with the company and track progress against our for our engagements, but are not the sole drivers of our
pre-defined engagement objectives. As the engagement engagement topics. We use our knowledge about each
is conducted as a collaboration between the RI team and company to tilt the engagement to aspects which we view
investment team, the outcomes have direct impact on the as the most material for the specific company in question
investment decision. Progress reports and outcomes of the – while still keeping an alignment with the material issues
engagement are also communicated to clients. identified by SASB.
One of the companies we are engaging with in the Samsung SDI published an index mapping the SASB
Emerging Stars Equity Strategy is Samsung SDI. Materiality Map to its 2020 Sustainability Report, which
allows investors to easily assess its performance
according to the Materiality Map.
Introduction to Samsung SDI
Samsung SDI is a South Korean company which special- Product Security
izes in developing lithium ion battery technology. The
company produces liquid crystal display (LCD) compo- The SASB Materiality Map’s focus on the product secu-
nents and rechargeable batteries for cellular phones, rity topic is mainly related to data security, as hardware
electric vehicles, energy storage systems and solar panels. products and related software offered by companies in
the hardware industry can have vulnerabilities that expose
The company is well positioned to contribute to and
consumers to data security threats. However, when we
benefit from decarbonisation, which is needed to combat
look at issues around Samsung’s products, our greater
climate change and the transition to a low carbon society.
concern is product quality, so this is where NAM has
Samsung SDI is not only part of the electrification of the
specifically focused the product-related engagement with
global car fleet, but can also help address one of the
Samsung SDI.
fundamental challenges with renewable energy: storage.
Wind and solar energy creation is not always timed with Issue: Quality control is a process where companies
the demand for energy. Samsung SDI’s energy storage review the design and manufacturing of their products to
systems can ensure that renewable energy is available ensure that the product quality is maintained or improved.
when there is a demand for energy. In 2016, Samsung SDI delivered batteries for the Samsung
Galaxy Note 7 phone which had a design fault that resulted
Samsung SDI has an investible ESG score and NAM has
in the phones overheating and combusting. The incident
engaged with the company since 2017. The engagement
ended up costing the client around USD 5bn in losses and
has been guided by the SASB Materiality Map, while we
lost sales.
have used our knowledge of the company to focus on
topics that we believe are most relevant for this specific Performance: In 2016, Samsung SDI enhanced its
company. quality management by establishing a Quality Assurance
department. Samsung SDI has now implemented a
comprehensive quality management system which is
Engagement guided by SASB certified in accordance with ISO9001 and IATF 16949.
Samsung SDI performs complete verifications on safety
Materiality Map factors from the product development phase - including
the selection of raw materials - through the whole manu-
The following section gives a brief overview of the issues
facturing process.
that the SASB Materiality Map identifies to be the most

27 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 NORDEA ASSET MANAGEMENT

SAMSUNG SDI Sustainability Report 2020

SASB Index
SASB Sustainability Disclosure - Hardware Industry

Accounting Metrics

Topic Code Accounting Metric Page (Reference)

Description of approach to identifying and addressing data Samsung SDI Privacy Policy
Product Security TC-HW-230a.1
security risks in products https://www.samsungsdi.com/privacy-policy.html

Employee Percentage of gender and racial/ethnic group representation for

TC-HW-330a.1 76p
Diversity & Inclusion (1) management, (2) technical staff, and (3) all other employees

Samsung SDI complies with global regulations such as EU RoHS

Percentage of products by revenue that contain IEC 62474 and REACH and national laws. In addition, strict pre-inspection
TC-HW-410a.1
declarable substances and follow-up management is implemented for all components
and raw materials used in products.

Percentage of eligible products, by revenue, meeting the

Product TC-HW-410a.2 N/A
requirements for EPEAT registration or equivalent
Lifecycle
Management Percentage of eligible products, by revenue, meeting ENERGY
TC-HW-410a.3 N/A
STAR® criteria

N/A
Weight of end-of-life products and e-waste recovered,
TC-HW-410a.4 * Please refer to 31p for Samsung SDI's efforts regarding
percentage recycled
Recycling and Reuse

Percentage of Tier 1 supplier facilities audited in the RBA

TC-HW-430a.1 Validated Audit Process (VAP) or equivalent, by (a) all facilities 40p
and (b) high-risk facilities
Supply Chain
Management Tier 1 suppliers’ (1) non-conformance rate with the RBA Validated
Audit Process (VAP) or equivalent, and (2) associated corrective
TC-HW-430a.2 40p
action rate for (a) priority non-conformances and (b) other
non-conformances

Materials Description of the management of risks associated with the use

TC-HW-440a.1 42-43p
Sourcing of critical materials

Activity Metric

Code Activity Metric Page (Reference)

TC-HW-000.A Number of units produced by product category 74p

TC-HW-000.B Area of manufacturing facilities 8-9p

TC-HW-000.C Percentage of production from owned facilities 2020 Annual Report 19-20p

Source: Samsung SDI – 2020 Sustainability Report1

1  https://www.samsungsdi.com/upload/download/sustainable-management/2020_Samsung_SDI_Sustainability_Report_English.pdf

28 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 NORDEA ASSET MANAGEMENT

Engagement: NAM has engaged with the company on with civic organisations -- as key points on its agenda to
this issue since 2017. We have required that the company improve the conglomerate’s business compliance. NAM
invests in improved quality control mechanisms and gives will continue to review and engage to ensure that the corpo-
transparency around this to its shareholders. Our assess- rate culture is changed to be more accepting of employees’
ment concludes that Samsung SDI has improved its quality union activities. It is very positive that the company now
control system and continues to improve the system. This has an official policy on the topic. NAM believes that a
has increased our conviction in the investment case as the balanced and harmonious relationship between workers
quality improvements reduce the risk of future recalls and and the company is likely to increase the attractiveness of
provisions, which can be very costly for Samsung SDI, and Samsung SDI as an employer and strengthen its brand and
therefore impact the valuation of the company. standing in South Korea, ultimately increasing the longevity
and value of the company.

Human Capital
Product Lifecycle Management
Human capital is an important topic that we considered
in our analysis and engagement with Samsung SDI. The NAM’s view and engagement on this topic is aligned with
SASB Materiality Map’s focus within the hardware industry and follows the issues identified by SASB Materiality Map.
is on the employee diversity & inclusion topic is mainly
Issue: Samsung SDI’s products are used in various tech
related to workforce diversity of gender and minority
products, some of which get obsolete and replaced by
groups, and the company reports on these issues in their
consumers after only a few years. While the collection and
sustainability report. However, NAM has chosen to focus
recycling of smaller batteries can be complex because
on a different topic within the issue of human capital. NAM
the end users discard batteries in many various ways,
sees unionisation as an unaddressed issue in Samsung
the move towards larger batteries in electric vehicles and
SDI as well as in the wider Samsung Group, thus we have
energy storage systems will make it more efficient to
focused our engagement on this topic.
create a recycling process for used batteries.
Issue: NAM supports the core ILO conventions, which
Performance: The company ensures that scraps from the
include employees’ right to organise and have collective
manufacturing process are collected and sent to a recy-
bargaining. While Samsung Group has not had an official
cling company which can then send it back in the value
anti-union policy, historically there have been several
chain. It also works with battery recovery companies,
cases of anti-union activities throughout the group, some
which can send the batteries for recycling. The company is
of which have resulted in legal cases against senior
looking for potential partnerships with car manufacturers
management.
to develop a closed-looped battery recovery system.
Performance: Samsung SDI has for many years supported
Engagement: NAM has engaged with the company on the
freedom of association in its supply chain through its
issue of recycling. While it is already addressing the issue
supplier code of conduct, but these rights have never been
of recycling scrap material from its production process,
officially applicable for its own employees. However in
there is room for improvement in relation to the end-of-life
2019, Samsung SDI officially announced in a policy that
recycling. Samsung SDI could build recycling consider-
it supported and would respect its employees’ freedom of
ations into the design of its products and make easier the
association.
separation of raw materials in discarded batteries. We
Engagement: NAM has engaged with the flagship company view it as essential that the company succeeds in its
of the Samsung Group on the issue of labour rights within efforts to create partnerships to recycle its discarded elec-
the group. The group has established an independent global tric vehicle batteries, as this would reduce the negative
compliance committee, which has the mandate to review externalities that arise from their use.
and monitor the group’s compliance. Since its establish-
ment, the committee has selected three issues -- the group’s
union, management succession and communication

29 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 NORDEA ASSET MANAGEMENT

Supply Chain Management the Democratic Republic of Congo and an estimated 25%
of it is mined in artisanal way. Artisanal mining refers to
Supply chain management is an integrated part of NAM’s
informal and unregulated mining, which is often done in
ESG analysis and follows the issues identified by SASB
abandoned mining pits or old mining tailings. The health,
Materiality Map.
safety and working conditions of artisanal cobalt miners
Issue: Samsung SDI has a complex supply chain, with are poor, and because it is unregulated there is a high risk
production among suppliers as well as its own facilities. of environmental pollution.
Its supply chain is also diverse, which means that its
Performance: Samsung SDI has addressed its exposure
suppliers have different ESG challenges and the company
to artisanal-mined cobalt by assessing all of its suppliers
has to adjust its supply chain audits accordingly.
that use cobalt through the application of the Responsible
Performance: Samsung SDI has a relatively good process Mining Initiative’s Cobalt Reporting Template, to ensure
of supply chain management. The company utilises a traceability and transparency of its cobalt supply chain. In
combination of self-assessment and onsite audits of all 2017, 23% of the company’s suppliers complied with the
new and major suppliers to assess its supply chain’s ESG requirement, and this has increased to a 91% compliance
risks. The company has a comprehensive Supplier Code of rate in 2020. To further reduce its reliance on artisanal
Conduct7, which describes its policies on issues such as cobalt and to secure its cobalt supply, Samsung SDI
human and labour rights, health and safety, environment, has made a direct cobalt purchase agreement with an
and ethics. Samsung SDI also provides ESG awareness industrial miner in the DRC, which will ensure that the
training to suppliers and supports manufacturing innova- company has full traceability of all its cobalt. At the same
tions in partnership with major suppliers. It is transparent time, the company has implemented several initiatives to
with the result of the audits in relation to how many had to address the reliance on mined cobalt, such as recycling
make improvements and how many failed the audit. programmes to recapture cobalt from used batteries and
product design to reduce the amount of cobalt used in its
Engagement: NAM has not had any specific engagement
batteries.
with Samsung SDI on its supply chain management of its
direct suppliers, as our assessment is that the company The work the company is doing, through intense research
generally manages this issue quite well. Our engagement and development, to reduce and even eliminate the
on this topic is focused further up the supply chain around cobalt content in its batteries is highly beneficial here.
the raw materials used in production, specifically its cobalt Newer batteries have ever lower cobalt content and the
supply chain. company is working on developing so-called solid state
batteries that don’t use cobalt at all. This would not only
reduce the overall cost raw materials and thus improve
Materials Sourcing the profitability outlook of the company, but also improve
its standing versus competitors and proposition to
SASB Materiality Map flags raw materials as one of the customers, and help the company stay ahead of potential
challenges for companies within the industry where future regulation.
Samsung SDI operates. NAM has focused its engagement
Engagement: NAM’s main engagement focus with
on the company’s sourcing of cobalt.
Samsung SDI has been on cobalt for several years. NAM
Issue: Cobalt is a metal which is often used in recharge- has requested that the company increases the transpar-
able batteries because of its unique properties which ency of its cobalt supply chain and has it audited. The end
improve the performance, safety and longevity of the goal for NAM is to ensure that Samsung SDI accesses a
batteries. Cobalt mining does not face any significant critical raw material in a sustainable way, and that utilises
different ESG risks to those which are inherent in other responsible cobalt in its products, which we believe will be
types of mineral mining. However, the challenge around future requirement from its clients and regulators. While
cobalt is that 70% of the annual global supply comes from Samsung SDI is well on its way to addressing its exposure
to artisanal cobalt, NAM will continue to engage with the
7  https://www.samsungsdi.com/upload/download/sustainable-management/
Supplier_Code_of_Conduct_v1.01.pdf company around cobalt. The new engagement focus will

30 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

 NORDEA ASSET MANAGEMENT

be to address the ESG risks that are prevalent in large

scale Congolese mining operations, such as labour rights
and corruption.

Conclusion
Materiality is a crucial concept within ESG, and the SASB
Standards and associated Materiality Map provides a clear
foundation that can be used in different parts of the ESG
investment process. However, since the SASB Standards
are developed at an industry level, for some purposes
users may find it useful to add their own company-level
knowledge onto the industry-based framework provided
by the Materiality Map to ensure that they are focusing
on the most relevant topics for each company, particu-
larly where the company’s operations may differ from the
industry norm.

31 | SASB STANDARDS INTEGRATION CASE STUDY SASB.ORG/INVESTOR-USE

www.valuereportingfoundation.org www.sasb.org