Our ESG Integration Strategy

From conception to continuous stewardship, the integration of ESG entails evaluating significant ESG risks and opportunities at every stage of the investment process.

Implementation in Practice




The Vital Importance of Accountability

At Prime Credit, we are committed to being a responsible firm—both in our actions and our investments on behalf of our clients. We believe that conducting research, engaging stakeholders, and integrating material ESG (Environmental, Social, and Governance) issues can aid us in assessing risks more effectively and identifying opportunities, ultimately resulting in improved decision-making and better outcomes for our clients.

The industry knowledge of our investment team plays a crucial role in gaining insights into significant ESG issues. Additionally, the Prime Credit Responsibility team enhances the research and engagement endeavors of the investment teams. Team members possess expertise in Environmental, Social, and Governance (ESG) matters, enabling them to question the perspectives of the investment teams and provide our fundamental analysts with the necessary tools and training to address material ESG issues, as appropriate.



Responsibility Is Integrated Across the Organization

The Prime Credit Responsibility team, consisting of specialists in corporate responsibility and environmental, social, and governance (ESG) matters, collaborates closely with our investment teams, central to our responsible investment initiatives. Their efforts are bolstered by both internal and external resources, and are supervised by our Responsibility Steering Committee and the Prime Credit Board of Directors.

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Sustainable Themes

Climate

Efforts to combat climate change are gaining traction globally. Increasingly, consumers, businesses, and policymakers alike are acknowledging the imperative for change.

  • Cleaner energy
  • Resource efficiency
  • Sanitation and recycling
  • Sustainable transportation



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Health

Healthcare expenditure is on the rise, coupled with extended life expectancy, presenting intricate challenges regarding access to top-tier and cost-effective medical care, as well as long-term support.

  • Access to quality care
  • Food security and clean water
  • Medical innovation
  • Well-Being



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Empowerment

Numerous segments of society face marginalization due to economic and social dynamics. Establishing robust physical and technological infrastructure is essential to facilitate sustainable economic progress, foster employment opportunities, alleviate poverty, and promote social integration.

  • Education and employment services
  • Financial security and inclusion
  • Information and communication
  • Sustainable infrastructure



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Strong Institutions

Responsible governments lay the groundwork for private sector innovation and for the formulation of effective and transparent public policies.

  • Freedom and fundamental rights
  • Anti-corruption and government
  • Law and order



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$3 Billion


in Portfolios with Purpose

The Benefits of Proactive Engagement

As proactive investors, engagement plays a crucial role in our approach. Annually, Prime Credit analysts interact with leaders of both corporate and non-corporate entities, such as municipalities, supranational organizations, and sovereign issuers. Additionally, we engage selectively through our proxy voting initiatives.

These interactions enable us to evaluate, discuss, and advocate for improved business practices and strategies to tackle swiftly evolving material ESG concerns. We are confident that engagement can enhance our research efforts and deliver superior outcomes for our clients.

Enhancing Outcomes Through ESG Integration

ESG risks frequently translate into financial risks. Through thorough research, engagement, and integration of significant ESG factors, we enhance our ability to evaluate risks and seize opportunities, ultimately leading to more informed investment decisions.

Crafting a climate investing strategy involves more than merely steering clear of companies vulnerable to global warming risks. It necessitates an active pursuit of diverse opportunities among companies contributing to the fight against climate change, while also possessing robust business models.



Concerns and efforts to combat global warming have been underway for decades, though there has been a notable escalation in recent years. For instance, the German city of Freiburg spearheaded the adoption of solar power back in the 1980s and is swiftly progressing towards its objective of nearly halving greenhouse gas emissions by 2030. While Freiburg's early recognition is remarkable, many economies and industries are only now beginning to acknowledge climate-related risks.



High Stakes of Climate Risks with Opportunity for Action

Europe witnessed its second-warmest year on record in 2022, while globally, it ranked as the fifth warmest. In light of this, environmental experts at the UN have heightened calls to accelerate climate mitigation efforts across all countries and sectors and on every timeline.

Encouragingly, the same UN report emphasized that there is still time for action. The widely embraced objective of constraining annual temperature increases to 1.5 degrees Celsius by 2030 remains feasible. Through the mobilization of resources and the exchange of best practices, technology, and impactful policy measures, any entity can more effectively manage, and even mitigate, carbon emissions.

Additional support from government initiatives is proving beneficial as well, with a clear incentive at hand. Research indicates that climate change could either impede or enhance economic output by as much as -8% to 15% annually, contingent upon the response from governments and industries.

During last year's UN COP27 conference, for instance, delegates reached a consensus to create a multinational financial safety net for loss and damage, aimed at assisting less affluent nations in recuperating from climate-related repercussions. Initiatives like the US Inflation Reduction Act and the forthcoming European Green Deal offer substantial financial incentives to steer economies towards a low-carbon trajectory. Even China, arguably one of the largest greenhouse gas emitters, has joined the cause. Its 2060 carbon-neutral roadmap, which tackles climate change, also underscores its economic vision for the country moving forward.



Numerous Sectors Gain from Economic Drivers Tied to Climate Factors



Addressing climate change extends beyond macroeconomic strategies. An increasing array of sectors, spanning from electric vehicles to wind farms, find themselves at the forefront of a decarbonizing economy—and all are experiencing growth rates surpassing that of the US economy.

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These innovative enterprises are poised to spearhead the shift with business models tailored to climate transition, along with offerings that facilitate global decarbonization. Anticipated is their potential for sustained growth spanning multiple decades.

Certainly, investors maintain a cautious stance given the prevailing uncertain macroeconomic landscape, notably characterized by escalating interest rates and significant inflation. Undoubtedly, these disruptors also influence the investment selection process, but they should be assimilated alongside climate risks, not separately, in identifying enterprises poised to thrive in the evolving economy.

Climate Solutions Present an Attractive Investment Element

Investors are increasingly drawn to the growth prospects presented by companies offering climate solutions. In 2022, global investment in energy-transition technologies and services, encompassing renewable energy, electric vehicles, energy efficiency, and hydrogen, surged to a record $1.1 trillion, marking a notable 31% rise from the previous year (Display). Notably, China emerged as the primary driver of this growth, contributing approximately half of the total investment. Equally significant, this surge has brought investment in energy-transition technologies to parity with fossil fuels for the first time. Projections indicate that by the end of this decade, spending on decarbonization solutions will surpass expenditures on fossil fuels by at least fourfold.

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The increasing dedication to achieving global carbon reduction targets transcends industries traditionally associated with climate-friendly practices. A growing number of companies, especially in the consumer discretionary, information technology, and industrials sectors, are demonstrating their commitment to science-based greenhouse gas reduction objectives.

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This momentum is cultivating a healthy sense of competition among innovative businesses that are resilient to climate change and prioritize climate action, presenting appealing growth prospects. For instance, companies like AECOM, headquartered in Dallas, Texas, specialize in consulting services for carbon-intensive sectors such as transportation and construction, aiding in the achievement of ambitious emissions reduction targets, sometimes reaching up to 50% for various projects. Hexcel, based in Stamford, Connecticut, manufactures lightweight carbon fiber used in aircraft construction, contributing to fuel savings and reducing annual greenhouse gas emissions for airlines by significant amounts. Additionally, Norway-based recycling company TOMRA is experiencing continued growth due to the expanding global commitment to reusable plastic in various industries, including manufacturing, retail, and food packaging.

Strong fundamentals are essential not only for climate resilience but also for sustained growth

A company's climate resilience is also rooted in the quality of its business model, which is why investors should consider both aspects. In addition to managing the immediate challenges posed by climate change, companies must strategize for their long-term viability and success within a low-carbon economy. We believe that alongside active climate investing, robust balance sheets and effective governance play crucial roles. Simply mitigating the financial risks of climate change isn't sufficient; companies must exhibit strong foundational principles and forward-thinking strategies to capitalize on both present and future opportunities in the shift toward decarbonization.

With the global population projected to reach 10 billion by 2050, the urgency for worldwide action akin to Freiburg's initiative is paramount. Innovation is now indispensable for environmental improvement, ensuring access to clean water, and meeting the demands for safe food production. Therefore, a comprehensive integration of risks and opportunities within today's economy is pivotal for an effective climate strategy. Companies poised to thrive are those capable of identifying their role in this monumental endeavor, mitigating current risks while laying the foundation for future profitability. Climate investment solutions should address both aspects of this equation.



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Social issues pose considerable challenges for research and are often the least familiar aspect of environmental, social, and governance (ESG) considerations for investors. Nonetheless, their significance in terms of risks and opportunities is escalating, necessitating investors to find effective approaches to address them.


A mounting array of social concerns, ranging from modern slavery to gender diversity in the workplace, continue to challenge companies. These issues are responsible for a larger share of corporate controversies compared to environmental and governance matters. However, investors with a focus on environmental, social, and governance (ESG) factors, while adept at integrating environmental and governance considerations into their investment strategies, often lack equally robust frameworks for addressing social factors systematically and comprehensively.



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The challenge lies in the scarcity and ambiguity of data concerning social factors, making their integration into research and investment processes complex. Given the prominence of social trends and evolving legislation, overlooking the risks associated with companies' social performance can have detrimental effects on investment outcomes.

Investors, in our view, can rise to this challenge—and the opportunities it creates—by understanding how to apply and expand upon the available data within a research framework that captures three critical dimensions of global social change.

Why Social Data Falls Behind



Increased regulation and quasi-governmental oversight have driven significant improvements in data availability concerning "E" and "G" issues. Now, there's growing official interest in social matters, which could address the current information imbalance. Social factors still have relatively limited data compared to "E" and "G" domains.

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The social data most readily available typically pertain to gender diversity in the workforce, health and safety standards, product recalls, and human rights policies. However, the quality of this data often lacks depth. For instance, merely having a human rights policy in place doesn't guarantee its effectiveness or proper implementation.

Comparing social metrics across companies and industries poses challenges. Unlike carbon footprints and governance standards, which can be readily compared across companies or sectors, social issues vary significantly across industries.

Within the apparel industry, prominent concerns encompass forced or child labor, the percentage of employees encompassed by trade unions or bargaining agreements, mechanisms for reporting grievances, and supplier codes of conduct.

In retail banking, predatory lending stands out as a significant social issue, alongside considerations such as access to services for customers from lower-income backgrounds, privacy and data security, and penalties imposed for regulatory violations. Food and beverage companies, on the other hand, should be assessed based on criteria such as product quality and recalls, investment in safety and quality systems, and the amount of production time lost due to workplace injuries or safety incidents.

These concerns are poised to gain more attention as regulatory oversight of "S" factors continues to rise steadily.



Investors are confronted with a deluge of legislation related to social factors.

According to our findings, from 2011 to 2022, major Western governments and quasi-governmental bodies implemented 23 notable measures, ranging from enacting laws to establishing guiding principles and conducting parliamentary investigations, aimed at combating forced labor and human rights violations. The majority of these actions (17) occurred during the latter half of this timeframe.

The gradual surge of legislative measures will compel companies to conduct and disclose due diligence in both their operations and supply chains. Initiatives to prohibit products manufactured through forced labor are already in progress in the United States, with similar actions anticipated from the European Union in the near future.

Growing grassroots awareness of social issues is amplifying. The COVID-19 pandemic underscored the disparity in vaccine distribution and strained healthcare systems. Concurrently, disruptions in the supply chain due to both the pandemic and conflicts such as the war in Ukraine have exposed difficult conditions in certain export-oriented nations. Escalating inflation and the cost-of-living crisis are further heightening public consciousness regarding social concerns.

In our perspective, investors should consider taking two actions to adapt to the increasing significance of "S" factors in their portfolios.

Insights can be driven by combining data science with qualitative analysis.



The initial step involves tackling data quality and accessibility concerns. Once data are accessible, their relevance to different industries should be accurately assessed. Subsequently, the fusion of data science and qualitative analysis can facilitate the extraction of more valuable insights.

For instance, while in-house securities analysts may possess broad insights into "S" factors, specialized third-party providers often have more profound knowledge, albeit covering fewer companies. By leveraging data science techniques, investors can tap into additional data reservoirs facilitated by artificial intelligence.

Comprehending the data is crucial to prevent erroneous deductions. While "S" controversies are more prevalent in certain sectors like automotive, it's inaccurate to presume that industries with limited data have proportionally fewer controversies. Additionally, conducting fundamental research can validate the effectiveness and proper implementation of a company's human rights policy.

Three Facets of Grasping "S" Concerns



The second stage involves crafting a research framework capable of pinpointing crucial "S"-related hazards and advantages.

We've delineated three overarching themes to aid investors in navigating the dynamic "S" investment landscape: a transforming world, an equitable world, and a sustainable world.

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These themes encompass a wide array of profound changes. Regarding the perspective of a transforming world, they involve grasping how effective human capital management can confer competitive benefits to firms, grappling with the ramifications of an aging workforce, and confronting the risk that automation could potentially eliminate 30% of jobs by 2030.

Considering the world through a lens of social justice can direct investors' attention towards mounting evidence indicating a positive correlation between female corporate leadership and corporate performance. It can also sensitize them to the industry-wide repercussions of import bans on products manufactured through forced labor.

The worldwide shift toward a low-carbon economy underscores the need for governments to formulate policies that assist individuals in adapting to the loss of old jobs and the creation of new ones. The effectiveness of governments in this regard will carry ramifications for investors in sovereign bonds.

Health is a crucial consideration for both companies and investors. It's worth noting that inadequate health conditions are projected to incur a staggering cost of approximately US$12 trillion annually worldwide, which amounts to roughly 15% of the annual global GDP.

The recognition of modern slavery as both a social scourge and an investment hazard is steadily increasing, placing investors in a crucial role to detect and eliminate this risk across various sectors. The mining sector, in particular, presents a significant challenge in this regard: the risks to individuals within this industry are substantial and escalating, and they are not adequately mitigated compared to sectors with higher consumer-facing risks like technology and apparel.

The mining sector often recruits workers from highly vulnerable demographics, including migrant laborers and minority groups. Numerous companies operate in regions marked by conflict, corruption, or deficient legal systems. Moreover, the nature of mining work itself is hazardous, and the business models, frequently dependent on subcontracting and seasonal demand, can also carry significant risks.

Therefore, it's unsurprising that our analysis identifies the mining industry as posing considerable risks to individuals, both within its operational framework and across its supply chains. Moreover, we believe these risks are escalating.


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Increasing risk is partly attributable to heightened scrutiny from governmental and intergovernmental bodies. For instance, the United States has enacted legislation on conflict minerals, while the European Union (EU) rolled out its Corporate Sustainability Reporting Directive on January 5, 2023. This directive mandates that large companies within and outside the EU report on various social aspects, such as working conditions, equality, non-discrimination, diversity and inclusion, human rights, and the impact of their operations on individuals and human health.

In February 2022, the EU Commission introduced a Corporate Sustainability Due Diligence proposal aimed at regulating companies' human rights and environmental responsibilities. Similarly, in September 2022, it initiated a Forced Labour Regulation proposal, which doesn't specifically target the mining sector but includes companies involved in forced labor. If enacted, this regulation would prohibit the import and export of their products to and from the EU.

The United Nations (UN) Sustainable Development Goals set the target of eradicating modern slavery by 2030. In December 2022, an initiative by the UN-backed Principles for Responsible Investment was launched to engage with companies on social issues and human rights. This initiative, the largest of its kind, garnered support from over 220 asset managers, representing a total of US$3 trillion under management.

The initial focus of the initiative is on the mining, metals, and renewables sectors. Another source of increasing risks stems from geopolitical factors. The drive to expand the use of renewable energy sources, coupled with technological advancements such as military equipment, is fueling high demand for certain minerals. This heightened competition may extend beyond companies to include governments vying for these relatively scarce resources.

As these challenges intensify, so does the ambiguity surrounding individuals employed in the mining sector, especially those situated in the most isolated and least transparent segments of the supply chain. Consequently, the imperative heightens for investors to recognize and mitigate risks to individuals within investment portfolios. How can these endeavors be enhanced for greater efficacy?

Geography Poses Significant Risks in the Mining Sector

In our perspective, the critical aspect involves establishing a robust framework to evaluate the risk of modern slavery across all firms within the pertinent investment sphere, extending beyond those currently held in investors' portfolios. By blending fundamental analysis with specialized third-party investigations, it becomes feasible to rank companies and sectors based on their susceptibility to modern slavery risks.

Our framework relies on four primary risk factors: vulnerable demographics, precarious geographic locations, high-risk products and services, and high-risk business models. These elements are pertinent to both mining activities and their associated supply chains.

Our framework relies on four primary risk factors: vulnerable demographics, precarious geographic locations, high-risk products and services, and high-risk business models. These elements are pertinent to both mining activities and their associated supply chains.

Given its extensive presence in developing nations, the mining sector poses a significant human risk in many of these regions. Artisanal and small-scale mining (ASM), characterized by its relatively hazardous nature and often inadequate safety measures, is prevalent in these countries. The International Labour Organization reports that nearly 13 million individuals are engaged in ASM, with an estimated 100 million reliant on it for their livelihoods.

In regions hosting mining activities, risks to individuals encompass exploitative circumstances in isolated areas, potential forced displacement of indigenous populations to facilitate mineral extraction, and connections with organized crime or armed conflicts. These hazards are expected to escalate, as a substantial portion of the anticipated increase in mineral demand will be concentrated in high-risk geographical areas.

Engagement Leads to Understanding... and Insights

While the overarching framework for modern slavery risk is valuable, genuine insight stems from grasping the unique exposure of each firm. Although risk factors are elevated across the industry, they differ from one company to another, as does their awareness of risks and their efforts to mitigate them.

Comprehending the specific exposures to modern slavery risks demands robust research capabilities and collaboration between fundamental analysts and internal environmental, social, and governance (ESG) specialists, coupled with a keen understanding of best practices in risk management.

Being prepared to directly engage with companies to recognize and tackle these issues is crucial. Engaging for both understanding and action holds the promise of mitigating risks, not just for employees within the mining operations and supply chains of businesses, but also for the companies themselves and their investors. It presents a valuable chance to heighten companies' awareness of the modern slavery risks they confront and support them in devising efficient strategies to address them.

Our engagement efforts regarding this matter indicate that while mining companies demonstrate a reasonable level of risk awareness, there's room for further action to effectively manage these risks. For instance, the companies we've interacted with typically boast robust policies concerning human rights and modern slavery, yet there's notable disparity in the execution quality. A significant insight gleaned from these interactions is that training initiatives on this matter are relatively advanced within companies' internal operations and procurement teams, but they are still in nascent stages with regard to their suppliers.

Emerging public policies underscore the increasing urgency to tackle climate risk, a priority that equity investors should also underscore.

Despite longstanding warnings from scientists about rising global temperatures, record heatwaves, and costly wildfires observed in recent months, most investors prioritize concerns such as inflation, increasing interest rates, geopolitical tensions, and the quest for new economic drivers over climate change as their top risks.

While we acknowledge the significance of all these risks, given the unprecedentedly high global temperatures, climate change must be integrated into investment considerations on par with these other concerns.

Climate change extends beyond mere temperature shifts; its enduring economic repercussions are profound, exemplified by the ongoing energy crisis. As evidenced by the gas and oil scarcities resulting from the conflict between Russia and Ukraine, costs have skyrocketed, imperiling global business operations in the absence of viable alternative energy outlets.

Climate risk poses a universal challenge across industries, prompting businesses to seek viable solutions. Nevertheless, by implementing best practices, leveraging technology, securing adequate funding, and enacting sound public policies, both companies and nations can mitigate or forestall carbon-intensive practices. In essence, there are opportunities in combating climate change. This sentiment is echoed by government policymakers, particularly in Europe and the US, where unprecedented public initiatives and funding endeavors are underway.