Statement on integration of sustainability risks into investment process regarding Luminor Bank AS’s (hereinafter Luminor) discretionary portfolio management service
Sustainability factors we consider in our investment process are environmental, social and employee matters, respect for human rights, anti‑corruption and anti‑bribery matters. For consideration of sustainability factors in discretionary portfolio management service1 we classify investments as direct investments and investments in collective investment undertakings.
Companies are excluded from our direct investments and financing universe if they are:
- involved in the production of or trade of any product or activity deemed illegal under national laws or regulations, or international conventions and agreements, or are subject to international bans;
- sanctioned by the United Nation, European Union, United Kingdom HM Treasury, United States OFAC, national regulations of Estonia, Latvia and Lithuania;
- where it is suspected that financial crime and other illicit activities are happening (such as human trafficking, smuggling, extortion, wildlife trafficking, illegal distribution of arms and munitions, proliferation of weapons of mass destruction, narcotics, corruption, tax evasion) or acting without the required license in the jurisdiction in which they or Luminor operate in;
- related to the financing of terrorism (e.g. foreign fighters, activities in war zones, fundraising through crowd‑financing platforms for purposes which could be suspected as related to the financing of terrorism activities, etc.);
- related to production of weapons which through normal use violate basic humanitarian principles;
- related to vaping and/or tobacco or production of pornography.
Furthermore, we exclude companies from our future direct investments and financing universe if they are engaged in the following environmentally relevant activities:
- establishing new capacity for coal‑fired power generation and/or thermal coal mining, and/or extraction of oil and oil shale;
- production of or trade in ozone depleting substances2;
- production or use of or trade in persistent organic pollutants3;
- trade in wildlife or production of or trade in wildlife products regulated under CITES4;
- transboundary movements of waste prohibited under public international law5.
Regarding collective investment undertakings we invest only in financial instruments issued by investment managers who have signed United Nations Principles for Responsible Investment (UN PRI).
The investments underlying this financial product do not take into account the EU criteria for environmentally sustainable economic activities6.
Assessment of the likely impact of sustainability risks7 on the return of the investments
We believe occurrence of an environmental, social or governance (hereinafter ESG) event or condition could cause an actual or potential material negative impact on the value of investments made in the course of providing discretionary portfolio management service.
Empirical and academic research8 have shown that sustainability factor exposures impact financial assets’ risk and return characteristics, e.g.:
- stock prices of companies with low ESG ratings demonstrate higher volatility compared to those with high ESG ratings;
- companies in the worst quintile of ESG scores have greater earnings volatility and are less profitable as compared to best quintile;
- positive contribution to risk‐adjusted returns when using ESG screening approach in different markets, portfolios exhibiting higher returns and lower tail risk, without reduction of diversification potential despite the reduction in the number of companies;
- in corporate bond markets – integrating ESG characteristics beyond pure financial data may add value by both improving returns and reducing returns volatility.
Overall, considering sustainability risks in investment process is crucial to achieving high and sustainable long‑term returns.
For additional information please also see The statement on principle adverse sustainability impacts and indicators of Luminor
Portfolio management service: the Banks’s activity of investing and management of the assets composing Client’s Portfolio at the Bank’s discretion, according to the Portfolio strategy agreed between the Parties, as well as other activities under the Discretionary portfolio management service agreement aiming to receive a positive return on the investment.2
Ozone Depleting Substances (ODSs): Chemical compounds which react with and deplete stratospheric ozone, resulting in the widely publicised ‘ozone holes’. The Montreal Protocol on Substances that Deplete the Ozone Layer lists ODSs and their target reduction and phase out dates. A list of the chemical compounds regulated by the Montreal Protocol, which includes aerosols, refrigerants, foam blowing agents, solvents, and fire protection agents, together with details of signatory countries and phase out target dates, is available from the United Nations Environment Programme
Reference document: Stockholm Convention on Persistent Organic Pollutants (POPs) as amended in 2009.4
CITES: The Convention on International Trade in Endangered Species of Wild Fauna and Flora. A list of CITES listed species is available from the CITES secretariat.5
Reference documents: Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal; Regulation (EC) No 1013/2006 of 14 June 2006 on shipments of waste; and Decision C(2001)107/Final of the OECD Council concerning the revision of Decision C(92)39/Final on the control of transboundary movements of wastes destined for recovery operations.6Taxonomy Regulation
, Article 7.7
Sustainability risk: an environmental, social or governance event or condition that, if it occurs, could cause a negative material impact on the value of the investment.8
1) Assessing Risk through Environmental, Social and Governance Exposures, J. Dunn, S. Fitzgibbons and L. Pomorski, 2017, February 17
2) ESG for All? The Impact of ESG Screening on Return, Risk, and Diversification, T. Verheyden, R G. Eccles, A. Feiner, 2016, July 11
3) The impact of ESG investing in corporate bonds, C. Ferrarese, J.Hanmer, 2018, July