Investors translate PAI data into pre-trade warnings, portfolio tools

Managers explore ways to embed PAI reporting in the investment process.

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This article is the third in a four-part series on PAI reports by Responsible Investor. The first two covered data concerns and solutions and investors’ approach to voluntary indicators. Next week we will look at how firms are translating PAI reports into stewardship opportunities.

Investment firms are working out how best to turn their PAI reports into useful tools for their portfolio managers, with two asset managers implementing a pre-trade warning for investment decisions with major PAI impacts, and another launching a PAI sandbox tool.

Danske Bank’s €91 billion asset management wing has introduced a pre-trade warning to alert managers if a planned investment would breach pre-set thresholds for a selection of PAI indicators.

Stine Lehmann Schack, head of responsible investment frameworks and governance at Danske Bank AM, told Responsible Investor that the tool was intended to prompt additional due diligence by a manager.

The firm’s managers will be considering PAIs are part of their investment process anyway, she said, so the warning “serves as a sort of last resort to keep in mind that they need to consider this element”.

A manager can choose to override the warning but will have to submit a rationale to the responsible investment team for evaluation. For Article 9 funds or funds with a sustainable investment objective or exclusions, the manager will be unable to override.

The system was introduced in February and covers most actively managed Danske Invest funds. It is yet to cover every one of the 14 mandatory PAIs that asset managers are required to report against but there are plans to introduce thresholds for all of the indicators.

Lehmann Schack said there had been good feedback from portfolio managers and the system was working well. “It has been quite an enhancement to how we work with the PAIs and it gives us many learnings along the way on how we should extend our work in the respect,” she said.

Danske is already looking at how to further leverage the pre-trade warning.

“It is an extremely good tool to make sure we have control of what considerations are being made,” said Lehmann Schack.

If portfolio managers override on a continuous basis “that will also prompt further attention to certain strategies”, she added. “That’s a different type of tool you can use both for monitoring and awareness.”

A similar system has been introduced at Allianz Global Investors. The €514 billion manager said in its report that the PAI profile of corporates is screened pre-trade and a warning system is in place to make portfolio managers “aware of potentially relevant PAI ahead of making investment decisions”.

Sandboxes and PAI budgets

Other managers have taken different approaches to integrating their PAI numbers into tools at the portfolio level.

At T Rowe Price, portfolio managers consider the aggregated profiles for certain PAIs as part of the investment process, although this varies depending on the product mandate. The US giant gives its PMs access to the full PAI profile of their products in real-time, and they are able to see how changes to the portfolio could impact this profile.

Turning to Germany, DWS has instituted a PAI budget for its products. Dennis Hänsel, the firm’s global head of ESG advisory, explains: “[Entity-level] PAI statements will influence the management of an asset manager, ie to which products open budgets of the respective PAI will be allocated.

“This means that we have to decide on a product-specific basis what the individual contribution to the PAI is and which products receive more or less budget for their investment strategy.”