Sustainability risk policy. SFDR article 3

1. Introduction

Saxo Bank, LEI 549300TL5406IC1XKD09, is an international firm for investors and traders who are serious about investing towards their own financial goals and towards generating impact in the things they value. For over 30 years, we have perfected our industry-leading platforms to give our clients regulated and reliable access to over 70,000 financial instruments.

By providing investment services, Saxo Bank’s clients are exposed to the environmental, social and governance risks of the companies in its investment universe. This policy describes the processes implemented by Saxo Bank to integrate sustainability risks into investment decision-making.

2. Scope and Objective

Pursuant to Article 3 and Article 6 of Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (“SFDR”), this Policy provides information on how Saxo Bank A/S integrates sustainability risks in the investment decision-making process, when providing portfolio management services, in pension services and through its financial advisory services (“Wealth Management”) which are deemed financial market participants in scope.

The Policy applies to Saxo Bank A/S including all fully or partly owned subsidiaries. Where differences in local regulatory requirements exist, the local regulation takes precedence and local policies, and procedures will be drafted to reflect
deviation from this document.

The Policy does not apply to the financial products offered on the Saxo Platforms for self-investing clients. The Policy does not cover trading strategies implemented using derivatives.

This Policy is reviewed and updated as required and at least annually.

3. Definitions

SFDR is the EU Regulation 2019/2088 on sustainability‐related disclosures in the financial services sector. A requirement of SFDR is for financial market participants and financial advisors to publish on their websites information about their policies on the integration of sustainability risks in their investment decision-making processes. This is applicable to Saxo Bank for the following services: financial advice (“Wealth Management”), discretionary portfolio management and
pension services.

Article 2 (22) of the SFDR defines “sustainability risk” as an environmental, social or governance (ESG) event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of an investment. Sustainability risks of environmental degradation and climate change can be divided into two categories: physical risks and transition risks.

Physical risks to the investment such as increasing intensity of extreme weather events like heat waves, storms or rising sea-level. If not managed adequately, physical risks may lead to, amongst other consequences, the disruption or failure of supply chains and logistics, and potential changes in customer demand for various products and services.

Transition risks can happen due to environmental or social factors such as when consumer habits change and technologies evolve. A failure to account for transition risks may lead to, amongst other consequences, the impairment
of defunct or outdated assets or the loss of customer base.

Active Ownership (engagement) means the use of rights and position of ownership to influence the activities or behaviour of investee companies based on financial and/or impact materiality considerations.

Third party model portfolio service providers (MPS providers) – a third party with which Saxo Bank A/S or any of its subsidiary engages with the purpose to procure model portfolios for Saxo Bank’s discretionary portfolio management services. These partnerships are established so that Saxo Bank sources the best investment ideas. The third parties are advisors to Saxo Bank and do not manage clients’ funds, nor have any contact with Saxo Bank’s clients.

Financial materiality - likely impact of various sources of risk on the return of the investment service.

4. General statement on sustainability risk for Saxo’s investments

Sustainability risk is part of the investment framework of Saxo Bank. It is part of the products and services offered to clients, but also a part of the selection process of the third parties that Saxo Bank’s partners with.

The sustainability risk policy has the same set of objectives that apply across all products and services in scope. However, it is operationalized and reflected distinctively in each.

Sustainability is integrated in Saxo Bank’s products and services by taking into account customers’ preferences and informing them about the risks associated. Relevant material sustainability risk information is made available to clients and potential clients in each product / service pre-contractual documentation before investment, in accordance with Article 6 of SFDR. Notwithstanding our customers’ preferences, when recommending products and services, we are taking into account sustainability factors in conjunction with financial factors in order to identify sustainability risks and at the same time investment opportunities.

Therefore, the way Saxo Bank incorporates sustainability risks in the investment decision-making process varies across
financial advice, discretionary portfolio management and pension services.

5. Discretionary portfolio management

Saxo Bank offers discretionary portfolio management services in partnership with third party model portfolio service providers (MPS providers). It is our belief that sustainability risks may have an impact on the risk adjusted returns for investors. Therefore, sustainability risk is part of the investment decision-making process when developing our investment services as well as part of the selection process of the entities we partner with.

Saxo Bank’s identification, measurement, monitoring, and reporting of sustainability risk is supported by a due diligence process when engaging with MPS providers as well as the ongoing due diligence that occurs on a recurring basis after a partnership has been established. This is to ensure that MPS providers have internal processes governing the integration of sustainability risk.

5.1 Initial due diligence framework

The initial due diligence framework assesses these MPS providers on various criteria which are quantitative or qualitative. Sustainability risk integration is part of the minimum criteria that a MPS provider is assessed on before a partnership is agreed.

A score is assigned according to how well the MPS provider identifies and incorporates sustainability risk into their investment decision-making process, including how clear and robust their framework is. The MPS provider must therefore demonstrate relevance of the sustainability risks considered in the investment decision-making process together with traditional investment risks (e.g. market or liquidity risk) in line with each investment strategy and asset
class.

For a sustainability risk factor to be considered financially material, the MPS provider needs to translate it into a negative impact on the value of the investment. Therefore, the MPS provider must demonstrate that it is able to assess the probability and impact of a sustainability risk on returns and whether such impact is deemed material. All these considerations must be showcased by the MPS provider with appropriate data.

Furthermore, these third parties are assessed based on how they manage sustainability risk exposures and how this leads to their decision to either buy/increase weighting, hold/maintain weighting, decrease weighting, or sell/divest exposures in a strategy or to engage through active ownership efforts.

Sustainability risks will vary depending on the investment strategy characteristics, including types of asset classes used to implement an investment strategy. However, the way a potential MPS provider is assessed during the due diligence process is the same across all investments offered by Saxo Bank. The identification, assessment, monitoring and reporting of sustainability risk can therefore lead to a “Low” or “High” score of a potential MPS provider, or a “Knockout (KO)” which terminates the pursuance of a potential partnership. 

All relevant due diligence documentation and data is analysed and graded into a scorecard in relation to potential candidates. The scorecard and grading system are applied uniformly to all potential MPS providers. The findings are reviewed by the Group Investment Committee, before sending the materials for approval to the Group Asset Management Committee which includes members of senior management in Saxo Bank.

5.2 Ongoing due diligence

After the initial due diligence framework, Saxo Bank ensures that the MPS providers already onboarded continue to be appropriate for the service provided. For this, Saxo Bank completes a periodic review on an annual basis of all existing MPS providers in a similar manner as the initial due diligence, with the same approach to scoring and grading via a scorecard. The review follows the same process of rating and same criteria as the initial due diligence where an internal rating is applied resulting in either ‘KO’, a “Low” or “High” score is given.

In such an instance that a specific MPS provider will showcase shortcomings in their consideration of sustainability risk in investment-decision making, this will be evaluated on a case-by-case scenario and factored in the overall due diligence assessment. The findings are reviewed by the Group Investment Committee, before sending the materials for approval to Group Asset Management Committee.

If there are instances where the MPS cannot provide sufficient data, Saxo Bank will identify material sustainability risks using data from a third-party provider. During the ongoing due diligence process, Saxo Bank reviews together with the
MPS if these exposures led to the rebalance activity in client portfolios.

6. Financial advice (“Wealth Management”)

Saxo Bank actively manages and monitors its selection of financial instruments that the bank uses for its financial advisory services, that consists mainly of investment funds. Saxo Bank obtains information on sustainability risks for almost all financial instruments in its investment universe using a third-party data provider The third-party provider assesses the funds in Saxo Banks’ investment universe and gives a rating that is based on the underlying companies’ risk ratings. The rating is calculated based on the probability and materiality of a company’s value related to sustainability risk. These kinds of ratings can trigger the rebalance of companies in a client portfolio. However, the sustainability risk integration process does not change the clients ’ portfolios investment objectives or constrain the investable universe. There is a monitoring process of all funds used in Saxo Banks advisory portfolios, to ensure that material sustainability risks are identified and assessed on an ongoing basis.

7. Pensions

Saxo Bank does not, in its capacity as a pension product manufacturer, consider sustainability risks in its investment decisions-making.

Saxo Bank does not offer any portfolio management or any type of investment pools for pension accounts. Investments on Saxo Bank’s pension accounts are purely managed by the clients themselves, and as such it is entirely up to the client to choose available investment products on Saxo Bank’s trading platform available for pension accounts.

Consequently, Saxo Bank does not consider sustainability risk in its investment decision-making when it comes to investments made on pension accounts as Saxo Bank does not make any investment decisions on our clients’ behalf.

8. Roles and Responsibilities

Saxo Bank conducts due diligence on all potential MPS providers for Saxo Bank and any of its subsidiaries. All relevant due diligence documentation is analysed and graded into a scorecard in relation to potential candidates.

The Group Investment Committee reviews all materials as well as the scorecard and provides inputs before sending for approval to Group Asset Management Committee where senior management within the Group meets on a recurring basis. Group Asset Management Committee reports to Management Risk Committee where the Board of Management attends as well as representatives from second line and third line. Group Asset Management Committee is also responsible for financial advice.

9. Change log