ESG
Integration
Nomura Asset Management recognizes risks and opportunities, andincorporates them into the investment process using different methods
for each strategy based on our own ESG assessments.

Features of Integration
Equity Investment
When evaluating the ESG characteristics of portfolio companies,
we focus not only on potential risks but also on opportunities togenerate future earnings. Although the extent (if any) to which
each equity strategy integrates ESG consideration into its
investment decision-making process varies depends on eachportfolio’s strategy relating to sustainability, ESG research ismade available to all strategies.
Fixed Income Investment
We select and model ESG factors that are material for credit
investment based on a variety of research. In addition to thisESG factor model integration, qualitative evaluations by credit
analysts are also considered within the investment process toimprove the portfolio’s risk-adjusted return and sustainability.

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Responsible Investment Report 2023

Integrating ESG factors into the investment process
is critical, as we believe financial performanceand ESG factors (non-financial information) areclosely related and influence one another. We utilize
proprietary ESG evaluations of portfolio companies
when making investment decisions. In order toeffectively incorporate ESG considerations andother nonfinancial information into the investment
process to supplement the analysis of a company’s
fundamentals (financial information used to evaluate acompany), we conduct our own ESG assessment for
both equity investing and fixed income investing. This
integration of ESG factors into the investment process
not only helps reduce downside risk, but is also an

essential component to improve returns.
ESG assessment is not limited to Japanesecompanies, as the scope also includes companies indeveloped countries in Europe and the Americas, aswell as companies in Asia and emerging countries.
In addition to global themes such as climate change
and human rights, we assess specific material
ESG considerations for individual industries andcompanies, and utilize information from multiple
external sources to create our proprietary ESG
scores. These ratings are made available to all
portfolio managers for integration into the investment
decision-making process.

Equity Integration
Equity Integration Approach
Corporate value is essentially the discounted present value of future free cash
flows. The business assets that generate future free cash flow include not only
fixed assets such as production facilities, but also various types of intangible
assets (capital) not found in financial statements, including human capital, natural
capital and social capital. Evaluating such capital, or business assets including
non-financial information, is necessary in order to analyze corporate value. We
believe that, in addition to financial data, reflecting non-financial data in company
evaluations, and making investment decisions based on these evaluations, isessential in order to increase the added value of our investments.
There are two aspects to evaluating intangible assets that do not appear in acompany’s financial information. The first is evaluating the profits that intangible
assets can bring, or a “growth evaluation,” and the other is a “business risk
evaluation” related to the risks to which a company’s profits are exposed.
For “growth evaluation”, the business impact of climate change, supply
chain resilience, intellectual property, R&D capabilities and organizational
strength, quality of human resources and diversity are among the sources ofEquity Investment Process
An in-house proprietary ESG score, which is jointly produced by corporate analysts
and ESG specialists under overall supervision of the ESG investment manager isutilized for ESG integration into our equity investments. The ESG score includes
environmental, social, governance, and SDGs-related considerations, and is aquantified representation of our analysis and evaluation of risks, opportunities,
and other factors. These scores serve as an important piece of information utilized
by investment decision makers within the investment process/platforms for each
investment product (see diagram below). While individual stocks in the portfolio arebought and sold according to their investment ratings, the same score serves as acommon language for discussion among corporate analysts, ESG specialists, andportfolio managers, allowing for more effective ESG integration into operations. If
additional ESG research is deemed necessary, the Engagement Department takes
the lead in conducting the necessary engagement activities in collaboration withcorporate analysts and ESG specialists.
Our ESG evaluation framework is also applied to our global equities investment. In

Investors’ Basic Philosophy on Corporate Value
Corporate
value

Present
Past
Nonfinancial
capitalAccumulation of future earnings /cash flows

Passage of
time

Time
Present
Financialinformation
Nonfinancial
capitalFuturePassage oftime

Financialcompetitiveness that
information
Corporate
help differentiate a
Discounted
value
present value
company from its“Continuity between financial and non-financial” and thepeers. We consider“Impact on long-term profits/cash flow generation” are ofthese factors to be
the upmost importance.
materialized in the future
as financial information such as corporate profits and growth.
“Business risk evaluation” aims to ascertain the stability and sustainabilityof future profits based on whether or not the company is able to accumulate
intangible assets, and to determine whether or not future profits will fluctuate
sharply due to changes in the business environment. In other words, this“business risk evaluation” is looking at how to evaluate the discount rate when
discounting future cash flows to the present value. To put it another way, thevaluation of intangible assets is an important aspect of determining whether
the valuation (relative price metric for the stock price) of the investment target
company is too high or too low.
Corporate analysts
Credit analysts

Financialanalysis

ESG specialists

ESG evaluation
Nomura AssetManagement

ESG score
addition to global themes
Engagement Department
Select target companis/Milestonesuch as climate change
management/Escalationand human rights, we
S t r ateg y plat form
assess specific materialTeam αTeam θ
Team βESG considerations forTeam γPortfolio
individual industries andcompanies and utilize
information from multiple external sources to create our proprietary ESG ratings.
These ratings are made available to all portfolio managers for incorporation into theinvestment decision-making process. For example, at our Singapore Office, country
specialists (CS) are assigned to cover each country in this diverse region, and themain source of added value is the bottom up research conducted by meeting withcompanies (2656 meetings in 2023). Investment ratings are assigned to individual
stocks based on the fundamental research carried out by CSs as well as the ESG
evaluation. The portfolio is constructed based on these ratings.

90

Efforts to Advance ESG Integration
Issues such as climate change, human rights problems, and diversity arecommon issues that need to be addressed globally and over the long term. Allof our main ESG funds published on our website (https://www.nomura-am.co.jp/
special/esg/strategy/esglineup.html) incorporate ESG as an investment method
regardless of whether they are domestic equities funds, overseas equities funds,
or balanced funds. Aiming to improve and enhance this ESG integration is an
important topic for our portfolio management and investment operations.
Our investment teams manage portfolios based on a stock selection processthat takes various ESG factors into consideration (qualitative and quantitativedecisions about ESG). When assessing a company as an investment target,
managers of actively-managed portfolios must consistently ask “Is this acompany that controls ESG risks and opportunities and can continue to grow in
five or 10 years?” and manage the portfolio by examining portfolio companies
from a long term perspective. In our investment process, in addition to ESG
specialists, ESG investment managers and investment teams including portfolio
managers are partially responsible for ESG assessments. When selecting or
trading stocks, our portfolio managers make investment decisions after bothreferencing a variety of ESG data and information within the company as well as
holding internal discussions.
Each investment manager controls the ESG risks and opportunities in theportfolio based on the ESG integration policy of the fund for which they are
responsible. For example, when selecting a stock, we check the carbon
footprint of the company in question and strive to keep the carbon footprint of
the portfolio lower than the benchmark. In fact, there have been cases where
we have chosen to invest in a different company in the same industry withthe same investment grade, if that other company is actively working towards
net zero. Moreover, in addition to improving our ESG governance score, we
also sometimes assess a company’s stance on building an ecosystem aimed
at promoting good health, such as providing sporting goods, and increase
the weighting of that stock in the portfolio. Meanwhile, there were also cases
in which we sold stocks we had invested in, in light of the fact that quality
fraud was discovered, leading to expectations for a delay in the recovery ofbusiness results longer than initially expected. In addition, we make it a point tosystematically and carefully explain these ESG integration methods and specific91

Responsible Investment Report 2023

SeniorPortfolio
Manager

Yasuhiro
Mimbutapoints related to the evaluation of stocks and bonds to our customers.
Coordination with engagement activities is also an important element of ESG
integration. The reaction of top management during engagement meetings andthe status of milestone achievements are also important signals for managers
evaluating “opportunities.” Therefore, many of our investment managers attend
meetings with top executives, where they discuss ESG issues. By accumulating
more experience and case studies of gathering information to make proper
decisions on ESG-related risks and opportunities, performing ESG evaluationsof individual companies, managing portfolios, and carrying out engagement, weare able to select strong companies that can continuously grow amid the rapidchanges in society for our customers.

ESG
Investment
Manager

Portfolio
ManagerDai
YamawakiFeng
YichunPortfolio
Manager

Wang
ShanShanSeniorPortfolio
Manager

Shunnosuke
TochimotoPortfolio Manager’s ESG Viewpoint
Business risks andopportunities

Current and future segment mix

Assessment of M&A strategy

Geographic risks andopportunities

 tatus of production and sales in regions withS
enhanced regulations

Changes in the supply chain structure

Growth of environmental/social solutions businesses

Profitability of environmental/social solutions businesses

Growth targets

Current customer and market development strategy

Assessment of R&D

Environmental performance (CO2 emissions, stranded asset exposure, eco-friendly procurement ratio, etc.)

ESG track record

Social performance (employee turnover rate, diversity, safety indicators, actions on human rights, etc.)
Governance (governance structure, compensation, misconduct/scandals, etc.)92

At Nomura Asset Management, we believe that impact investing is not limited tosimply having an impact on the environment or society. We feel it is important forour impact to generate earnings and cash flows, which will ultimately be returned
to asset owners and other stakeholders. In carrying out impact investing, we
extensively analyze the impact that a portfolio company has on the environmentand society, as well as the portfolio company’s earnings/cash flows generated. At
the same time, we engage with the portfolio company to help it set CPI and targets
that generate impact, as well as proactively support business activities aimed atachieving them. Impact investment is generally defined as investment that aims tocreate environmental and/or social impact and an economic return on investment
at the same time. As opposed to the conventional two-dimensional evaluation ofrisk and return, impact investment requires the advanced skill of three-dimensional
evaluation covering risk, return and impact. Impact investing is defined as one
category of ESG investment and sustainable investment given the fact that it isexpected to bring about environmental and social improvements. The United
Nations SDGs are often used as a framework for impact investing. Adopted by theUnited Nations in 2015, the SDGs set forth 17 goals and 169 targets. The SDGs
indicate the enormous needs of the global market and effective risk management
methods that lead to returns on investments in portfolio companies, and are viewed
as useful indicators for measuring the impact on the environment and society.

Impact investment Engagement

IMPACTINVESTING

Returns

NomuraAsset Management

Investment

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Responsible Investment Report 2023

Portfolio company
Economic returns
Social returns

Returns

Environment/Society =Stakeholders

Pension funds,
etc.

Individual
investors

Clients/business
partners

Employees

Impacts
Outcomes
Outputs
Business activities
Inputs (investment)Our Impact Investment Process
Example of impact by investee companies of our impact funds(3 funds)
Contributed to the reductionof CO 2 by selling productswith strong environmental
performance

EliminateCommunicable
DiseaseR&D investment related tocommunicable disease

Mitigate Climate
ChangeSold EV traction motors,
which strongly curb
greenhouse gas emissions

226,000 units

Mitigate Natural
Capital Depletion

Volume handled by recycling
business in the metal field,
such as collecting andprocessing renewable
resources

6.34 million tons

Mitigate Climate
ChangeContributed to the reductionof CO 2 by selling productswith strong environmental
performance

241,000 tons

EliminateCommunicable
DiseaseHealthcare R&D investment

US$

JSEG

GSE

Mitigate Climate
ChangeASE

In Nomura Asset Management’s ESG statement, we aim to share with our
stakeholders the direction of our ESG activities and awareness of environmental
and social issues, as well as our aim for the realization of a sustainable
environment and society. This ESG Statement is the starting point for our approachto impact investing. The statement identifies issues such as climate change, natural
capital, and social responsibility (human rights, diversity, equity, inclusion andbelonging, as well as value creation to realize well-being within society). Throughinternal discussions on the above issues, we have set impact goals, which we aim
to achieve through our impact investment, appropriate to asset class and each
impact investment strategy. These goals include urgent issues facing the world
including mitigate climate change, mitigate natural capital depletion, access tohealthcare, and social responsibility (for example, access to financial services andto drinking water). We then establish indicators (KPI: Key Performance Indicator)
which serve as an indicator at a national and global level to measure the degreeof improvement for each established impact goal. For example, for the impact
goal “Eliminate Communicable Disease,” we can evaluate the global progress bymonitoring indicators such as mortality rates for HIV, tuberculosis, malaria, andother illnesses published by World Health Organization (WHO). Additionally, we
specify further segmented areas of investment linked to these indicators, and thenselect companies in which to invest in that area in order to improve this KPI.
Companies included in the investment universe are linked with the 17 goals of theSDGs, and more detailed CPIs (Company Performance Indicators) are then set foreach individual company. Carrying out detailed and continuous monitoring of theestablished CPIs allows us to not only appraise each company’s impact, but alsomeasure the extent of the improvement of the overall portfolio and the impact itself.
For example, in the case of “climate change issues,” by using CPIs such as GHG
emission reductions and R&D investments to address climate change, it is possible
to more specifically monitor individual companies’ efforts to resolve issues. By
engaging with investee companies based on what we learn from monitoring, we
can advance initiatives aimed at creating impact. By repeating this process, wewill be able to continue to generate impact that addresses social issues while also
pursuing economic returns.
Our impact investment fund is constructed based on the so-called “outside-in”
concept, whereby these kinds of social issues are applied to portfolio companies,
and this concept is shared within our domestic and overseas impact investment
strategies. In addition, we believe that publicly disclosing these initiatives in our
Impact Report and sharing them with our stakeholders is essential in order togenerate impact and address social issues.

11.74 million tons

US$

22 billion

7.67 billion

94

Our Impact Investment Process

Environment
Climate Change

Natural Capital

Establish impact goals

Mitigate Climate
ChangeKeep global warming to
below 1.5°c

Mitigate Natural
Capital Depletion

Mitigate the Obesity
Epidemic

EliminateCommunicable
DiseaseGlobal Access to
Basic Financial
Service

Global Access to
Clean Drinking Water

Key Performance
Indicators (KPI)

Global Renewable
Energy Output
Atmospheric CO 2
LevelsMaterial Consumption
per Capita
Global Annual Tree
Cover Loss

Mortality rateaccording to WHO
Cardiovasculardisease, cancer,
diabetes, chronic
respiratory disease

Deaths due to HIV,TB and Malaria
according to WHO

Percentage of lowincome householdswith access to banks

Percentage of
Global Population
with Access to Safe
Drinking Water

Identify investment
field

Renewable energy
developers
M anufacturers
possessing
technologies
E V/OEM
manufacturers
H ighly-efficient officebuilding construction
and management

 ustainable raw
Smaterial management
E fficient use of raw
materials

 usiness thatB
provides payment
methods throughfintechL ending business forsocially vulnerable
groups usinesses related toBthe provision of waterand sewage services
B usinesses thatprovide clean
drinking water

SDGs7.3

Double theimprovement in energy
efficiency

CPI for individualcompanies ontribution to GHG
Creduction throughproduct sales
S ales volume of EV
traction motors
P urchase amount of
renewable energy

Engagement withportfolio companies

Responsible Investment Report 2023

SDGs12.2

Achieve the sustainable
management andefficient use of raw
materials

 mount of resourcesA
reused throughrecyclingR eduction in virgin
raw material usage
through recycling

 edicine-related businessesMC ompanies related to the healthcare value chain

SDGs3.4

Reduce premature
mortality from
non-communicablediseases throughprevention andtreatment umber of patientsNwith heart disease
and diabetes
R esearch anddevelopment
expenses related tothe same field

SDGs3.3

End the epidemics ofAIDS, tuberculosis,
malaria andneglected tropicaldiseases and combat
hepatitis, waterborne diseases andother communicablediseases tatus of development
Sand information
dissemination related tothree major infectious
disease drugs
Development andproduction of new
infectious disease drugs
R esearch anddevelopment
expenses related tothe same field

Ongoing engagement with target companies

Social Responsibility

Social issues thatshould be solved

Establish impact goals
and Key Performance
Indicators (KPI)

Identify investment field
Select/Define portfolio
companies

SDGs1.4

Ensure all have equal
rights to economic
resources

SDGs9aPromote sustainable andresilient infrastructuredevelopment in developing
countries throughenhanced support for
finance, technology, andtechnology

 oan amount forLeconomically weak andlow-income peopleN umber of users of
payment services forpeople without bankaccounts

SDGs6.1

Achieve universal andequitable access tosafe and affordable
drinking water for all mount of safeA
drinking waterprovided by water
purifiers andchemicalsA mount of drinking
water filteredand purified bywater purificationequipment

Portfolio construction/management process

Alignment with the UN
SDGs

Increase global
percentage of
renewable energy

Access to Healthcare

Nomura Asset Management’s impact investing

Setting issues basedon ESG statements

SDGs7.2

95

Society

Identify SDGs topics

Establish CPI for
individual companies

Engagement withportfolio companies

Our Impact Funds

GSE

Nomura Asset Management manages impact funds in the UK, Tokyo,
and Singapore based on our impact investment philosophy.

Nomura Global
Sustainable Equity
Strategy (GSE)
Lead portfolio manager

Alex Rowe

Global Utilities and
ESG Analyst

Daniela Dorelova

GLOBAL SUSTAINABLE EQUITY STRATEGYUK Office manages Nomura Global Sustainable
Equity Fund based on the concept of impact
investing. This strategy is characterized by a global
equity strategy that aims to not only generate
investment returns but also have a high positive
impact on the environment and society throughinvestment in companies and engagement activities.
In addition, we select investee companies using aunique stock selection process that combines SDGs
(Sustainable Development Goals) analysis, which also
allows us to evaluate their efforts toward SDGs.
We measure impact by setting environmental
and social goals (targets) with clear policies andevaluating progress toward achieving those goals.
The impact investment process sets monitoring

indicators (Key Performance Indicators: KPIs) tomeasure the degree of improvement toward goals,
identifies investee companies that contribute togoal improvement, and sets monitoring indicators(Company Performance Indicators: CPI) to measure
the degree of goal achievement for each company.
In addition to monitoring both KPI and CPI
indicators, we also engage in dialogue (engagement
activities) with companies to contribute to “Impact
Goals” and encourage their efforts to achieve “Impact
Goals.” We regularly create and publish reports
on impact data such as KPIs and CPIs, which aremonitoring indicators, and dialogue with companies(engagement activities).
This strategy not only encourages companies totackle the key challenges facing the world today, butalso imparts social impact on a variety stakeholders
by encouraging them to address the sustainability of
their businesses.

Global Sustainable
Equity Fund Impact
Report 2022

96

JSEG

Portfolio Manager

Senior Portfolio
Manager

Main Portfolio
Manager

Portfolio Manager

Ken Nagano

Jun Takahashi

Kodai Sasaki

TatsuhiraMatsushima

JAPAN SUSTAINABLE EQUITY GROWTH STRATEGY

We began managing this strategy in 2016 basedon the philosophy of companies addressing social
issues through their core businesses. In the 2010s,
a wide range of stakeholders started to becomeaware of the need for sustainability with respect tothe environment and society. While the global turmoil
spurred by the 2020 COVID-19 pandemic is settling
down, other disruptions arising from geopolitical risks
are expected to continue for a prolonged period.
Therefore it is important not only to pay attention
to various social issues caused by such turmoil,
but also to take immediate action to address thosesocial issues. As a part of this, “impact investing”
is attracting attention as an investment method that
addresses the environmental and social problems

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Responsible Investment Report 2023

that we face. This is an investment method that, inasset management products, in addition to earning
the usual investment returns, seeks to solve issues
in society through the long-term holding of sharesof companies engaged in business activities with aneye towards addressing social issues. Because ESG
issues involve many topics to be addressed over the
medium- to long-term, we believe that investing incompanies on the premise of long-term ownershipwill allow us to make investments that seek bothexcess returns and aim to address ESG issues.
Utilizing NAM’s proprietary ESG scoring for Japaneseequities, this strategy invests in companies that, in
addition to passing our fundamentals evaluation, weview as being able to create social value to contributeto achieving the SDGs.
Furthermore, we believe that it is essential toshare portfolio companies’ outcomes and broad andcumulative impacts through impact reports.

JSEG Impact Report 2022

ASE

ASIA SUSTAINABLE EQUITY STRATEGYIn April 2022, Singapore office began managing
the Asia Sustainable Equity Strategy based on our
impact investing philosophy. This strategy invests
in companies, primarily those in Asia, that theteam believes to have an overall positive impact.
Approximately one-half of the world’s population
lives in Asia, and Asia is both an important
manufacturing hub as well as an indispensable
region in global supply chains. As ESG investing andimpact investing receive attention globally, focusing
on companies’ activities to solve social problems
in Asia, where growth is expected going forward,
represents an important investment opportunity. In
addition, We believe that focusing on companies
that the team deems to have a positive impact will

Head of ESG Asia

Viresh Mehta

Assistant Portfolio
Manager

Stacy Kuah

Senior Portfolio
Manager

Shigeto Kasahara

help tackle environmental and social challenges.
Given the fact that Asia is a manufacturing hub anda key region in global supply chains, environmentand related social issues are a top priority
sustainability theme for the region.
However, ESG initiatives by companies in Asia
(excluding Japan), including the disclosure of
related information and the details of the initiatives
themselves, are not yet well-established compared tothose in developed countries. Our Singapore office
employs a country-specific approach to portfolio
management using country specialists, enabling
us to conduct detailed and differentiated analysisof ESG factors and portfolio stocks. To incorporate
these stocks into their portfolios, our country

specialists conduct research including ESG issues
and continuous engagement. We believe that by doing
this, we can raise Asian companies’ awareness andresponsibility towards ESG.

98

ESG Scores for Japanese Equities
Nomura Asset Management computes
proprietary ESG scores which represent
Japanese companies’ true ESG abilities, under
the overall supervision of the ESG investment
manager, in collaboration with our analysts
and ESG specialists. ESG and other nonfinancial information are extremely importantin predicting corporate value based on future
cash flows. Researching, analyzing, and thenscoring a portfolio company’s non-financial
information makes it possible to measurecorporate value while taking ESG into account,
and we believe doing so leads to higher added
value of our investments.

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Responsible Investment Report 2023

ESG Score Content
The following is an overview of ESG scoring. The
assessment comprises four items each with aweighting of 25%. These four items are Environment,
Social, Governance, and SDGs. There are a totalof approximately 100 evaluation items, with agood balance between risks and opportunities. In
terms of opportunities, we evaluate items including
management’s vision and commitment with respect
to ESG issues (ability to explain, plan, and executeinitiatives, as well as past achievements), along with the
future growth potential of companies that contribute to
the achievement of SDGs, as well as the management
resources that contribute to this. Meanwhile, forrisks, our evaluations emphasize items that can bequantitatively analyzed, such as whether or not acompany has provided disclosure and/or obtained
certification, as well as the data disclosed and trends forsuch data. Furthermore, we use materiality (importantmanagement issues) to take into account differences inindustry attributes for each company.
For “Environment,” we look at whether a company
is managing transition risks and physical risks related
to climate change and incorporating such risks into
its business strategy. We also look at whether thecompany’s management has expressed a commitment
to the environment. With respect to matters such as the
TCFD, we analyze and evaluate based on a company’s
integrated report and materials posted on its website.
With respect to evaluating natural capital and otherenvironmental assessments, we evaluate items such as
those related to waste management, conservation ofriver and marine resources, and biodiversity (including
preventing marine pollution).
For “Social” factors, our evaluation is divided intolooking at a company’s internal and external risks as wellas measures to address such risks. The former includes
assessments such as those related to employees’ humanrights and the utilization of human capital, while the latter
relates to the issues surrounding the quality of products
and services as well as supply chain management.
Recently, much attention around the world has been given
to human rights initiatives. For Japanese companies inparticular, we emphasize the evaluation of supply chain
management at business sites both in Japan and overseas.
In “Governance,” we evaluate multiple items to makesure that companies have put appropriate structures/
systems in place, such as the composition of theboard, outside director independence, and whether
nomination and compensation committees have been
established. Meanwhile, we also evaluate qualitative
issues such as dialogue with top management andsuccessor planning. The unique strengths of ourcorporate analysts, who have been studying andanalyzing companies extensively for many years, arereflected in our evaluations. In “SDGs”, we proactively
evaluate a company’s stance vis-à-vis working on
future opportunities. We evaluate whether a company
considers solutions to SDG issues as business
opportunities and appropriately incorporates them into
its business strategies. In doing so, rather than simply
looking at whether or not a company has businesses
that enable it to contribute to the achievement of eachgoal, we conduct extensive research and forecast
future sales mixes capable of contributing to SDGs
goals, and look at whether or not a company has
excellent human and technological resources todifferentiate itself from industry peers.
Under overall supervision of the ESG investment
manager, corporate analysts who have frequent contact
with companies and possess extensive knowledge of thecompanies they cover collaborate with ESG specialists
who analyze ESG from a cross-industry perspective.
They work together, identifying items where one or theother possess particular expertise and comparativeadvantage. Ultimately, the Responsible Investment
Department is responsible for the final scores, which arethen shared with the related departments.

Revision of ESG Score

Main
category

E

S

G

Environmental

SocialGovernance

25% of total

25% of total
S1: S
 ocial strategy, senior
opportunity
management’s initiatives

G1: T op management(evaluation of senior
management)risk

S2: Working environment,
human capitalrisk

G2: Evaluation of board of
directors

risk

risk

S3: H uman rights, othersocial issues

risk

G3: Other governance items

risk

Subcategory E2: climate change

E3: Natural capital, otherenvironmental issues
Subitems

SDGs

25% of total

E1: E nvironmental strategy,
opportunity
senior management’s
initiatives

25% of total

opportunity
opportunity

Sub-items are individually evaluated in accordance with sub-category themes.
Importance (materiality) is reflected in scores, taking into account the specific characteristics of the industry for each company.
opportunity : Evaluation mainly by analysts

plus

SDGs opportunity

minus

consideration changes in regulations, etc., based on
the current situation of Japanese companies attained
through engagement and proxy voting.

E Environmental

S Environmental

G Environmental

E1 opportunity

S1 opportunity

G1 opportunity

E Environmental

S Environmental

G Environmental

score

Since our portfolio companies are improving their
ESG-related disclosures and their actual initiatives,
we revise the ESG scores for Japanese equities ona regular basis, thereby raising the effectivenessof company evaluations using ESG scores. In the2021 revisions, we started financial analyses using
carbon pricing, and in the 2022 revision we included
the amount of GHG absorption (the total of GHG
removals, avoided emissions, and offsets using
carbon credits) in the evaluation. Furthermore, inthe 2023 revision, we are taking it a step further by
estimating the economic value of the GHG removals
and avoided emissions, and reflecting this in the
climate change assessment. In the 2024 revision, we
added evaluations of companies’ efforts to respondto the TNFD issued in September 2023. In addition,
we are reviewing some of the other environmental,social, and governance evaluation items, taking into

New ESG Scoring Framework

E2/E3

risk
risk

Utilizing ESG Scores

S2/S3

risk

G2/G3

risk

: Evaluation mainly by ESG specialists

Research division

ESG scores generated by quantification of non-financial information are used not only for investment decisions
and new product development in investment portfolios, but also for client reporting and our ESG investment
management.
Utilizing ESG score data inengagement

Utilizing ESG score data ininvestment activity

Utilizing ESG scores in portfolio
construction and monitoring

ESG scores are determined not only
based on disclosed data but alsousing information on future risks andopportunities. By using this ESG score,
we can compare the strengths andweaknesses of portfolio companies’
ESG efforts, and use the scores inengagement such as discussing future
course of action.

ESG scores are posted on an internal
research-sharing system. The materials
used by investment committees andothers to evaluate investment value forindividual companies contain regularfinancial indicators as well as ESG scoresand ESG comments by the analysts incharge. These scores are actively utilized
in making investment decisions.

When building and reviewing portfolios, we checkscores for individual companies, use them to makecomparisons with industry peers and see how acompany’s score has changed, as well as to check
the ESG quality of the portfolio. Investment managers
can also use the items comprising the ESG scoresof individual companies as a standalone data.
Additionally, by regularly comparing the portfolio’s
overall ESG score to the benchmark, they can use
ESG scores to check ESG risk bias and other factors.

Reflect in corporate value
assessment Discover stocks torecommend

Investment division
Reflect in investments
and decision-making
ESG monitoring of funds
managedInternal information
platform(research information)

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advanced ESG
Identify ESG issues
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100Green Bonds and Sustainable Bonds
NAM’s assessment framework Green andSustainable Bonds

Head of Sustainable
Investment, Fixed Income

Jason Mortimer

101

Responsible Investment Report 2023

Companies, regulators, and markets are increasingly
focused on the question of how to deliver an efficientand orderly Net Zero climate transition. Green andSustainable bonds, which are fixed income securities
that fund projects and assets with positive climate
benefits, are an important way for capital markets tochannel finance for realizing this goal. Companies thatissue Green and Sustainable bonds can accelerate
their Net Zero transition and potentially reduce climate
related-risks to investors.
Nomura Asset Management applies a consistentassessment framework for determining the relative
attractiveness of Green and Sustainable bonds forinvestment in sustainable fixed income portfolios.
The underlying concept for NAM’s evaluation is thatthese bonds must meaningfully contribute to climate
goals and the issuer’s investment attractiveness.
In practice, this means that Green and Sustainablebond use of proceeds should directly relate to theissuer’s core business activity and credit profile, witha particular focus on green projects or assets thatmaterial risks and directly improve the issuer’s market
competitiveness.
The five pillars of Nomura AM’s Green andSustainable Bond qualitative assessment process areshown in the right table. Each pillar contains multiple
sub-categories that are assessed on a Pass/Fail basis.
If a single category is marked “Fail” then the Green or
Sustainable bond framework is deemed ineligible as
an impact investment. This structured and repeatableprocess results in clear and consistent assessments,
which is useful for communicating to issuers for preand post-issuance due-diligence and engagement.

For example, under the Use of Proceeds pillar, only
capital expenditures on asset and projects, researchand development for eligible projects, or operating
expenditures that increase the value or lifetime ofeligible assets are acceptable. Operating expenditures
for the procurement of green raw materials would
be ineligible, because they do not increase the valueof corporate assets. Under Impact Ambition, theallowable rate of use of proceeds for Green Buildings
is capped at 20% for non-Financial and Real Estateissuers and disallowed for Utility sector Green Bonds.
The rationale here is that utility companies shouldhave ready access to higher-impact projects – suchas for Renewable Energy or Clean Grids. Setting strict
standards reduces the number of Green Bonds eligible
for NAM sustainable fixed income portfolios, but canalso contributes to a more high quality and credible
Green bond market place.

Overview of Nomura AssetManagement’s Green and Sustainable
Bond Assessment Framework

Market Standards
Is the framework coherent and aligned tostandards? Is a second party opinion provided?

Use of Proceeds
Are the use of proceeds relevant to the issuer,and for eligible categories? Is the use ofrefinancing reasonable limited?

Impact Ambition
Is the impact investment efficiency (intensity)
rate sufficiently high given the nature andlocation of the projects?

Impact Reporting
Is timely impact reporting available andtransparent? Are the use of proceeds as
described in the offering documents?

Strategic Alignment
Does the issuer have a credible Sustainability
strategy, ambitious Net Zero commitment, andpotential for engagement in case problems arise?

Using “Impact Intensity per Dollar Invested”
to efficiently allocate impact capital
NAM prioritizes investment in green and sustainablebonds based on their level of impact and potential
contribution to environmental and climate objectives.
Inter alia, projects with high assessed positive
impact are likely to be more valued by investors andrepresent lower risk. By allocating scarce capital tothose projects and issuers that are best at generating
sustainable impact, investors can efficiently identify
attractive investment opportunities and contributeto global climate goals. One way of assessing theattractiveness of such sustainable investments is bymeasuring their “impact intensity per dollar invested”.
Focusing only on projects that deliver GHG
emission reductions, it is possible to see significant
differences in impact intensity across projecttypes, industries, and countries where the green
projects are located or developed. For example,
consider equivalent renewable energy develop
projects in Sweden and Japan. Both projects are“green” because they emit zero carbon at the
point of generation. But the Swedish renewableenergy project in this example has a significantly
lower “impact intensity” of GHG reduction due tothe significantly lower baseline carbon intensityof electrical generation in Sweden, where mostelectricity is already generated from low-carbon
sources. Significantly more capital would have to
be invested in the Swedish vs Japanese renewableenergy project to achieve the same absolute levelof GHG emission reduction impact. Sweden has
already substantially decarbonized its electric grid,so the marginal reduction in carbon emissions froma new Renewable Energy generation project would

be relatively low compared to the potential marginal
reduction in Japan
From a climate impact perspective, the implication
for green bond investors would be to prioritize
investment in the Japanese RE project while looking
to finance more high impact project types in Sweden
such as decarbonized transport or energy efficiency.
This approach can help sustainable investors analyze
and prioritize fixed income impact investments byapplying impact data as an investment performanceindicator and lead to greater overall impact.

Weighted Average Carbon Intensity ofElectric Generation (2022)
gCO 2 e /kWh (Generation)
500
400
300
200
100

Potential
for marginal
reductionin carbon
emissions fromadding the RE
project

0
Example Renewable Energy Project
SwedenJapan
Source: Carbon intensity of electricity generation, 2022 (ourworldindata.org)

102

Nomura Asset Management’s Systematic Approach to
Sustainable Fixed Income Investment
NAM’s approach to sustainable investment in global fixed income and corporate credit
Innovative approaches to fixed income sustainable investment research andintegration are a key area of focus at Nomura Asset Management. We believe thata systematic and objective assessment of issuer sustainability performance isfundamental to credit analysis and accurate risk pricing, through which mainstream
investors can deliver real-world impact. To implement this sustainable investment

1
Downside
Risk Focus:

We incorporate sustainability risks
to issuer creditworthiness primarily
from a downside perspective. The
integration of ESG data as particularly
relevant for fixed income strategies,
where loss-avoidance and downsiderisk protection are key.

philosophy, we have used a proprietary data-driven approach for evaluating credit
issuer sustainability since 2018. NAM’s approach to sustainable fixed income isdriven by three considerations that reflect our ultimate objective of improving riskadjusted returns through the integration of material extra-financial (ESG) data:

We selectively incorporate forwardlooking, material ESG factors forour proprietary sustainability data
models. The resulting scores areback-tested analyzed against price
Sustainability
returns for real-world effectivenessScoring Models: in a variety of market conditions.

2

3
Investment teamled Approach:

What Makes NAM’s approach to Sustainable
Fixed Income unique
Most sustainable investment products available in the market seek to deliver
investment out-performance and contribute to real-world sustainability outcomes.
But investors are increasingly scrutinizing these claims, which in some cases may
appear mutually exclusive. Here, NAM’s approach to sustainable investment in
fixed income is unique because our explicit goal is to embed sustainability in theinvestment process with the aim of raising risk-adjusted returns for clients first andforemost. This reflects a belief that markets can most efficiently achieve real-world
sustainable outcomes though better “pricing” of material sustainability risks, and is
the key to NAM’s approach to sustainable fixed income investment.
For an investment strategy to be “sustainable” it must deliver attractive returns
over the investment cycle, reliably and transparently. We aim to achieve this withclarity of purpose and a focus on real-world outcomes.

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Responsible Investment Report 2023

Senior Portfolio Manager

Hiroshi Matsumoto

Portfolio managers and credit
analysts are directly responsible fordriving the integration of sustainability
risk factors in the investment process.
Having this “skin-in-the-game”
encourages meaningful and resultsfocused ESG integration.

Introduction to NAM’s Corporate Credit ESG Scoring Model
A systematic, data-driven model for integrating
sustainability performance is a crucial component
for a consistent and high-quality sustainable fixedincome investment approach. NAM has achieved thisby developing a globally-relevant set of sustainability
performance factors, with data coverage for
substantially all issuers in the global corporate
credit market. The result is a system that is bothcomprehensive and flexible, with objectivity andrelevancy for any investment strategy.
Our corporate credit ESG scoring model integrates
over 50 data factors into 12 “Sustainability
Issues” that comprise 3 ESG risk-scoring pillars(Environmental, Social, and Governance) at the issuer
level. These ESG data factors are carefully selected
and screened based on their materiality to credit

Claimquality and financial performance, plus the clear
potential to manifest as ESG downside to the issuer.
For example, these ESG data factors include“voluntary efforts to reduce greenhouse gases” forE (environment), “human resources development
and training” for S (society), and “board of directors
governance system” for G (governance). “Upside”
ESG factors such as revenue exposure to electricvehicles and renewable energy are stripped out
from this model, reflecting the greater importanceof downside risks to credit investors. The resulting
issuer E, S, and G risk scores are multiplied byindustry-specific E, S and G weights derived from the
proprietary NAM Corporate Credit Materiality Matrix
for internal consistency and analytical objectivity.
Based on the belief that the relative importance of E,

Evidence

S, and G varies depending on the business content of
a company, the weight of E, S, and G is determinedfor each industry based on an industry-specificevaluation of the importance of each factor. The more
items judged to be important, the higher the weight.
The model covers over 6000 global names,with monthly updates based on entirely externallyobserved data. These resulting score outputs
are then tailored to each fixed income strategy’s
unique characteristics and investment goals. For
certain strategies, NAM Credit ESG scores areused as a downside risk screening tool basedon long-term market performance back-testing.
Investment strategies that emphasize environmental
factors focus on specific indicators such as the“environmental score” and “climate change risk

Results

Since 2018 NAM has developed proprietary, backtested Credit and Sovereign ESG scoring models,and customized our fixed income ESG integration forinvestment performance

Our quantamental NAM FI ESG funds excluded Wirecard
debt in 2020 and Russian sovereign dollar debt in 2022
based on NAM FI ESG scores

Investors must focus on key issues thatwill drive market pricing

In early 2020 NAM identified “Resiliency Factors”
such as Supply Chains, Cybersecurit y, Geopolitics,
and Energy Securit y as emerging key drivers of
fixed income market risk

Recent global events revealed the importance ofResiliency, which is now at the top of mind for policy
makers, businesses, and investors globally

ESG integration is asset-class andinvestment-style specific

NAM tailors the integration and analysis of sustainability
data with consideration for the unique characteristics ofeach fixed income market and to reflect investor goals

Our FI ESG platform has avoided sector bias anddelivered attractive risk-adjusted returns over theinvestment cycle with a consistent investment philosophy
and customized approach

ESG data is potential source of fixedincome investment alpha104

score” and exclude stocks whose scores fall below acertain level.
In other strategies, NAM Credit ESG scores areused as an input in issuer credit analysis for asustainability-integrated relative value assessments
for investment attractiveness. Ultimately, the goal of
NAM’s system is to support credit analysts and fixedincome portfolio managers to quickly home in on themost material sustainability risks to their portfolios.
This allows for more targeted and efficient researchand engagement, potentially leading to improved
risk-adjusted-returns and sustainability outcomes.

Corporate Credit ESG Scoring Model Framework
NAM Credit ESG
Scoring Model

Sustainability Issue

Social=Reputational Risk
“What is the net social
value of the company?”

Portfolio Manager

Portfolio Manager

Kazuki Matsuo

Shuhei Nakano

GHG Emissions

How Carbon intensive is the businessClimate Resilience

How resilient is the company to climate physical risk

Environment=Negative Externality
Risk“How severe are theenvironmental negative
externalities fromoperations?”

Governance=Governance Risk
“Is the businessmodel sustainable andresilient?”

Waste Intensity

How waste intensive is the business

Natural Capital

Does the business use natural capital sustainability

Extended Responsibility

Does the business show responsibility for product safety/liability

SDG Contribution

Does the business make a net contribution to society and SDGs

Social License to Operate

Are labor/workforce policies a reputational risk to the business

Sustainability Strategy

Does the business have a credible climate transition strategy

Corporate Disclosure

Does the business in a transparent and ethical way

Governance Quality

Does the business have well-functioning board oversight and accounting

Regulatory Scrutiny

Is the business at risk from increased regulation or regulatory scrutiny

Sustainability
themes that may
materialize as
downside risks tocreditworthinessand financial
condition
Materiality
criteria

Responsible Investment Report 2023

Does the business have a social license to operate

Human CapitalManagement

External ESG
data

105

Measurement of…

Categorized database

E

S

G

E

S

G

Importance map by industry

Fixedincome
E/S/G databy issuer

FixedincomeE/S/G
weights byindustry

Fixed
incomeE/S/GOverallscore

Why corporate debt markets are key to achieving the Net Zero transition
Corporate bond markets are significantly more
exposed to carbon emissions than equity markets,
representing both risks and opportunities to debt
investors from the Net Zero transition. To understandwhy, consider the relative emissions intensity ofindustrial sectors and exposures to these sectors bydifferent asset classes. Based on the non-overlapping
Scope 1 and 2 carbon emissions data reported by
global listed non-financial corporates, just three outof ten industrial sectors account for approximately
92% of emissions: Utilities, Energy, and Materials
Figure 1 . And based on their relative structural
market composition, corporate debt markets haveapproximately twice the exposure to these high-GHG
emissions sectors than that of equities Figure 2 . The
reason for this is simple: higher growth, asset-lightcompanies such as technology and healthcare tend
to fund themselves by issuing equity, while slower

Figure 1

Share of Total Scope 1 + 2 Emissions
by industry sector

growth asset-heavy industries like utilities tend to
fund themselves by issuing debt. In portfolio terms,
this means that the average weighted Scope 1 and2 emissions of a representative global corporate
debt portfolio is approximately 86% higher than the
representative global equity portfolio Figure 3 .
This leads to two important implications forinvestors: First, carbon transition risks to corporatebond portfolios must be managed carefully due to theasset class’s structural exposure to highly emitting
sectors of the economy. Second, corporate bondinvestors have a unique investment opportunity to leadthe Net Zero transition. Rather than excluding sectors
to achieve portfolio-level decarbonization, corporate
debt investors should look for ways to provide
qualified climate-aligned financing and constructively
engage with corporate issuers central to at therealizing decarbonization in the real-world.

Figure 2

Relative Exposure to High Emissions
Sectors Corporate Debt (outer ring)and Equities (inner ring)

Senior Portfolio Manager

Nanako Iwasaki

Figure 3

Weighted Average Sector Scope 1+2
Corporate Debt vs Equity market

1,800

Utilities
Utilities

Materials

38%

20%

EnergyMaterials

13%

6%4%

11% 6%
7%

Energy

34%

1,500
224
1,200

600

187

300

341

0
*Outer ring is Corporate Debt market, Inner ring is Equity market
Technology
Communications
Healthcare
Real EstateConsumer Discretionary
Industrials
Consumer Staples
Materials
EnergyUtilities

Materials

900

230
Equity market

553

Energy753

Utilities
Corporate Debt market

Source: Prepared by Nomura Asset Management106