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Itaú Asset Management

PRI reporting framework 2017

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ESG incorporation in actively managed listed equities

Implementation processes

LEI 03. Percentage of each incorporation strategy

New selection options have been added to this indicator. Please review your prefilled responses carefully.

03.1. Indicate (1) which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities and (2) the breakdown of your actively managed listed equities by strategy or combination of strategies (+/- 5%)

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied
90 %
Percentage of active listed equity to which the strategy is applied
10 %
Total actively managed listed equities 100%

03.2. Describe your organisation’s approach to incorporation and the reasons for choosing the particular ESG incorporation strategy/strategies.

We consider ESG issues to the extent that they can materially affect the value of our investments, thus helping us deliver better risk-adjusted returns to our customers.

The Brazilian stock market is very concentrated in a few sectors, thus making it difficult for a large player such as Itaú Asset Management to devise thematic strategies or screening across the entire portfolio. Therefore, we have chosen to apply screening+integration only to an specific product and use Integration alone for the remaining strategies. Our Integration approach fits better with our  investment philosophy, which prioritises fundamental approaches with a strong focus on internal research. By integrating ESG into the equity research process, our analysts may give customized recommendations to our PMs, taking into consideration specificities of each strategy (long-only, long-short, benchmark used, etc).

03.3. Where assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]

Only for our specific ESG fund, the process starts with positive screening (universe is made of ISE components), then negative screening is applied. Non-ISE companies may be added to universe based on analyst recommendation (based on integrated ESG analysis) and approval by the product advisory Board.


LEI 04. Type of ESG information used in investment decision

04.1. Indicate what ESG information you use in your ESG incorporation strategies and who provides this information.

Type of ESG information

Indicate who provides this information  

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

Indicate who provides this information 

04.2. Provide a brief description of the ESG information used, highlighting any differences of sources of information across your ESG incorporation strategies.

Screening is used only for one product and is done entirely by the in-house ESG analyst. Raw data is sourced from Bloomberg. A Brazilian research provider (SITAWI) provides Company and Sector analysis, based on a fundamental research process that includes reviewing public information, newsflow, stakeholder and company interviews. Analysis presented by international brokers covering Brazilian stocks are used as well. All research is treated and disseminated through the in-house ESG analyst, who works with all sector analysts and PMs to embed ESG into their models and present each thesis to the investment committee. The ESG analyst visit companies to present his views on their ESG performance and to clarify points of concern and information gaps. 

04.3. Indicate if you incentivise brokers to provide ESG research.

04.4. Describe how you incentivise brokers.

In 2011, Itaú Asset Management and other Brazilian PRI signatories committed to incentivise brokers by adding ESG-related criteria to their broker review process. The PRI event to communicate the initiative was hosted at Itaú and attracted more than 10 brokers. Itaú implemented the measure along 2012 and in the end of that year repeated the event to report on progress.

04.5. Additional information.[Optional]


LEI 05. Information from engagement and/or voting used in investment decision-making (Private)


(A) Implementation: Screening

LEI 06. Types of screening applied

06.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

Screening applies only to a single product that represents less than 5% of our Listed Equities - Active Strategies. Negative screening is applied to nuclear power, tobacco, alcoholic beverages and the defense industry. 

Screened by

Description

Screening applies only to a single product that represents less than 5% of our Listed Equities - Active Strategies. Positive screening entails listing on ISE (Sustainability Index). The index selects companies based on criteria marked in the above answer.

06.2. Describe how the screening criteria are established, how often the criteria are reviewed and how you notify clients and/or beneficiaries when changes are made.

Our ESG active equities product has a Board of Advisors made of external members who are specialists in ESG. This board establishes the screening criteria for the fund and may approve additions / removals of specific companies based on recommendations from the ESG analyst. This is done on a yearly basis. 


LEI 07. Processes to ensure screening is based on robust analysis

07.1. Indicate which processes your organisation uses to ensure screening is based on robust analysis.

07.2. Additional information. [Optional]

Screening applies only to our ESG active equities product and has very specific criteria (negative: product / positive: listing on ISE), therefore the research and approval process are straightforward. 


LEI 08. Processes to ensure fund criteria are not breached

08.1. Indicate which processes your organisation uses to ensure fund criteria are not breached

08.2. If breaches of fund screening criteria are identified - describe the process followed to correct those breaches.

Automated IT system prevents investment in excluded stocks. In case of a new exclusion has been determined the fiduciary department regularly monitors compliance with fund mandates.

08.3. Additional information.[Optional]


(C) Implementation: Integration of ESG issues

LEI 10. Review ESG issues while researching companies/sectors

10.1. Indicate if E, S and G issues are reviewed while researching companies and/or sectors in active strategies.

ESG issues

Coverage/extent of review on these issues

Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

10.2. Additional information. [Optional]

The ESG analyst systematically updates analysts and PMs on ESG issues. Additionally, the NPV of material E&S issues is available in an intranet platform to all analysts and PMs. Questions and feedback on the analysis are used by the ESG analyst to adjust the assumptions used in the models.

Corporate Governance analysis is part of the equity research process for a longer time than E and S. Each sector analyst holds responsibility to analyze G. Given the relatively limited investment universe (Latam and Brazilian equities) and our access to senior management teams, we consider G to be incorporated in our analysis.


LEI 11. Processes to ensure integration is based on robust analysis

11.1. Indicate which processes your organisation uses to ensure ESG integration is based on a robust analysis.

11.2. Describe how ESG information is held and used by your portfolio managers.

11.3. Additional information.[Optional]

At the end of 2016, our complete ESG research process covered the following indices:

Brazil: Ibovespa (100%), IBX100 (100%) and ISE (100%)

Chile: IPSA (60%)

Argentina: Merval (50%)


LEI 12. Aspects of analysis ESG information is integrated into

New selection options have been added to this indicator. Please review your prefilled responses carefully.

12.1. Indicate which aspects of investment analysis you integrate ESG information into.

12.2a. Indicate which methods are part of your process to integrate ESG information into fair value/fundamental analysis and/or portfolio construction.

          Our ESG model is based on calculating the NPV of specific E&S issues. ESG may impact CAPEX, WACC, costs, revenues, among others.
        

12.3. Describe how you integrate ESG information into portfolio construction

For activelly managed funds, PMs are aware of the NPV of speficic ESG issues and the fair value of companies integrated with ESG analysis. PMs are able to use the adjusted ESG fair value of companies in portfolio construction if they agree with the assumptions used in the ESG model calculations.

12.4a. Describe the methods you have used to adjust the income forecast / valuation tool

Higher COGS due to resource scarcity/climate change.

Higher CAPEX due to incresed extreme weather events.

Lower/higher margins due to environmental issues such as certifications, lack of environmental licenses, land disputes, water costs, emissions taxation.

Higher/lower WACC due to specific company sustainability practices. 

12.2b. Indicate which methods are part of your process to integrate ESG information into fair value/fundamental analysis and/or portfolio construction.

12.4b. Describe the methods you have used to adjust the income forecast / valuation tool

We focus on projecting ESG-speficic impacts on cash flows. Our full methodology with examples is depicted in our white paper: http://www.itauassetmanagement.com.br/_arquivosestaticos/Asset/pdf/WhitePapers/White_Paper_ESG_Port.pdf

12.5. Additional information.

 We prefer adjustments to financial forecasts than to valuation tools. On the later, we occasionally adjust cost of debt (never cost of equity) and growth rates.


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