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Pensionfund Metalektro (PME)

PRI reporting framework 2017

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ESG incorporation in actively managed fixed income

Implementation processes

FI 04. Incorporation strategies applied

04.1. Indicate 1) Which ESG incorporation strategy and/or combination of strategies you apply to your actively managed fixed income investments; and 2) The proportion (+/- 5%) of your total actively managed fixed income investments each strategy applies to.

SSA
0 Screening alone
0 Thematic alone
0 Integration alone
95 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
5 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (non-financial)
0 Screening alone
0 Thematic alone
0 Integration alone
85 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
15 All three strategies combined
0 No incorporation strategies applied
100%

04.2. Describe your reasons for choosing a particular ESG incorporation strategy and how combinations of strategies are used.

SSA: We use negative screening based on UN PRI principals and European sovereign bonds investments we rank the countries by looking at several governance indicators. Only the top 25% ranking countries are eligible for inclusion. We take into account Governance data from the World Bank Worldwide Governance Index.

EMD: We use negative screening based on UN PRI principals and ESG criteria (based on MSCI country scores which are updated yearly) to provide a minimum level of ESG standards in the portfolio. When we established the investable universe, we do a deep-dive in each country that we are allowed to invest in and we take into account data that covers E, S and G. The analysis done is updated regularly and consists indicators like United Nations Human Development Index, World Bank Worldwide Governance Index, Heritage Index of Economic Freedom, World Bank Ease of Doing Business Index, World Bank Dependency Ratio, MSCI environmental data to analyze countries.

Credits: We use negative screening based on UN PRI principals and positive screening in instrument selection (green bonds). Subsequently, we (analyst is in the lead, but portfolio managers are also involved) perform a downside risk analysis which is most important to bondholders (see further 04.3)

04.3. Additional information [Optional].

Credits; We use negative screening based on UN PRI principals and positive screening in instrument selection (green bonds). Subsequently, we (analyst is in the lead, but portfolio managers are also involved) perform a downside risk analysis which is most important to bondholders. Risks and opportunities with respect to environmental, social and governance issues are explicitly taken into account and fully integrated in our analysis. As it could have impact on credit quality or even threaten the viability of a company's business model. Thematic is used when all companies within a sector are heavely exposed to a certain trend and therefore the risk is more systemic.

Also, we would like to provide you with some examples:

Credits&EMD: Screening example; we conduct positive screening in case of green bonds, conditional on yields, which need to match those on conventional bonds. Credits: Thematic example; Within utilities, we take a thematic approach: in addition to screening and integration, we clearly prefer players which are less exposed to regulatory risk and are ahead of the curve regarding the energy transition towards more renewables.


FI 05. ESG issues and issuer research (Private)


FI 06. Processes to ensure analysis is robust

06.1. Indicate how you ensure that your ESG research process is robust:

specify description

          - Discuss with other asset managers key ESG challenges/how to leverage our combined knowledge; 
- organize and participate in internal Education sessions regarding specific ESG themes.
        

06.2. Describe how your ESG information or analysis is shared among your investment team.

          We keep track of our ESG activities, discuss the progress on climate issues from the cross-asset Climate Task Force. Furthermore, ESG is regularly discussed
        

06.3. Additional information. [Optional]

SSA: Our investable universe is determined by either positive (Rates) or negative (EMD) screening. After the investable universe is determined we use multiple ESG indicators and multiple providers of ESG research to determine where to most efficiently invest the money. As such ESG is an integral part of our investment decision/process and can take on different forms depending on the country at hand. To determine that ESG research is robust we use different providers for similar ESG indicators to check for consistency. We participate in country visits to determine if the 'on the ground' situation is reflected in the reported ESG criteria.

 

Credits, our investable universe is determined by negative screening. Subsequently, we use various ESG indicators, depending on sector and issuer specific characteristics and use various ESG sources (primarily from MSCI and CRA's if available) and use recent ESG specific news flow for determining the most imminent issues. We also compare ESG performance within heterogeneous sectors and assess whether or not we see risks for credit quality and if so when (short or long term) this could materialize.


(A) Implementation: Screening

FI 07. Types of screening applied

07.1. Indicate the type of screening you conduct.

Select all that apply
SSA
Corporate (non-financial)
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

07.2. Describe your approach to screening for internally managed active fixed income

SSA: In European sovereign bonds investments we rank the countries by looking at several governance indicators. Only the top 25% ranking countries are eligible for inclusion. We take into account Governance data from the World Bank Worldwide Governance Index.

EMD: We apply negative screening in Emerging Market Debt (MSCI country scores) and we use ESG issues in the analysis. We take into account ESG data that covers E, S and G. like United Nations Human Development Index, World Bank Worldwide Governance Index, Heritage Index of Economic Freedom, World Bank Ease of Doing Business Index, World Bank Dependency Ratio, MSCI environmental data to score countries.

Corporates (Fin and non-Fins), we use an exclusion list for negative screening (See FI 08.2 for more details).  The exclusion criteria UN PRI are reviewed on a quarterly basis and/or if a material ESG risk materializes. In terms of norm-based screening, we analyze each corporate that is part of our investable universe and we require certain minimum standards regarding governance, disclosure and business practice.

07.3. Additional information. [Optional]


FI 08. Negative screening - overview and rationale

08.1. Indicate why you conduct negative screening.

SSA

SSA

Corporate (non-financial)

Corporate (non-fin)

08.2. Describe your approach to ESG-based negative screening of issuers from your investable universe.

In addition to complying to Dutch law, we apply certain international treaties to our investment policy, as we want to provide pensions on a sustainable way. We exclude companies that are directly involved in the development, production and/or maintenance of products and/or services that are not compliant with following treaties and criteria (see additional information for the list).

08.3. Additional information. [Optional]

In addition to complying to Dutch law, we apply certain international treaties to our investment policy, as we want to provide pensions on a sustainable way. We exclude companies that are directly involved in the development, production and/or maintenance of products and/or services that are not compliant with following treaties and criteria.

• Anti-personnel mines: definitions as defined in Ottawa convention

• Cluster weapons: definitions as defined in Convention on Cluster munitions

• Chemical and Biological weapons: definitions as defined in Chemical Weapons Conventions and Biological and Toxin weapons Convention.

• Nuclear weapons: we only considers companies involved in nuclear weapons in case activities are carried out in, or for countries that are not allowed to develop or produce such weapons based on the Non Proliferation Treaty. • White Phosphorus: for military use.

Besides the above mentioned exclusion of controversial weapons, we exclude companies when they are directly involved in the development, production or maintenance of products and/or services that are non-compliant with international treaties signed by the Dutch government. This applies for the following treaties: • The Montreal Protocol (protection of the ozon layer)

• CITES (aim is to ensure that international trade in specimens of wild animals and plants do not threaten their survival).

• Social Practices: violation of human rights and labor standards

• Failure to meet Governance standards: Limited disclosure, transparency (EM Corporates)


FI 09. Examples of ESG factors in screening process (Private)


FI 10. Screening - ensuring criteria are met

10.1. Indicate which systems your organisation has to ensure that fund screening criteria are not breached in fixed income investments.

Type of screening
Checks
Negative/exclusionary screening?
Positive/best-in-class screening
Norms-based screening

10.2. Additional information. [Optional]

Our benchmarks are customised to include our negative or positive screening criteria. Every quarter our excluded companies are updated. Our compliance department monitors daily whether our mandates requirements are met (which includes restrictions on positive and negative screening on ESG). In addition our systems prevents our portfolio managers from investing outside their investable universe.


(B) Implementation: Thematic

FI 11. Thematic investing - overview (Private)


FI 12. Thematic investing - themed bond processes

12.1. Indicate whether you encourage transparency and disclosure relating to the issuance of themed bonds as per the Green Bonds Principles:

12.2. Describe the actions you take when issuers do not disburse bond proceeds as described in the offering documents.

We would engage with both the issuer and the third-party assurer.

12.3. Additional information. [Optional]


FI 13. Thematic investing - assessing impact

13.1. Indicate how you assess the environmental or social impact of your thematic investments

13.2. Additional information. [Optional]

The validations indicated in FI 13.1 (the requirement to report once per year on specific environmental or social impacts and the independent audits that are conducted on the environmental or social impact of our investments) are not directly performed by PME or MN but validated by a third party as MN on behalf of PME ensures that Green bonds are issued according to the Green Bond Principles (GBP).


(C) Implementation: Integration

FI 14. Integration overview

14.1. Describe your approach to integrating ESG into traditional financial analysis.

SSA (EMD): All countries we invest in are analyzed bottom-up. We take into account Environmental (for example the effect of Climate Change on the country), Social (for example poverty indicators, eduction, healthcare, inequality) and Governance (for example corruption, rule of law, government effectiveness etc). In order to analyze the countries we use different data sources as well as visit the country in order to build a complete picture. We dedicate a specific part of our country report to ESG analysis. Concerns/opportunities on ESG can result in an underweight, neutral or overweight recommendation. Last year we had an UW on Mozambique on concerns about governance, Mozambique decided to default on their debt. Databases we use take into account data that covers E, S and/or G, like United Nations Human Development Index, World Bank Worldwide Governance Index, Heritage Index of Economic Freedom, World Bank Ease of Doing Business Index, World Bank Dependency Ratio, MSCI environmental data.

Within Corporates (Fin and non-Fins), we fully integrate ESG in our bottom-up credit analysis (100% of our investable universe) as these can translate into higher credit risk by weakening a company's business profile and/or financial profile. Each sector analyst assesses the key ESG risk which are separately reported in the credit analysis and weighed in the investment recommendation (UW, Neutral or OW). Apart from using external research providers, company data, analysts consult the internal Responsible Investment & Governance team if more information is required regarding companies we actively engage with, with regard to specific themes (Climate, Tax principles, Social eg) or to flag our worries regarding a specific company.

14.2. Describe how your ESG integration approach is adapted to each of the different types of fixed income you invest in.

SSA

All countries we invest in are analyzed bottom-up. We take into account Environmental (for example the effect of Climate Change on the country), Social (for example poverty indicators, eduction, healthcare, inequality) and Governance (for example corruption, rule of law, government effectiveness etc). In order to analyze the countries we use different data sources as well as visit the country in order to build a complete picture. We dedicate a specific part of our country report to ESG analysis. Concerns/opportunities on ESG can result in an underweight, neutral or overweight recommendation. Last year we had an UW on Mozambique on concerns about governance, Mozambique decided to default on their debt. Databases we use take into account data that covers E, S and/or G, like United Nations Human Development Index, World Bank Worldwide Governance Index, Heritage Index of Economic Freedom, World Bank Ease of Doing Business Index, World Bank Dependency Ratio, MSCI environmental data.

Corporate (non-financial)

In Corporates, the weight/importance of certain ESG factors may vary by sector and/or company depending on our risk assessment on the company's credit quality. One sector where ESG risks are much more explicit (and could potentially be a risk for the existence of the company) is the utilities sector. Therefore the weight/importance of ESG factors should be much higher versus various other sectors. We take the ESG factors/weights and scores from MSCI as a starting point, but prioritize, add or exclude ESG factors and/or scores. Examples of Environmental issues comprise carbon intensity (total value chain approach, thus including suppliers as well), Water & Energy efficiency, Recycling, Renewable energy use (utilities, , responsible sourcing (palm oil, agriculture); Examples of Social factors include privacy & Data protection, Product Safety and accessibility, Responsible marketing, Nutritional benefits, Process/Production Safety (Production related sectors like Healthcare, Food & Beverage, Industrials, Chemicals, Oil&Gas. It comprises the occurance of Injuries, risk of contamination, HACCP certificate, recalls). Labor standards can be particularly an issue in Retail, Personal & Household goods; Examples of Governance factors (all sectors) comprise data disclosure and transparency, shareholder structure, Controversies/Fraud, consistency with regard to strategy.

14.3. Additional information [OPTIONAL]

Above we mentioned that the weight/importance of certain ESG factors may vary by sector and/or company depending on our risk assessment on the company's credit quality. One sector where ESG risks are much more explicit (and could potentially be a risk for the existence of the company) is the utilities sector. Therefore the weight/importance of ESG factors should be much higher versus various other sectors.


FI 15. Integration - ESG information in investment processes

15.1. Indicate how ESG information is typically used as part of your investment process.

Select all that apply
SSA
Corporate (non-financial)
ESG analysis is integrated into fundamental analysis
ESG analysis is integrated into security weighting decisions
ESG analysis is integrated into portfolio construction decisions
ESG analysis is a standard part of internal credit ratings or assessment
ESG analysis for issuers is a standard agenda item at investment committee meetings
ESG analysis is regularly featured in internal research notes or similar
ESG analysis is a standard feature of ongoing portfolio monitoring
ESG analysis features in all internal issuer summaries or similar documents
Other, specify

15.2. Additional information [OPTIONAL]

Corporates and SSA: ESG factors are explicitly discussed and assessed in our bottom-up fundamental analysis. If we see more risk on a longer horizon, we express this by limiting exposure to shorter duration. Furthermore, if we become less comfortable about certain ESG risks, we actively engage with our RIG team and/or the company involved. See 14.2 for further details. ESG, climate risk and Green Bonds are recurring themes in our team meetings as well.


FI 16. Integration - E,S and G issues reviewed

16.1. Indicate the extent to which ESG issues are reviewed in your integration process.

Environment
Social
Governance
SSA

Environmental

Social

Governance

Corporate (non-financial)

Environmental

Social

Governance

16.2. Please provide more detail on how you review E, S and G factors in your integration process.

SSA

SSA: The ESG opinion on E, S and G from MSCI and Governance Indicators will determine our investable universe. Within the investable universe further ESG analysis is systematically used as input for investment decisions.

Corporate (non-financial)

Corporates: E, S and G are standard elements of our analysis of corporates and is updated regularly, we use it as input into our investment decision. When material ESG issues arise, a more in depth view is developed.

16.3. Additional information.[OPTIONAL]


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