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BNP Paribas Asset Management

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
100 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (financial)
0 Screening alone
0 Thematic alone
0 Integration alone
100 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (non-financial)
0 Screening alone
0 Thematic alone
0 Integration alone
100 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 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.

BNPP IP responsible investment policy applies to all asset classes. Our exclusion lists based on the UN Global Compact principles + our own ESG requirements translated in sector policies target companies that are lagging in terms of ESG and that are blacklisted for investment by portfolio managers.

The second pillar of our integration policy is the use of the ESG scores and research by all BNPP IP portfolio managers to help them better manage their risk exposure. Since 2015 all fixed income portfolio have access to the ESG scores for integration in their investment decision processes both for coporates and sovereign issuers.

 

04.3. Additional information [Optional].


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

          work between ESG analysts and portfolio managers/sector analysts + joint meetings (PM + ESG) with issuers.
monthly calculation of performance attribution of ESG scores vs benchmarks
        

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

06.3. Additional information. [Optional]

Each month, our ESG scores are updated by the ESG research team. They are distributed through 3 channels: a monthly email with an xls spreadheet sent to all investment centers through the ESG correspondents community ; a collaborative workspace where all the ESG research is stored and in a bigger number of teams the integration of the ESG scores directly in their front office tools and IT systems.


(A) Implementation: Screening

FI 07. Types of screening applied

07.1. Indicate the type of screening you conduct.

Select all that apply
Corporate (financial)
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

see below :

BNPP IP responsible investment policy (UN Global Compact + sector policies + ESG integration).

and for SRI funds, best in class apporach with 1/3 exclusion.

07.3. Additional information. [Optional]

UN Global Compact filter:

The following principles govern the implementation of ESG Standards in investment processes:

1. Investment universes are periodically screened with a view to identify issuers that are potentially in breach of UN Global Compact Principles and/or mandatory requirements applicable to controversial sectors and products.

2. This assessment is conducted by our SRI/ESG Research Team on the basis of internal analysis and information provided by external experts (Sustainalytics) and in consultation with BNP Paribas Group CSR Team.

3. As a result from this process, BNPP IP establishes and maintains two lists:

 an exclusion list of issuers that are associated with serious and repeated breaches of UN Global Compact Principles and/or mandatory requirements related to controversial sectors and products.

 a watchlist of issuers that are at risk of breaching ESG standards and with whom we engage in a dialogue in order to encourage improvements.

4. The exclusion and watchlists are communicated by CIOs to investment teams on a regular basis and are reviewed twice a year. As a result, investment teams should not initiate new investments in excluded companies with immediate effect. Existing investments should be divested from relevant portfolios based market conditions but not later than one month after communication by CIOs.

5. The exclusion list applies to all open-ended funds managed by BNP Paribas Investment Partners entities, with the exception of portfolios which replicate the composition of indices (eg ETFs and indexed funds). Exceptions may also be granted in cases where exclusions from actively managed portfolios would result in significant market risk versus the benchmark.

6. The exclusion list applies to all types of securities (equities, bonds, convertible bonds) issued by aforementioned companies, as well as bonds issued by related financial vehicles. It also applies to participation notes and derivatives issued by third-parties on such securities. These restrictions apply to securities negotiated on primary and secondary markets, as well as OTC instruments.

7. Pre-trade and post-trade compliance checks are conducted by Investment Compliance teams to ensure that exclusions lists are implemented by all relevant portfolios.

 

Sector specific minimum ESG standards:

In addition to the UN Global Compact principles, BNP Paribas Investment Partners implements a series of ESG standards related to investments in controversial sectors and products. These standards are consistent with sector policies adopted by the BNP Paribas Group and cover the following areas:

 Palm oil and Wood Pulp The aim is to encourage the production of sustainable palm oil and wood pulp by investing only in companies that meet minimum environmental and social standards. Consequently, companies that do NOT adhere to such minimum standards (eg by converting protected areas into palm oil and wood plantations, or using child/forced labour) should not be invested in.

 Nuclear. The objective is to ensure that we invest in companies that operate in countries with a proper legal framework, use appropriate technologies and adopt adequate health& safety monitoring and accident prevention measures.

 Coal-fired Power Generation. The aim is to ensure that we invest in utility companies that decrease their CO2 intensity by operating more efficient coal-fired power stations and diversifying to cleaner sources of electricity generation.

Controversial weapons. The objective is to ensure that we do not invest in companies involved in the production, trading and storage of controversial weapons. These include cluster ammunition and antipersonnel landmines, chemical and biological weapons, and nuclear/depleted uranium weapons. Most of these weapons are covered by international conventions and investments are already prohibited in some jurisdictions.

 Asbestos. The objective is to ensure that we do not invest in companies involved in the extraction or production of asbestos fibers banned today in more than 50 countries.

 Mining: the objective is to ensure that we do not invest in companies that use Mountain Top Removal (MTR) technics or with low ESG standards and practices.

For each area, the sections below contain background information and key definitions on activities and companies concerned. Investment criteria addressing the main ESG issues and are split into two categories:

 Mandatory requirements are to be understood as sine qua non: those have to be met without exception for BNPP IP to invest in a company.

 Evaluation criteria provide a framework for further contextual analysis and dialogue with companies, based on which BNPP IP may decide not to invest even if mandatory requirements are met.

The sector policies are reviewed once a year by BNPP Group with help of external and internal experts and also integrate the feedback of the engagement results.

 

SRI funds

For SRI funds we apply all the above mentioned exclusions and exclusion of companies active in alcohol, tobacco, gambling, pornography, armament sector (if revenue >10% of the activity).

In addition, we implemented early 2016 a strict coal-free policy excluding all mining companies with 10% or more of their revenues generated from “thermal coal” and all utilities whose carbon intensity when producing electricity is higher than 600 kgCO2/MWh. If they emit below this level, we will divest if the following thresholds are exceeded: a company’s coal installed capacity is above 30% and coal production is higher than 30%, and carbon intensity when producing electricity is higher than 400 kgCO2/MWh.

SRI best in class funds select the companies that best perform in term of ESG. All companies within a given sector are benchmark against a set up of ESG indicators - developed by our in-house research team -. The best performants (top 2/3 ) are included in the investment universe; in other words, the bottom one third is excluded. The same occurs for countries and supranationals

 

For non SRI funds :

progressive use by all the investment centers of our ESG scores and research to reduce risk exposure to ESG factor and to identify new investment opportunities.


FI 08. Negative screening - overview and rationale

08.1. Indicate why you conduct negative screening.

Corporate (financial)

Corporate (fin)

Corporate (non-financial)

Corporate (non-fin)

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

see previous answers : in line with BNPP IP's objective to be a responsible investor, we decided to apply ESG requirements to be met by all the companies we invest in. Our requirements are based on the UN Global Compact principles and sector best practices.

We do consider that ESG risk management is part of our fiduciary responsibility.

08.3. Additional information. [Optional]


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]


(C) Implementation: Integration

FI 14. Integration overview

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

As part of the ESG integration, we are working with the different investment centers to integrate ESG scores and research in their quality/risk assessment of companies.

The aim is to give a appreciation/depreciation factor according to the ESG profile of the companies, based on the ESG deciles provided by our in-house ESG research team.

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

SSA

Our ESG research team has developed dedicated ESG methodologies to assess sovereign, supranat and agencies issuers. The scores are used by SRI fixed income portfolio managers for nmore than a decade in our SRI funds. Wehave started working with the fixed income teams to make use of the ESG scores for non SRI funds.

A country review is organised once a year. The review is prepared by a prior meeting in which the ESG analyst, the ESG research director and the portfolio managers attend to set the major research topics and stakes, as well as the ESG country indicators to watch.

Then the sector review is presented by the ESG analyst to the whole team (other ESG analysts and portfolio managers): exhaustive presentation of ESG stakes, ESG scoring and in/out recommendations (buy list). Simultaneously, a constant monitoring is performed to integrate the news flow coming from all possible sources (external data suppliers, sell side brokers…). Depending on the seriousness of the event, a special surveillance procedure can be triggered by the ESG analysts. Portfolio managers are consequently alerted and any holding reinforcement is forbidden, waiting for a new ESG recommendation from the ESG analysts.

ESG analysis and conclusions coming from the reviews are disclosed and sent to all the portfolio management through a network of ESG Correspondents within the whole IP firm, well above the strict SRI management, in order to better integrate ESG extra financial contents.

Corporate (financial)

Our ESG research is done for issuers, there is no differences between a company releasing a bond or an equity: we apply the same best in class approach with sector-specific ESG indicators.

Each GICS sector is reviewed annually on the same date. The purpose of the sector review is to benchmark all companies within a sector against a set of ESG indicators. These indicators are chosen by the sector analysts after in-depth research and analysis undertaken by the analyst and also based on an ample pool of sources.

For  corporates, a one-to-one meeting or conference call is conducted with each company to doublecheck, verify and discuss findings and data. In many cases, discussions are followed by email exchanges.

There are 10 sector reviews a year ; well prior the review a meeting is set up with fund managers and financial analysts where the analyst presents an overview of the key ESG drivers that will be analysed - including the weighting breakdown between environmental, social and governance issues - in the coming sector review.

Once the analysis is completed, an ESG score and a ranking is given to each company of the sector in which BNPP IP invests or has an interest - icl. non-listed companies within the fixed income universe, large and medium caps,etc. The results are presented formally to fund managers and financial analysts.

The analyst monitor and follow the sector's ESG evolution and the companies's ESG behaviour during the entire year. When a company faces a relevant change and/or controversy the company is put under surveillance and a meeting is set up with the company following which, and the research done, the analyst will change or not the company's score, rating and inclusion in SRI funds.

Corporate (non-financial)

same research process as for corporate financial.

14.3. Additional information [OPTIONAL]


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 (financial)
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]

the only difference between SRI and non SRI funds requirements is for SRI funds the answers to questions 2,3 and 4 are systematic.

We are making progress in the integration of ESG in the fundamental analysis and the systematicaly integration of ESG analysis in all issuers summaries (it varies depending of the investment centers - we have 65 teams worldwide).


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 (financial)

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

ESG scores are systematicaly used by SRI portfolio managers for the investment/exclusion of SSA of the investment universe (see details on the ESG scoring at question 14.2

We have  started to encourage the non SRI portfolio managers to use the ESG analysis and scores produced by the ESG research team for their investment in SSA decision process : they have access to the sovereign issuers ESG scores, the same level of information as the SRI portfolio managers.

 

Corporate (financial)

As part of our ESG integration process, we consider all the porfolio managers should master the ESG elements of research provided by ou in-house ESG research team the same level as our SRI portfolio managers.

ESG sector reviews and ESG scores are shared to all portfolio managers within the organisation through our network of ESG correspondents and the use of IT tools.

We are moving to a more systematic integration of ESG elements in all the PMs investment processes: it's started in 2015 and we have continued in 2016.

 

Corporate (non-financial)

same answers as above for corporate financial

16.3. Additional information.[OPTIONAL]


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