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Edmond de Rothschild Asset Management (France) (EDRAM)

PRI reporting framework 2018

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You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income » (C) Implementation: Integration

(C) Implementation: Integration

FI 11. Integration overview

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

By constantly optimising its SRI expertise, Edmond de Rothschild Asset Management (France) seeks to offer its clients new, complementary analysis and management tools on top of those already developed by the management company.

Integrating ESG in traditional financial analysis gives managers of credit debt and sovereign debt an additional appreciation perspective, enabling them to fine-tune their assessment and, ultimately, their level of confidence in issuers' levels of exposure to a default risk.

 

Integrating ESG in corporate debt

Since 2015, the ESG analysis has been systematically integrated in one of the euro zone SRI credit funds, Edmond de Rothschild Euro Sustainable Credit, totalling €103 million in assets under management at 31 December 2017. This fund is a sort of Trojan horse used to incorporate ESG analysis concretely and gradually within credit management as a whole by contributing, initially, to disseminating the codes of ESG analysis throughout the credit management team. This integration results in informal exchanges between the credit management team and the RI manager, as well as with the internal extra-financial analysts through  day-to-day email discussions with RI asset managers regarding an issuer's material ESG risks (risk mitigation). This also takes the form of more formal exchanges with the reporting of current issues discussed in weekly equity and fixed-income management meetings regarding ESG convictions (alerts regarding controversies or sensitive issues, highly material events, investment opportunities on sustainability-related stocks)

 It is being  strengthened  with the integration of ESG data related to corporate debt issuers within our in-house tools  that  is an ongoing project opened in 2017 and an access to Sustainalytics’  ratings for all EDRAM asset managers. The RI credit fund manager is the link between the credit management team and the RI analysis team, integrated in all Edmond de Rothschild Asset Management (France)'s management strategies in a cross-cutting way, guaranteeing the ESG analysis process.

.  We also invested in green bonds issues by corporates (Toyota, Westpac…)

Besides, all equity and bond management teams are contributing to and co-operating with ten ESG integration projects in 2017-2020. These innovative projects, chosen by asset management teams, are giving concrete, traceable results, and are focusing on precise subjects identified as highly material in financial terms.

For illustrative purpose, the RI team worked closely with the Credit management team on one primary ESG integration project with strong financial materiality and related to “Valuation impact of ESG research for equities and corporate credit”. In this context, the impact of ESG ratings on the valuation of bonds has been assessed using an internal methodology and validated by the corporate credit management team involved in the project. The positive or negative impact of ESG ratings is shown by the improvement or deterioration in financial ratings (number of notches) in the case of bonds. This impact is now systematically recorded in all new issuer analyses and their updates, and the analysis results are provided to all bond managers.

 

Integrating ESG in sovereign debt

Edmond de Rothschild Asset Management (France) has also implemented an ESG analysis approach for euro zone sovereign debt issuers formally launched in 2017.

This analysis approach, which for the time being covers only the category of Sovereign issuers within the meaning of the PRI's SSA classification, has been developed by one of our sovereign debt manager-analyst, with regular interaction with the internal RI team as part of the search for and selection of sustainability indicators based on publicly-available sources, such as Eurostat. It has been updated in 2017 with the alignment of the methodology on the Sustainable development goals and the inclusion of a new criteria to attain this alignment.

The combination of ESG indicators short-listed for the ESG integration process aims to identify a favourable trend in terms of solvency of states in the medium to long term by combining the financial and extra-financial approach. Consequently, this analysis model enables us to see more clearly which ESG factors have a material impact on the economic performance of issuer countries in Europe. Our in-depth review of all possible indicators resulted in around 33 being selected which we consider the most relevant across the 3 ESG pillars. We have prioritized to use raw data for the countries' ESG criteria and minimise the use of indices aggregating several data/indicators, so that we can interpret more precisely the strengths and weaknesses of each country:

The Environmental pillar includes waste recycling systems, the surface area of organic farming and of course CO2 emissions and renewable energy generation. For financial reasons, we favoured issuers of green bond, which accounted for 1.5% of all the sovereign and agencies debt AUM

In the Social pillar, the use of multi-dimensional indicators proved very revealing. For example, the merging of the rate of employment of men and women with the birth rate per family has shown that, despite its economic strength and its very good Governance score, Germany lost some points, notably due to the absence of policies to balance work and family. On the contrary, the strength of France's score on the Social and Environmental pillars supports it in continuing to receive an AA rating from the main agencies (compared with Germany's AAA).

This holistic view of each country's approach has helped us to identify, for example, Ireland's ability to resist and bounce back after the financial crisis (it has one of the highest ESG scores) and to identify Portugal as a country where a good ESG score points to a strong sustainable growth potential. By contrast, Greece and Italy's low score on the Governance and Social pillars partially explained why their overall rating was lower than that of other countries.

 

 

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

SSA

The ESG indicators selected to assess euro zone sovereign debt issuers are intended to demonstrate their contribution:

  • to a sustainable and harmonious development of society
  • to the construction of a healthy economy, competitive and reducing inequalities

These indicators are thus likely to have a positive impact on the long-term growth of the countries concerned. They complement the purely financial view, by strengthening or moderating it (on the whole, purely financial criteria are more correlated to growth in the short and medium term).

The internal SRI rating model for sovereigns includes, in addition to financial criteria, criteria on the 3 ESG pillars with scores on the overall ranking and scores on progress. The progress score rewards countries that make efforts, which we expect to have a positive impact on their development and growth outlook, and therefore on the performance of the bonds issued.

The choices made and the weight given to the various criteria take into account possible fiscal effects in order to link sustainable development policies with their effectiveness and with the bond investor's point of view (expenditure/results or measurable progress on the criteria for which a measure is available or greater weighting of criteria liable to fines for non-compliance, as included in the EU's objectives or, more generally, for greenhouse gas emissions).

In 2017, an integration project between the RI team and the fund manager  resulted in the alignment of the ESG analysis of countries to the Sustainable Development Goals.

Corporate (financial)

The ESG analysis for the corporate debt is the same as for equities.

Company ESG ratings are calculated in-house as Edmond de Rothschild Asset Management (France) firmly believes that this process is complementary to financial analysis and offers important insights on whether the company's strategy is sustainable (or not): it can also strengthen the confidence toward the default risk.

Edmond de Rothschild Asset Management (France)'s rating methodology and the matrix for extra-financial analysis were drawn up by our SRI fund management/research team following a survey of existing data frameworks (UN Global Compact, OECD or ILO-led conventions and official texts).

Our SRI rating model was built with weightings that differ from the sector-based ESG criteria which take the specificities of each sector or industry in account. The ESG ratings of companies covered by our in-house extra financial analysis are updated every 18 to 24 months.

The result of this ESG analysis is materialized by ratings that are based on a seven-point scale ranging from CCC to AAA and are determined by aggregating the company’s global results on different ESG criteria, as per the rating matrix designed by the RI specialist team. Extra-financial criteria are allocated different weightings according the company’s sector or industry; however, the overall rating is determined on an absolute basis and is not relative to the sector performance

Corporate (non-financial)

Our corporate non-financial approach is the same as the corporate financial described above.

11.3. Additional information [OPTIONAL]


FI 12. Integration - ESG information in investment processes

12.1. 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

12.2. Additional information [OPTIONAL]

Corporate Debt issuers

For the two choices ticked related to the integration of ESG analysis within corporate debt weighting decisions and portfolio construction decisions, it is only applied to our SRI corporate debt fund Edmond de Rothschild Euro Sustainable Credit.

Concerning the fourth choice ticked, we choose to keep the ESG rating apart from the financial rating of an issuer in order to dig the gap during the dialogue with the issuers and by strengthening our analysis.

 

Sovereign Debt issuers

The ESG scoring for the sovereign issuers is regularly updated, integrated within the spread sheets and easily accessible by the Asset Allocation and Sovereign debt team. The ESG analysis and information  is systematically a part of the interest rates committee. On a non-systematic basis, the ESG opinion related to sovereign debt issuers  has been part of discussion during investment committee meetings in order to confirm an investment choice, for instance on the Portugal or the Netherlands. 


FI 13. Integration - E,S and G issues reviewed

13.1. 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

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

SSA

Integrating ESG in traditional financial analysis gives managers of sovereign debt an additional appreciation perspective, enabling them to fine-tune their assessment and, ultimately, their level of confidence in issuers' levels of exposure to a default risk.

Based on the short list of quantitative indicators on the ESG pillars, we combined data from the ranking in absolute terms (best-in-class), giving a "Global" score weighted at 60%, with data on changes over 5 to 10 years (best effort), giving a "Progress" score weighted at 40%. These two rating levels combined provide an aggregate score by E/S/G pillar. An overall ESG score is determined at the end of process. This score is cross-referenced with the financial score determined internally for euro zone sovereign debt issuers.

Around thirty ESG indicators have been selected for the three pillars (around fifteen for environmental and social, six for governance):

for the Environmental pillar, 2 types of criteria have been selected: one focusing on waste management and natural resources, the other on energy.

for the Social pillar, indicators are divided according to 4 criteria: health, poverty and social protection, education and social progress, employment and social progress.

for the Governance pillar, the salient themes relate to the ease of doing business, the corruption index, the global peace index, innovation, R&D and development aid.

Corporate (financial)

Integrating ESG in traditional financial analysis gives managers of corporate debt an additional appreciation perspective, enabling them to fine-tune their assessment and, ultimately, their level of confidence in issuers' levels of exposure to a default risk.

Our SRI rating model is constructed in order to allocate different weightings to ESG criteria in order to take the specificities of each sector or industry into account. In practical terms, this means that different extra-financial criteria are given varying degrees of importance depending on the company's sector or industry; each of the four pillars is therefore allocated a different weighting. For instance, a chemicals company will be more concerned by environmental issues, while a services company will be allocated a higher weighting for social factors. However, the overall rating is determined on an absolute basis and is not relative to the sector performance.

Corporate debt managers draw on the internal ESG-S analysis and the corresponding scoring made available to them to assess the sectoral issues related to each stock in their investment universe, i.e.:

  • On the Environmental pillar:

Environmental Risk Management: Implementation of environmental management scheme, present and future regulations  compliance

Environmental footprint: GHG/CO2 emissions, Energy/water consumption, Waste management, Pollution

Product or service impact and Green innovation:  Lifecycle analysis, Innovation, Eco-design

 

  • On the Social pillar:

Human resource management : Employee loyalty, Career management and training, level of absenteeism and staff turnover 

Social dialogue: Employee representation, Restructuring management,  collective agreements, employee satisfaction

Workplace environment: Health & Safety management, Diversity, etc

 

  • On the Governance pillar:

Board Structure: Independent board& committees, Power separations, Diversity of the board,

Audit and internal control: Independence of auditors, Independence of audit committee,

Executive compensation: Transparency, Link with performance

 

 

In addition, the fund managers pay special attention to aspects related to management quality and exposure to controversies, which can have an impact on debt repayment capacity.

Corporate (non-financial)

Same contents as the one for the corporate financial above

13.3. Additional information.[OPTIONAL]


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