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LBPAM La Banque Postale Asset Management

PRI reporting framework 2019

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You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income

ESG incorporation in actively managed fixed income

Implementation processes

FI 01. Incorporation strategies applied

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
1.5 Screening alone
0 Thematic alone
0 Integration alone
74 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
24.5 No incorporation strategies applied
100%
Corporate (financial)
1.5 Screening alone
0 Thematic alone
0 Integration alone
74 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
24.5 No incorporation strategies applied
100%
Corporate (non-financial)
1.5 Screening alone
0 Thematic alone
0 Integration alone
74 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
024.5 No incorporation strategies applied
100%
Securitised
1.5 Screening alone
0 Thematic alone
0 Integration alone
74 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
24.5 No incorporation strategies applied
100%

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

LBPAM applies an screening approach to all its RI Fixed Income strategies. We have differentiated the way we apply screening strategies within our institutional mandates and within our pooled funds.

Within our Fixed Income mandates we exclude companies having a high-risk profile as well as companies exposed to climate change risks (mining and utilities) depending on clients' approach. We also monitor companies with laggard scores (scores between 8 and 10) and use a comply or explain approach with investment managers of the“investment insurance mandate” team .

Within our pooled funds we select issuers with the best practices in their industry regarding ESG issues according to our proprietary framework GREaT. The companies with scores between 1 and 5 are selected for our RI Fixed Income Funds. Since 2016, we have decided to go beyond a Best in class approach by introducing sector biais in our quantitative ESG approach. For example, we have enlarged the number of eligible companies when they face more ESG opportunities than ESG risks. On the contrary, we have reduced the number of companies facing high-risk in our investment universes.

01.3. Additional information [Optional].

For  private our  debt investment actvities, we have developed a dedicated ESG questionnaire to each team (Infrastructure, Real estate and Corporate) based on our GREaT approach. The assessment is roll-out in every due-diligence pre-approval and is used as an input in the investment decision process.

FI 02. ESG issues and issuer research

02.1. Indicate which ESG factors you systematically research as part of your analysis on issuers.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
Environmental data
Social data
Governance data

02.2. Indicate what format your ESG information comes in and where you typically source it

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  

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

Raw ESG data is used as the primary source of our quantitative ESG rating system so-called AGIR. This data is then aggregated according to out GREaT approach for generating scores for 4.800 issues. We use scores from 2 rating agencies. We also use raw data for feeding into our Energy Transition Reporting tool (co2 emissions, revenues generated from coal activities) and to identify controversial activities.

In our rating tool, RI analysts can adjust ratings after meeting with companies, or controversies (regulatory changes, incidents, statements from executives, surveys conducted by NGOs or trade unions, etc.) leading to upgrades or downgrades. The objective is to increase responsiveness in our rating system.

Company related ESG analysis is performed by the RI Team using inputs from different sources. In the end, we create investment cases combining financial information and ESG related issues such as Energy Transition and Development of Local Territories.

ESG factor specific analysis is provided for green bonds with and assessment of the alignement between green bonds’ objectives and issuer's climat/environmental strategy.

Sector related ratings are generated by our rating tool AGIR.

ESG country information is primarily sourced by specialised rating providers which is assessed by the RI Team

02.4. Additional information. [Optional]

For the private debt team, raw data is collected directly by the Investment teams and the RI specialist in order to fill into our RI questionnaire. These data mainly come from the issuers, the banks that structure the deals, technical advisors, sell side analysts and our in-house research.

FI 03. Processes to ensure analysis is robust

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

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

03.3. Additional information. [Optional]

ESG rating methodology relies on several external sources, in order to strengthen the quality of the analysis.

External sources are generally chosen by the RI team after having benchmarked different providers. Depth, granularity and responsiveness are important criteria to select external ESG providers.

ESG ratings are reviewed on a quarterly basis - through AGIR, our quantitative rating tool - to ensure that ESG data is updated and accurate.

The internal audit department controls on an annual basis the engagements, investment procedures and rating process of the RI Team.

All our RI credit and treasury strategies have obtained the French SRI label.

ESG ratings and comments generated by the RI Team are diffused through front office tools to all audiences including Fixed Income portfolio managers. Quarterly meetings are organised with RI fixed income fund managers to explain changes and evolutions in our rating system.

(A) Implementation: Screening

FI 04. Types of screening applied

04.1. Indicate the type of screening you conduct.

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

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

We have different screening strategies regarding SSA and Corporates.

SSA

  • For all our investments we exclude countries that are sanctioned by United Nations, the European Union and the French Government (ie. Irak, Iran, Lebanon, Libya..). We also exclude from our investments countries included in the FATF Recommendations and countries identified as tax heavens.
  • Within our RI funds we apply different weights to countries according to their ESG ratings. Countries with positive ESG ratings are over-weighted, whereas countries with a negative ESG rating are underweighted compared to their benchmark.
  • Some mandates exclude countries that are not able to ensure human rights, freedom of expression or are associated to corruption.

Corporates

  • Sector exclusion: Companies belonging to sectors ICB Level 3 "Tobacco" and ICB sector level 4 "Gaming" are systematically excluded of RI Fixed income funds.
  • Product negative exclusion: For all funds (SRI or not) we have a formal policy that excludes investments in companies involved in Controversial weapons encompassing the production, trading or storage of cluster munitions and antipersonnel land mines.
  • Norms based screening: We exclude from all our RI strategies, companies that have seriously and frequently violated the Global Compact principles.

 

04.3. Additional information. [Optional]

Corporates

  • Positive screening: Within our RI funds we only invest in issuers with a low ESG risk profile (issuers having a score between 1 and 5)

 

 

FI 05. Examples of ESG factors in screening process

05.1. Provide examples of how ESG factors are included in your screening criteria.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Danske Bank:

In December 2018, the Credit and RI Team have met to discuss Danske Bank allegations on money laundering in its Estonian Branch. Money Laundering is one of the ESG criteria integrated under the Sustainable governance pillar (Business ethics). This pillar is composed of four main criteria: business ethics, executive remuneration, fiscal responsibility and the board of directors. During this meeting we have reviewed all the potential impacts that this allegation can create on Danske's control systems, governance, ethical culture, employees and clients. In addition, we have reviewed how these issues are integrated by the credit reseach and fixed income markets..

We have studied as well the corrective measures. We have concluded that in spite of measures taken since September, we are not satisfied with the level of transparency. We have decided to downgraded its RI score to reflect these weaknesses. In addition the credit team put this name on a watch list given the negative outcomes of the investigations.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Prosegur is an Spanish issuer classified in the commercial services and supplies sector. The company has a score of 8 (in a scale from 1 to 10), thus it is a laggard in its industry. We have discussed this case with the credit team in order to determine what where the main negative contributors to its score.

For a company operating in the private security domain mainly in emerging markets, its main issues at stake are: human rights, freedom of association, health and safety, governance and corruption. The company has been highlighted for violating human rights in its Latin American branches without corrective measures.

Credit analysts have exposed that this business could disappear with the digital developments. From a financial standpoint, the issuer is not transparent. We have discussed if all these risks are remunerated by its interest rate and we have agreed that there is a small prime given its exposure to emerging markets but not additional compensation for all the risks taken. The company is excluded  in the end of our fixed income portfolios.  

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

LBPAM has an opened fund called Liberté Solidarité in partnership with the NGO Fédération International des Droits de l'Homme. This funds is invested in bith equity and fixed income. For the sovereign investments, LBPAM relies on FIDH assessment of the 28 European Union (EU) Member States. The report was updated in February 2018. The current study evaluates and compares all 28 Member States’ “performance” in the field of human rights and on the basis of the comprehensive and binding body of human rights law. In defining the content of each right, international and regional jurisprudence – stemming either from judicial decisions or interpretations by international monitoring bodies provides essential guidance on what governments must do to discharge their human rights obligations. Such obligations include extraterritorial obligations, which are increasingly recognized as fundamental to human rights protection in a globalized context.

05.2. Additional information.

FI 06. Screening - ensuring criteria are met

06.1. 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

06.2. Additional information. [Optional]

LBPAM has a clear process to ensure that ESG fund criteria are respected:

Integration of the SRI investment universe in IT asset management tools. These tools create alert when portfolio managers want to invest in a forbidden issuer.
At the Risk Department level, an independent ex-post audit is conducted on a daily basis regarding the implementation and compliance of the ESG rules of the fund (allocations by ESG score, authorized issuers...) .
External auditors frequently ask investment universes and portfolio holdings in order to check out that the ESG fund approach and procedures are respected.

(B) Implementation: Thematic

FI 07. Thematic investing - overview (Not Applicable)

FI 08. Thematic investing - themed bond processes (Not Applicable)

FI 09. Thematic investing - assessing impact (Not Applicable)

(C) Implementation: Integration

FI 10. Integration overview

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

All ESG scores are integrated into the traditional financial tool named Pegase. This score is supported by an ESG qualitative comment that helps credit financial analysts to better understand ESG risks and opportunities related to the issuer.

In addition, a monthly meeting was implemented in June 2018 where RI and credit analyst discuss issuers at risk from an ESG perspective. 

We have develop a dedicated tool to assess green bonds. This scoring tool is based on 2 axes: one axe analyses the overall climat/ environmental strategy ofthe issuer, while the 2nd axe focuses on the effective impact of the green bond. The score relies on various weighted qualitative and quantitative KPI. Scorings range from 1 to 10. Issues that scored between 8 and 10 are not considered as green assets within LBPAM.

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

SSA

We apply the same ESG criteria for all type of issuers. However according to their sector we change the weight per pilar of our GREaT framework. 

 

Corporate (financial)

We apply the same ESG criteria for all type of issuers. However according to their sector we change the weight per pilar of our GREaT framework. For example for financial issuers, the governance pillar is 35%, for sustainable ressources is 15%, energy transition is 25% and local territories is 25%. We also identified if sectors face more risks than opportunities and this has impacts in our rating score. 

Corporate (non-financial)

We apply the same ESG criteria for all type of issuers. However according to their sector we change the weight per pilar of our GREaT framework. For example for each non-financial sector, we adopt a dedicated weight per pillar according to the most relevant ESG risks and opportunities identified. We also determined if sectors face more risks than opportunities and this impacts our rating score. As a consequence, the energy, materials and transport sectors have less (40%) companies with a rating between 1 and 5. On the contrary, sectors which provide solutions have mmore issuers ranked between 1 and 5 (60%).

Securitised

We apply the same ESG criteria for all type of issuers. However according to their sector we change the weight per pilar of our GREaT framework. 

10.3. Additional information [OPTIONAL]

For Infrastructure, Real estate and private debt, we have developed a dedicated ESG questionnaire based on our GREaT approach. The assessment is roll-out in every due-diligence pre-approval and is used as an input in the investment decision process.

FI 11. Integration - ESG information in investment processes

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

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
ESG analysis is integrated into fundamental analysis
ESG analysis is used to adjust the internal credit assessments of issuers.
ESG analysis is used to adjust forecasted financials and future cash flow estimates.
ESG analysis impacts the ranking of an issuer relative to a chosen peer group.
An issuer's ESG bond spreads and its relative value versus its sector peers are analysed to find out if all risks are priced in.
The impact of ESG analysis on bonds of an issuer with different durations/maturities are analysed.
Sensitivity analysis and scenario analysis are applied to valuation models to compare the difference between base-case and ESG-integrated security valuation.
ESG analysis is integrated into portfolio weighting decisions.
Companies, sectors, countries and currency and monitored for changes in ESG exposure and for breaches of risk limits.
The ESG profile of portfolios is examined for securities with high ESG risks and assessed relative to the ESG profile of a benchmark.
Other, specify

11.2. Additional information [OPTIONAL]

We have 3 main ways of integrating ESG into FI investment decisions:

  1. We have an ESG scoring tool that supports the portfolio weighting decision process (AGIR).
  2. Monthly committees are held between RI and deks analysts to discuss the most material ESG risks for credit worthiness
  3. Finally, we analyse the issuer yield curve and potential relative value of green bond vs vanilla bonds to find out if there is a potential greenium. 

 

FI 12. Integration - E,S and G issues reviewed

12.1. 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

Securitised

Environmental

Social

Governance

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

SSA

We apply the same ESG criteria for all type of issuers. However according to their sector we change the weight per pilar of our GREaT framework. 

Corporate (financial)

We apply the same ESG criteria for all type of issuers. However according to their sector we change the weight per pilar of our GREaT framework. For example for financial issuers, the governance pillar is 35%, for sustainable ressources is 15%, energy transition is 25% and local territories is 25%. We also identified if sectors face more risks than opportunities and this has impacts in our rating score. 

Corporate (non-financial)

We apply the same ESG criteria for all type of issuers. However according to their sector we change the weight per pilar of our GREaT framework. For example for each non-financial sector, we adopt a dedicated weight per pillar according to the most relevant ESG risks and opportunities identified. We also determined if sectors face more risks than opportunities and this impacts our rating score. As a consequence, the energy, materials and transport sectors have less (40%) companies with a rating between 1 and 5. On the contrary, sectors which provide solutions have mmore issuers ranked between 1 and 5 (60%). 

Securitised

We apply the same ESG criteria for all type of issuers. However according to their sector we change the weight per pilar of our GREaT framework. 

12.3. Additional information.[OPTIONAL]

For Infrastructure, Real estate and private debt, we have developed a dedicated ESG questionnaire based on our GREaT approach. The assessment is roll-out in every due-diligence pre-approval and is used as an input in the investment decision process.
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