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DNCA Finance

PRI reporting framework 2019

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

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

At DNCA, we make a difference between:

- SRI strategies (2% AUM) that combine thematic, screening and incorporation

- ESG incorporation that applies for all the funds but only for equities and corporate bonds.

- All the rest where we do not incorporate any ESG analysis because it make little sense in our opinion (SSA).

 

01.3. Additional information [Optional].


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
Corporate (financial)
Corporate (non-financial)
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  

specify description

          Company meetings with top management and site visits
        

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.

At DNCA we do no use any external data from providers. We focus on internal research based on CSR information and ESG raw data coming from companies (annual report and dedicated CSR report). To which, we add information collected through company meetings and newsflow. 

02.4. Additional information. [Optional]


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]

The RI team works in coordination with the risk management team, the compliance team, the investment teams (who all have access to our internal ABA ESG platform) to ensure that the ESG screens are robust and well implemented. We are also very transparent with our clients and provide regularly upon request samples of our ESG analysis to them. The monthly ESG committee, which includes the risk management team, the compliance team, the legal team, the investment teams, commercial teams, also discuss and review how our ESG screens are applied to the relevant funds.

Last but not least, all our SRI funds (BEYOND range) have been certified according to the French SRI Label, which mostly evaluates the robustness of SRI procedures.


(A) Implementation: Screening

FI 04. Types of screening applied

04.1. 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

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

We assess companies and not the financial instrument in itself. As such, our methodology for fixed income is the same as equity.

Our ESG analysis is based on a combined analysis of the ESG risks the company faces (the "Responsibility" rating) and the sustainable investment opportunities it is positioned to tap into (the exposure to the sustainable economic transition).

Our "Responsibility" rating is built on the assessment of 4 pillars: governance, environment, labour and society. It results in a rating out of 10 and a recommendation on the level of responsibility risk. Our "Sustainable Transition" assessment is based on the company's exposure to the sustainable transition themes that we have identified in the 4 transitions we follow (demographic, medical, economic, lifestyle, ecological).

We also exclude from our SRI funds companies facing high level of controversies, that we consider as being in breach with international norms (UNGC, OECD, ILO, UNGP).

Then, we do have a strict exclusion of controversial weapons for every funds; and we apply sector/activity exclusions for SRI strategies (tobacco, coal, unconventional oil and gas, defence).

04.3. Additional information. [Optional]


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

Due to a poor human resources management and lack of transparency on social issues we decided to divest from a French media company. Several controversies on labour issues and fatal accidents resulted in a poor ESG rating, highlighting the high level of ESG risks.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

In coordination with the Fixed Income team, we reinforced our investment in a pure recycling play in France, as both the financials and the ESG/Sustainable transition assessments were good (pure player in the Ecological transition).

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

In the banking sector, there are very few examples of companies that are positively exposed to the sustainable transition. We selected an Italian bank that in addition to having a good management of ESG risks, derived an estimated 5.2% of revenues from SME lending. This is a good example of exposure to Access to Financial Services, which is one of our Sustainable Transition themes.

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]

Pre-trade controls have been put in place by the internal control and risk team on controversial weapons (across all funds) and on ESG criteria for our SRI funds. Stocks that do not meet the relevant criteria/threshold cannot be traded. This is the first line of defence to avoid any breach.

The internal control and risk team has also established post-trade alerts. If breaches are identified, the department of internal control and risk send a formal alert to the portfolio manager, the head of the Responsible Investment team and the CIO. Breaches have to be explained and regularised within a week.

An assessment of all the breaches identified is made regularly to correct processes, if needed

 


(B) Implementation: Thematic

FI 07. Thematic investing - overview

07.1. Indicate what proportion of your thematic investments are:

3 %
1.5 %

Specify

          Traditional corporate bonds from issuers exposed to the sustainable transition
        
34 %

07.2. Describe your organisation’s approach to thematic fixed income investing

We do not invest regularly in Social or Green bonds but we are open to opportunities in this segment. Our SRI Fixed income fund and SRI diversified fund are currently invested in one green bonds and one social bond. We will design a dedicated Green bond and Social bond assessment methodology in 2019.

In addition, all companies in our Fixed Income portfolios have been analysed through our combined Responsibility/Sustainable Transition screen. As such, we monitor the percentage of companies that are exposed to sustainable transition themes. Our SRI Fixed Income portfolio is invested in 34.5% of issuers exposed to the sustainable transition. In all our SRI portfolios, we seek to maximize this portion, without altering the investment philosophy.

07.3. Additional information [OPTIONAL]


FI 08. Thematic investing - themed bond processes

08.1. Indicate whether you encourage transparency and disclosure relating to the issuance of themed bonds as per the Green Bonds Principles, Social Bond Principles, or Sustainability Bond Guidelines..

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

As we don't have a formalised process of investing in Green or Social Bonds, this question is non applicable.

08.3. Additional information. [Optional]


FI 09. Thematic investing - assessing impact

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

09.2. Additional information. [Optional]

We analyse the contribution to the sustainable transition for each company (we look at issuers, not financial instruments, so we use the same process for equity and fixed income). This analysis identifies a company's exposure (% of revenues) on one or more sustainable transition themes. A total of 38 themes and business areas have been identified as contributing to the sustainable transition. This number can vary every year, depending on the materiality of each transition theme and the emergence of new ones.

Our framework of sustainable transition themes is set up around 5 transitions: demographic, medical, economic, lifestyle and ecological. Each company is assessed according to its absolute level of revenues in each transition theme. Exposure ranges from 0 to 100% and results in a recommendation on the extent of the company's exposure and contribution to the sustainable transition going from a "no exposure" position to a "pure player" profile. 

This assessment, along with the "Responsibility" risk analysis, enters into account when building the SRI Fixed Income portfolios.


(C) Implementation: Integration

FI 10. Integration overview

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

Our proprietary ABA model (internal platform to analyse and rate companies on ESG factors) results in a matrix that combines Corporate Responsibility Risks (Severe risk, high risk, moderate risk, low risk and managed risk) and Sustainable Transition Exposure (No, low, trend, major and pure player). This combination results in 4 levels of recommendation and each level has an impact on the risk premium :

1- Conviction: -20% on the risk premium rate

2- Strong opportunity: -10% on the risk premium rate

3- Opportunity: -5% on the risk premium rate

4- Weakness: +10% on the risk premium rate

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

Corporate (financial)

We look at issuers, not financial instruments. As such, our ESG analysis is the same when looking at equity and fixed income. On the corporate fixed income side, we analyse in the same way financials and non-financials in principle, but we tend to give more weight to governance issues for financial issuers. We analyse non-financial issuers depending on the sector and company's specifics, which can impact the weighting we give to each responsibility pillar.

Corporate (non-financial)

We look at issuers, not financial instruments. As such, our ESG analysis is the same when looking at equity and fixed income. On the corporate fixed income side, we analyse in the same way financials and non-financials in principle, but we tend to give more weight to governance issues for financial issuers. We analyse non-financial issuers depending on the sector and company's specifics, which can impact the weighting we give to each responsibility pillar.

10.3. Additional information [OPTIONAL]


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
Corporate (financial)
Corporate (non-financial)
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 explained in detail in the previous section how the ESG analysis is integrated in the fundamental analysis, and thus valuation, of the company, across our equity and corporate fixed income investments.

For SRI funds, the impact of the ESG assessment is also directly on the portfolio construction by defining the eligible universe:

1- Screen out of companies facing high ESG risks (below our 4 /10 rating threshold): for European equity strategies the exclusion rate is about 30%, for global equity strategies the exclusion rate is about 50%, for European corporate bond strategies the exclusion rate is about 60%. The result of this first screen is our "Responsible" Universe.

2- Screen in of companies that have a positive impact on sustainable transition: this represents about 50% of the "Responsible universe". The result of this second screen is our "Sustainable & Responsible" Universe.

All SRI Funds must invest only in companies that are in the "Responsible" universe and seek to maximize the share of companies in the "Sustainable & Responsible" universe.


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
Corporate (financial)

Environmental

Social

Governance

Corporate (non-financial)

Environmental

Social

Governance

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

Corporate (financial)

Corporate responsibility is evaluated and then rated  out of 10 (Responsibility rating). The analysis is composed of 4 themes: shareholders responsibility, environmental responsibility, labour responsibility and social responsibility. We have retained the four traditional dimensions of corporate social responsibility, selecting for each only the most material analysis criteria.  

Each theme is built according to the most relevant material issues for companies (sector and company's specifics). The number of analysis criteria is deliberately limited to 24, in order to retain only the most material issues. For financial issuers, governance issues are deemed the most material and will thus typically account for about 40% of the overall "Responsibility" rating.

Here are the detailed ESG criteria used:  

- shareholders (G): Respect for minority shareholders, Independence of Board and committees, Accounting risks, Quality of management, CEO compensation and Quality of financial reporting

- environment (E): Environmental management, Regulation and certification, Climate & energy policy and Impact on biodiversity and externalities

- labour (S): Corporate culture and HR management, Labour relations and working conditions, Health and safety, Attractiveness and recruitment, Training and career management and Promotion of diversity

- social (S): Product quality, safety and traceability, Supply chain management, Respect for local communities and human rights, Ability to innovate, Customer satisfaction, Protection of personal data, Corruption and business ethics and Tax policy and practices

Corporate (non-financial)

Corporate responsibility is evaluated and then rated  out of 10 (Responsibility rating). The analysis is composed of 4 themes: shareholders responsibility, environmental responsibility, labour responsibility and social responsibility. We have retained the four traditional dimensions of corporate social responsibility, selecting for each only the most material analysis criteria.  

Each theme is built according to the most relevant material issues for companies (sector and company's specifics). The number of analysis criteria is deliberately limited to 24, in order to retain only the most material issues.

Here are the detailed ESG criteria used:  

- shareholders (G): Respect for minority shareholders, Independence of Board and committees, Accounting risks, Quality of management, CEO compensation and Quality of financial reporting

- environment (E): Environmental management, Regulation and certification, Climate & energy policy and Impact on biodiversity and externalities

- labour (S): Corporate culture and HR management, Labour relations and working conditions, Health and safety, Attractiveness and recruitment, Training and career management and Promotion of diversity

- social (S): Product quality, safety and traceability, Supply chain management, Respect for local communities and human rights, Ability to innovate, Customer satisfaction, Protection of personal data, Corruption and business ethics and Tax policy and practices

12.3. Additional information.[OPTIONAL]


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