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ERAFP - Etablissement de Retraite Additionnelle de la Fonction Publique Pension Scheme

PRI reporting framework 2020

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
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%

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

Sovereign, municipal and supranational bonds are managed in-house. ERAFP's investment team is thus directly in charge of the implementation of the SRI policy defined by the Board. This approach is based on an ESG rating framework comprising ERAFP's five values (Human rights, Social progress, Employee democracy, Environment, Governance and transparency) which are declined into about forty criteria adapted to the specificities of countries and local governments.

Aside from the integration of best in class ESG criteria the Board of Directors decided to add three specific exclusion criteria for sovereign bonds. Are excluded from the investment universe, countries which:

- have not abolished the death penalty,

- practice torture,

- have recourse to child soldiers.

Our investment universe for direct investment is relatively limited since it only comprises € denominated bonds issued by OCDE countries. As a consequence rather than implementing issuer selection rules based on a ranking of European countries, it has been decided to set a minimum ESG average score to obtain in order to be eligible for investment : ERAFP cannot invest in a country with an overall ESG score which is below the average (50/100).

01.3. Additional information [Optional].

In addition, ERAFP invests in three sovereign Climate-related Bonds issued by EIB, French State and Ile de France region


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
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  

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

Based on customised ESG scores and analysis provided by Vigeo, ERAFP's investment team ensures that investment proposals comply with ERAFP's SRI policy for this asset class: ERAFP cannot invest in issuers with an ESG score below average (50/100). On a bi-annual basis our ESG third-party providers (Vigeo) assesses our bond portfolios and reviews are conducted with the Investment Policy Committee of the Board. The SRI team completes Vigeo analysis with more qualitative data when it's necessary and reports to the ERAFP investment team.

In addition, ERAFP monitors environmental impacts of its sovereign bonds portfolio based on the analysis of its service provider for this asset class. In 2018, ERAFP has monitored carbon intensity, green and brown shares, trajectory in term of temperature and also physical risks for its portfolio and its Benchmark. This analysis allows ERAFP to manage its portfolio climate-related risks and opportunities. In 2019, as ERAFP has changed its service provider which is more specialist of corporate issuers, analysis have been conducted on carbon footprint and energy mix only. We will work to improve the scope of analysis in future years but as the portfolio almost does not move, the 2018 results are still quite relevant. 

02.4. Additional information. [Optional]

q


FI 03. Processes to ensure analysis is robust

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

specify description

          The internal SRI team reviews the service provider's ESG analysis and completes it with its own research if necessary
        

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

03.3. Additional information. [Optional]


(A) Implementation: Screening

FI 04. Types of screening applied

04.1. Indicate the type of screening you conduct.

Select all that apply
SSA
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

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

Sovereign, municipal and supranational bonds are managed in-house. ERAFP's investment team is thus directly in charge of the implementation of the SRI policy defined by the Board. This approach is based on an ESG rating framework comprising ERAFP's five values (Human rights, Social progress, Employee democracy, Environment, Governance and transparency) which are declined into about forty criteria adapted to the specificities of countries and local governments. ERAFP cannot invest in issuers with an ESG score below average (50/100).

Aside from the integration of best in class ESG criteria the Board of Directors decided to add three specific exclusion criteria for sovereign bonds. Are excluded from the investment universe, countries which:

- have not abolished the death penalty,

- practice torture,

- have recourse to child soldiers.

In 2016, ERAFP added in its SRI Charter that it favours States that have ratified the International Labor Organisation's fundamental conventions.

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

During the selection process, all sovereign bonds are evaluated and rated on the 3 social values of the ERAFP's SRI charter for sovereign bonds:
- Social Progress: working conditions, quality of contractual guarantees, investment projects for employment development, promoting individual career choices, forward-looking employment strategy, trends in employment within the country
- Democratic Labour relations: Respect for the rights of trade unions and promotion of social dialogue, Improvement of health and safety conditions, respect for employee representatives, conventional practices
-Rule of law and Human Rights: The absence of discrimination, Freedom of opinion and of expression and respect for all other fundamental rights, preventing forbidden forms of labour, fight against corruption


In addition, with specific regard to States, ERAFP does not invest in the sovereign debt of States that:

- have not abolished the death penalty;

- practice torture;

- use child soldiers

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

During the selection process, all sovereign bonds are evaluated and rated on the environmental criteria of the ERAFP's SRI charter for sovereign bonds:

  • Documentation and implementation of an environmental strategy, control of environmental impact, integration of environmental criteria in supply chain, greenhouse gas limitation, biodiversity preservation and internal decision process and stakeholders consultation

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

During the selection process, all sovereign bonds are evaluated and rated on the governance criteria of the ERAFP's SRI charter for sovereign bonds:

  • check and balances and political system, external control, reject of tax haven, quality level of relations with population, efficiency of control of the public funds use

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

other description

          the SRI team reviews the ESG analysis of ERAFP's third-party provider on annual basis
        
Positive/best-in-class screening

other description

          the SRI team reviews the ESG analysis of ERAFP's third-party provider on annual basis
        

06.2. Additional information. [Optional]

ERAFP's risk team also monitors the implementation of ERAFP's SRI charter for sovereign bonds portfolio


(C) Implementation: Integration

FI 10. Integration overview

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

Sovereign, municipal and supranational bonds are managed in-house. ERAFP's investment team is thus directly in charge of the implementation of the SRI policy defined by the Board. This approach is based on an ESG rating framework comprising ERAFP's five values (Human rights, Social progress, Employee democracy, Environment, Governance and transparency) which are declined into about forty criteria adapted to the specificities of countries, supranational bonds and local governments. Based on customised ESG scores and analysis provided by Vigeo, ERAFP's investment team ensures that investment proposals comply with ERAFP's SRI policy for this asset class: ERAFP cannot invest in issuers with overall ESG scores below average (50/100). Moreover, for supranational bonds, the SRI rate on at least one of the 5 SRI values of ERAFP's SRI Charter could not be below 25/100. For local governments bonds, the SRI rate on at least one of the 5 SRI values could not be below the half of average of the benchmark. On a bi-annual basis our ESG third-party providers (Vigeo) assess our bond portfolios and reviews are conducted with the Investment Policy Committee of the Board.

Aside from the integration of best in class ESG criteria the Board of Directors decided to add three specific exclusion criteria for sovereign bonds. Are excluded from the investment universe, countries which:

- have not abolished the death penalty,

- practice torture,

- have recourse to child soldiers.

Since the ERAFP SRI Charter review in 2016, ERAFP also specifies in its SRI Charter that it favours States that have ratified the International Labor Organisation's fundamental conventions.

Our investment universe for direct investment is relatively limited since it only comprises € denominated bonds issued by OCDE countries. As a consequence rather than implementing issuer selection rules based on a ranking of European countries, it has been decided to set a minimum ESG average score to obtain in order to be eligible for investment : ERAFP cannot invest in a country with an overall ESG score which is below the average (50/100).

On a bi-annual basis our ESG research providers (Vigeo) provide us with a third-party assessment of our portfolio: they identify the issuers in our portfolio which do not respect our SRI requirements according to their research.

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

SSA

We manage in-house only sovereign, municipal and supranational bonds.

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
SSA
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 in Additional Information

11.2. Additional information [OPTIONAL]


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

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

SSA

All the countries in our investment universe are rated according to our ESG rating framework which comprises about 40 criteria. Countries have to obtain a minimum overall ESG score of 50/100 in order to be eligible to ERAFP's investments.

In order to support investment decisions country profiles are elaborated and updated on a bi-annual basis. Each issuer's profile includes a section on ESG which summarizes the strengths and weaknesses of the country on environment, social and governance issues.

In addition, the measure of specific environmental impacts conducted with a service provider is updated every year. In 2019, the sovereign bonds portfolio has a carbon intensity 2,6% lower than its benchmark (only composed of euro-denominated securities issued from OECD countries)

12.3. Additional information.[OPTIONAL]


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