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VBV Vorsorgekasse AG

PRI reporting framework 2020

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

Our actively managed fixed income investment must undergo our screening process in order to be eligible as investment universe. The screening process standards are set from three different ESG rating agencies. Moreover we are investing in green and social bonds.

 

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
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  

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

Our data source are external ESG research provider and we have an open discussion before we invest.

We use ESG factor specific analysis to match factors which are relevant for us with our investment criteria.

02.4. Additional information. [Optional]

A certain ESG level is a must for every investment.


FI 03. Processes to ensure analysis is robust

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

specify description

          external audit (OEGUT)
Austrian eco label certification
        

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
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

Our data source are external ESG research provider.

We use ESG factor specific analysis to match factors which are relevant for us with our investment criteria.

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

We favoured the investment proposal of one of our external managers to invest in a Northern Europe country´s first corporate green bond targeting renewable energy

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

We favoured the investment proposal of one of our external managers to invest in an Asian country´s social bond supporting low income households with affordable mortgages

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

We are not invested into countries with a high corruption index

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

          external audits
Austrian eco-label certifications
        
Positive/best-in-class screening

other description

          external audits
Austrian eco label certifications
        
Norms-based screening

other description

          external audits
Austrian eco label certifications
        

06.2. Additional information. [Optional]

All of our investment funds have dedicated ESG guidelines in their official documentation.


(B) Implementation: Thematic

FI 07. Thematic investing - overview

07.1. Indicate what proportion of your thematic investments are (totalling up to 100%):

50 %
20 %
30 %

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

We invest in green and social bonds both within our internally managed FI portfolio and within our externally managed FI portfolio.

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.

We will touch base and engage with the issuer.

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 started implementing an SDG based monitoring.


(C) Implementation: Integration

FI 10. Integration overview

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

Our investment universe is defined by our positive and exclusion criteria. Fundamental analysis lets us further characterize investable assets and assign them a score. Given an industry sector, assets with the highest score are identified as best-in-class.

We believe that financial report alone is no more likely to effectively perform the informative function of corporate reporting. Over the last two decades, criticism of how well financial reporting informs investors emerged: our economy is getting more knowledge- and information-based on the one hand, less machinery- and physical properties-based on the other. It follows that a growing proportion of intangible assets is not entirely or partially captured in the balance sheet.

Our need of integrating sustainability reporting into fundamental analysis arises from the deteriorated value relevance of accounting numbers, from economic reasons and from ethical reasons. We believe that integrating reporting fills the “information function” gap, accurately affects corporation´s access to finance and is a better proxy of the risk-return profile of a portfolio.

We agree that the status quo of corporate sustainability reporting has a significant margin of improvement to achieve filling the accountability vacuum. Evaluation of the level of corporation´s sustainability is problematic: firstly, sustainability itself has a qualitative nature, therefore it sometimes still lacks rigorous measurements, reporting standards comparisons and audit processes. Secondly, sustainability is a multidimensional measure: the same company might be environmentally-friendly but, at the same time, behave irresponsibly on other issues, and still getting a decent ESG score. 

We did some research on the relation between company´s sustainability score and portfolio performance. Among others, we found the outcomes of Fetsun and Söhnholz interesting. These researchers asked themselves how to improve portfolios through ESG parameters. According to their findings, total ESG scores themselves do not improve portfolio, and neither do scores of single E-S-G dimensions. The authors tried to explain portfolio performance through different numbers of ESG factors, and they discovered that ten most statistically significant factors can optimize the portfolio. Most of these factors are Governance-parameters. From these authors we were warned that considering too many ESG factors could potentially damage our analysis. What is more, a particular focus on the Governance dimension significantly integrates the informative function of corporate reporting.

The next step was to compute and to differentiate weights of each E-S-G dimension among sectors: for example, it does not make sense to give the same weight to environmental criteria when it comes to assess banks and oil companies. How should weights be calculated and how should they differ among sectors? Capelle-Blancard and Petit proposed a new weighting scheme to aggregate E, S and G criteria across sectors and to provide a composite sustainability score. Sectors considered were six: banks, basic resources, chemicals, consumer goods and services, industrial goods, technology. Relying on the hypothesis that the number of ESG news reflects the level of public concern, they used a large database on ESG news to build a weighting scheme that was proportional to media and NGO scrutiny. Specifically, for each sector they defined weight as a number of articles on a specific dimension of ESG, divided by the total number of news on ESG.

The first outcome was that the number of ESG news follows a growing trend of 21% per year. Secondly, authors noted that ESG issues play different roles across sectors: the range goes from a significant importance in consumer goods and service sector and technology, to the least concerned banking sector. Picture of this second remark, however, changes completely if we divide news between good and bad and consider only bad news: in this case, the sector under the closer scrutiny is Basic resources, followed by consumer goods and services. Banking sector remains the least concerned. The paper observed that bad news has a more negative impact on the market than good news, so the hypothesis of asymmetry of news was introduced. Table 3 reports the proposed weighting scheme under media and NGOs scrutiny  of bad news across the above mentioned sectors. Results show that for social concerns the highest weights, almost 50%, are for the traditional industries and services, e.g. consumer goods and services, industrial goods and chemicals. For corporate governance, the weight is the highest for industries that employed high-skill workforce, in particular the banking sector. Environmental issues are weighted more strongly for oil and gas firms than for other sectors.

We could draw three conclusions from the paper of Capelle-Blancard and Petit: firstly, the relevance of ESG issues follows a dynamic path and increases every year. Secondly, ESG contribution on assessing corporate´s performance varies among sectors. Last, the weight of each single ESG dimension strongly depends on the sector considered.

The bibliography collected drove us to the following in-house definition of integrated report lines and portfolio structure:

Company analysis must contain both financial and sustainability data. For the sustainability part, we rely on quantitative figures according to the GRI G4 framework;

Each company is given a final score. Relevance of sustainability is assessed according to the sector. Each single dimension of ESG should be weighted according to the sector;

Company analysis results in a score. As long as the score is below our minimum acceptable level, the asset is no more investable. This means that fundamental analysis itself can further restrict the investable universe defined by our investing criteria;

For the Environmental dimension, a particular focus has been devoted to the company´s carbon intensity. This measure must be recorded and compared with the benchmark and with the company´s track record itself;

 

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

SSA

Observations made on question FI 10.1 are valid.

 

Corporate (financial)

Observations made on question FI 10.1 are valid.

Corporate (non-financial)

Observations made on question FI 10.1 are valid.

Securitised

Observations made on question FI 10.1 are valid.

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
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 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

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

For fixed income investments ESG analysis, we focus on the issuer and if possible on the impact. For this reason, no standardized analysis is made.

 

 

Corporate (financial)

For fixed income investments ESG analysis we focus on the issuer and if possible on the impact. For this reason, no standardized analysis is made.

Corporate (non-financial)

For fixed income investments ESG analysis we focus on the issuer and if possible on the impact. For this reason, no standardized analysis is made.

Securitised

For fixed income investments ESG analysis we focus on the issuer and if possible on the impact. For this reason, no standardized analysis is made.

12.3. Additional information.[OPTIONAL]

We have a third party ESG check before we invest in a new fixed income instrument.


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