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Grupo Fineco

PRI reporting framework 2020

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

(C) Implementation: Integration

FI 10. Integration overview

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

As a first step, the negative screening applies the same to equity and fixed income investments. For SSAs, we have a different set of negative screening that we have already explained.

For the fixed income analysis, the next step is to gather ESG data. Given that we have limited resources, we obtain it from an external research provider (MSCI ESG Research) for corporates and financial institutions. For SSAs, we get it from different public sources: stats from Treasury of different countries, public domains such as Human Development Index, International Transparency Corruption Index, etc. 

This year, we have additional sources of information such as the specialized sell-side reports on ESG issues from two top broker entities such as JPM and Kepler. They include extensive ESG research of how sovereigns are working on ESG issues and the risks that can arise from unbalanced budgets, exposure to fossil fuels income, social unrest, etc. together with significant analysis on sectors and specific corporate and financial institutions, such as energy transition issues, physical risks, risks of strikes from their labour, etc. 

Those ESG variables are integrated in each analyst´s research and are explicitly discussed with the portfolio managers. We do not have an automated algorithm that links ESG metrics with spreads, but deterioration of ESG profile of an issuer is linked to higher yields that are needed for that issue to be included in the portfolio or it might trigger a sale. We must remind that the expert groups that we talked about in the Equity module also are available for contrast for fixed income analysts and portfolio managers in order to improve the credit analysis and what duration risk we might want to take. 

One thing that we continue to believe it is important is that there is a constant dialogue between the equity and fixed income analysts in relation to ESG in order to be more efficient.

In relation to green, social an sustainable bonds, we pay attention to the ESG quality of the issuer and the coherence of the business strategy with the environmental and social parameters.

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

SSA

For sovereign issuers and issues, the previously described process works.

Corporate (financial)

For corporates (financial and non-financial), the previously described process works.

 

Corporate (non-financial)

For corporates (financial and non-financial), the previously described process works.

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)
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

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

SSA

We pay special attention to the "E" metrics since we see that there is growing unisured number of properties that somebody will have to pay for when (not "if") a major natural disaster happens. And we increasingly pay attention to the sustainability of public finances to respond to those challenges. We ask for a higher yield to those countries with distresses budgets and with higher exposure to unsinsured properties within its country. The report prepared by Munich Re on a yearly basis is very insightful. We also pay attention to the sustainability of tax income and we analyze where tax revenues come from and what the exposure to business activities are at risk due to energy transition (i.e. percentage of jobs in activities that are already being impacted by energy transition, such as the automotive sector). Those countries are at risk of having large number of unemployed people, putting at risk their tax income and potentially generating social unrest. 

Corporate (financial)

We have increased our sources of ESG analysis this year due to our hiring of broker reports from two top firms. This has provided us with larger insights apart from the ones we receive from MSCI ESG Research. In terms of financial institutions, we play equal importance to the three variables:

- Environment: we see increasing reputational risk from financing activities related to fossil fuels (North Dakota project, for example) and which banks have large fees from these activities, since that income is increasingly at risk

- Social: in Europe especially, banks have significant P&L issues due to the low interest rates. We are increasingly putting a lot of effort in identifying jurisdictions where it can be very difficult to reduce the headcount to improve their cost sustainability due to "social issues" (for example, in Spain)

- Governance: "G" has been always a key variable to analyse at every company but especially in banks due to issues related to uncontrolled trading, money laundering, etc.

Corporate (non-financial)

We have increased our sources of ESG analysis this year due to our hiring of broker reports from two top firms. This has provided us with larger insights apart from the ones we receive from MSCI ESG Research. In terms of non-financial institutions, we currently pay more attention to E and G rather than S given that social issues are being increasingly important (Especially data privacy in Europe) but we think E (energy transition for the energy companies for example, or physical risk related to hotels with high exposure to specific geographic areas like the Caribbean or first-line hotel next to the sea) and G (complex ownership structures such as the one at Renault) are having more weight in yields currently. However, we do not disregard the "S" but we think it is not as important yet.

12.3. Additional information.[OPTIONAL]


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