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BNP Paribas Asset Management

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.

At the core of all our investment processes, analysts and portfolio managers integrate a consideration of relevant ESG factors into their company, asset and sovereign evaluation and investment decision-making processes. As reflected in our investment beliefs, this process allows them to identify and assess areas of risk or opportunity which may not be understood by all market participants, and which may provide them with a relative advantage.

The process to integrate and embed ESG factors is guided by formal ESG Integration Guidelines. Critically, to support the ESG integration process and make sure that all investment strategies managed by BNPP AM are run in line with the ESG Integration Principles we set out, we set up an ESG Validation Committee. Between Q4 2018 and the end of 2019, each investment team presented its proposed ESG Integration Process for review and validation.

We put below some of the common ESG Integration Principles, which apply to all the strategies that are in the scope of our sustainable investment approach.

PHILOSOPHY

  • Sustainability is embedded in our investment philosophy.
  • All investment teams will implement our Global Sustainability Strategy.
  • We recognise that the level of ESG integration achievable over short to medium term horizons varies between asset classes and strategies.
  • Some common principles for ESG integration will apply across all asset classes, while others are asset class or strategy-specific.

INVESTMENT PROCESS

  • Each investment team is fully responsible for their investment process, and all investment research, analysis and decisions resulting from the application of this process.
  • Investment teams are ultimately responsible for the integration of ESG factors in their investment processes.

RESEARCH

  • ESG analysis on individual entities will concentrate on those factors deemed to be material for the respective sector by the Sustainability Centre, with input from the investment teams.
  • Qualitative ESG analysis on individual entities will primarily be undertaken within the investment teams, in collaboration with the Sustainability Centre.
  • We will avoid investing in a public entity without an ESG score, performing qualitative ESG analysis in the absence of a quantitative ESG rating.
  • We will avoid investing in a private entity without performing ESG due diligence (which could include qualitative analysis, or receiving a completed ESG questionnaire).

EXCLUSIONS

  • We will not invest in companies in violation of the UN Global Compact Principles, the UN Guiding Principles on Business and Human Rights or the OECD Guidelines for Multinational Enterprises (OECD MNE Guidelines).
  • Companies struggling to meet the standards laid down in the UN Global Compact Principles, the UN Guiding Principles on Business and Human Rights or OECD MNE Guidelines will be put on a watch list (or not invested in)
  • We will implement BNPP AM's sector policies, in collaboration with the BNP Paribas Group.

STEWARDSHIP AND ENGAGEMENT

  • We will actively own our passive investments through stewardship, engagement and voting.
  • We will avoid investing in a weakly rated entity without actively engaging (or planning to actively engage in the near future) particularly on the key issues identified.
  • Holdings of weakly-rated public entities will need to be justified by additional qualitative analysis integrating ESG factors, working closely with the sustainability centre.
  • As a last resort, we may disinvest from weakly rated entities which do not respond to engagement, and which show no sign that they will place greater emphasis on sustainability considerations in the future.

KPIS AND REPORTING

  • Integrating ESG factors into our investment processes should have a measurable positive impact on the ESG characteristics of our portfolios.
  • We should aim to hold portfolios with more positive ESG characteristics than their respective (invested) benchmarks. This includes holding portfolios with a lower carbon footprint than their respective (invested) benchmarks.Note:The initial focus for the above KPIs is corporate issuer scores (e.g. sovereigns, derivatives and cash excluded at this stage). 

BNP Paribas AM portfolio managers have access to ESG research and scores (with ongoing coverage extensions still underway in some pockets, such as quasi-sovereign and US High Yield). This comes as a complement to their financial/fundamental analysis.

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

SSA

Our ESG research team has developed dedicated ESG methodologies to assess sovereign, supranational and agencies issuers. The scores have been used by SRI fixed income portfolio managers for more than ten years in our SRI funds (now called Sustainable + funds).

In 2018 and 2019, we developed an ESG scoring methodology that facilitates the incorporation of ESG considerations into SSA Fixed income investing. 

There are two levels of analysis in BNPP AM scoring methodology for sovereigns, and emphasis is put on Climate Change, considering the current environmental and geopolitical – following the signature of the Paris Agreement in 2015 – context. The two levels are:

  1. The ESG Performance quantitative assessment. This assessment is now sensitive to countries’ income level, to build rankings by comparing like with like.
  2. An overlay that consists in: 
  • A Climate overlay. The Climate overlay is determined by an assessment of the countries’ commitment (Nationally Determined Contributions) to reduce their GHG emissions to comply with the goals of the Paris Agreement (keep climate change below 2 degrees). This assessment follows an innovative methodology developed by Beyond Ratings. The Climate overlay also uses information on the countries’ policies adopted for tackling climate change, provided by the London School of Economics.
  • A Qualitative adjustment. The qualitative adjustment is determined by investment teams’ view on the evolution of countries’ policies & results from potential engagement with countries.

This research is made available to all investment teams, and influences different investment processes in different ways. For example, sovereigns SRI funds exclude bottom 3 deciles. Or emerging funds apply the “better than the benchmark rule”

Finally, BNPP AM is committed to actively engage with regulators, in order to help shaping the markets and the rules that guide and govern companies’ behaviour.

 

Corporate (financial)

We are able to assess ESG issues on both quantitative and qualitative aspects. The qualitative overlay takes into account a forward looking analysis based on the firm-wide strategy and ambition.

The ESG analysis of issuers is carried out by grouping companies into peer groups based on geographic, sectorial and sample size considerations.

By creating a strong analytical framework around ESG research, the ESG team is able to make an independent judgement on companies' performance on a range of ESG indicators most relevant and material to their sector.  

Our proprietary scoring methodology combines a quantitative scoring methodology, which is currently being enhanced, and a qualitative assessment. It then enables an ESG ranking of issuers. This information is disseminated firm-wide.

ESG analysts monitor and follow the sector's ESG evolution and the companies' ESG behaviour throughout the year. When a company faces a relevant change and/or controversy, it will be monitored and a meeting may be set up with the company. Depending on the outcome of the meeting, the analyst may raise or lower the company's score and rating (or even propose that the company be put on the exclusion list, depending on the nature of the issue/controversy).  

As explained in section 04, Responsible Business Conduct and sector policies exclusions are reviewed quarterly - information from our external provider on UN Global Compact breaches is reviewed internally by our ESG research & Stewardship teams. They are then presented to the Sustainability Committee chaired by our CEO for final approval four times a year.

Finally, beyond integrating ESG evaluations into their investment decisions, the different FI teams may further integrate ESG into their risk ratings and analysis. For example, our Global Credit team integrate ESG-related risks at each step of their analysis process, thanks to a systematic Sustainability Risk Assessment.

Corporate (non-financial)

Please refer to the answer above

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]

For the ‘ESG analysis is integrated into portfolio weighting decisions’ analysis – with SSA, this relates to our EMD and Best in Class portfolios. Developed sovereign strategies consider issuer ESG related indicators but do not systematically reflect them in portfolio weights.


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

Please refer to question 10.1 on our ESG integration process.

Corporate (financial)

ESG sector reviews and ESG scores are shared with all portfolio managers within the organisation through our network of ESG champions and the use of IT tools.

We are moving towards a more systematic integration of ESG elements in all the PMs investment processes.

Please refer to question 10.1 on ESG integration process

Corporate (non-financial)

 Please refer to the previous answer.

12.3. Additional information.[OPTIONAL]


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