In this section we will provide you with a description of the fund selection processes that we follow for two distinct parts of our business: (1) fund selection incorporating ESG criteria for the management of portfolios of Occupational Pension Funds that have to observe the provision of the IORP II Directive regarding the incorporation of ESG criteria in the investment decision making process and the assessment of sustainability risks, and (2) fund selection incorporating ESG criteria for the management of Fund of Funds specifically set up for ESG incorporation.
(1) Fund Selection process for the management of portfolios of Occupational Pension Funds: We employ a process that identifies the funds that use a dedicated ESG compliant investment process. Thus, we invest in ESG compliant funds for the majority of our fund allocation. As part of our qualitative fund selection process, we regularly conduct one-to-one meetings and conference calls with the dedicated fund managers to get an in-depth analysis of their ESG investment process and make sure that they stick to this process. It is also noteworthy that we have organized dedicated meetings with some of our third party fund providers' ESG analysis teams that proceeded to deliver an extensive presentation of the ways they approach ESG incorporation with a special focus in the way they incorporate their own ESG criteria along with the weight that they apply to each of these criteria. Moreover, some of our providers also exhibited the questionnaire they use when analysing a company for ESG factors and showcased the way they onload the respective answers to their systems in order to produce their in-house rankings that they then couple with rankings they get from other data providers. In this context, we are quite confident that the ESG compliant funds offered by our third party providers are indeed incorporating in a meticulous and pedantic way ESG factors. As a next step, we also do detailed look through into the ESG compliant funds that we choose in order to also enhance our investment idea generation process for individual stocks and bonds.
We also rely on the ESG ratings of the funds under selection that are issued by well trusted indpendent European and global organizations or government agencies. We assign an ESG score of 100 to these funds. The fund managers themselves also update a list with "ESG" integrated funds that do not have an independent third party ESG certification, but nonetheless have an investment process that is ESG focused and designed to systematically capture ESG risks and opportunities in the portfolios. We assign an ESG score of 66 (2/3) to such funds. We then update our third party funds database with all the relevant ESG funds in order to facilitate our sectorial ESG fund selection.
Our IOPF ESG investment process entails investing mainly in ESG certified funds and ESG compliant funds in order to make sure that the funds we invest in have a pure ESG strategy with a dedicated ESG investment process.
In addition to the above, we also use the following tools and systems to screen mutual funds in terms of their ESG compliance: (i) Mercer ESG rating that used to be available on Bloomberg and was applicable at the investment strategy level of each fund, (ii) Morningstar ESG ratios, and (iii) Eurobank AM Fund of Funds ESG process that will be described below.
(2) ESG Fund of Funds Selection and Investment Process: We start with a universe of UCITS available in Bloomberg, which comprises of approximately 1,500 funds. First, we exclude all funds with a Mercer ESG rating of 3 and above (Mercer ESG ratings range from ESG1 to ESG4 being the lowest). We then take the higher rated funds, ESG1 and ESG2 as well as all non-rated ones and create an Investment List in Morningstar Direct. We take the Morningstar Sustainability Score (which incorporates Sustainalytics ESG data) of the portfolios and we exclude funds that are ranked below the 40th percentile in the Sustainability Score percent-rank. It should be noted that Morningstar calculates the Portfolio Sustainability Score by combining a fund's Portfolio ESG Score with its Portfolio Controversy Score, by deducting one fifth of the Portfolio Controversy score from the Portfolio ESG one. The resulting score is displayed as a number between 0 and 100. From a sustainability standpoint, higher scores are better than lower ones and indicate that a fund has, on average, more of its assets invested in companies that score well under Sustainalytics' ESG methodology. The top 60% selected funds are then ranked with our Quantitative Model developed for Fund Selection adjusted for ESG. From each of the six sub-universes (four for equity funds and two for fixed income funds) we take the 10 to 15 highest scores. In the next step we apply a three factor (equal weight) ranking and sort them for max Momentum, low Volatility and Quality. For ESG incorporation, Quality may include ESG and Governance scores (equity funds) or Environmental Scores (Fixed Income Funds). In the final stage of portfolio construction we adjust the asset class exposure as well as the geographic/style allocation based on our assessment of the current market conditions and of the fund's or the account's specific mandate and investment guidelines.