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Eurazeo

PRI reporting framework 2020

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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.
Corporate (non-financial)
00 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.

As a subsidiary of Eurazeo Group, Idinvest and Eurazeo share the same vision of responsible investment. Idinvest is convinced that strong and sustainable growth cannot take place without considering non-financial aspects and integrates ESG-criteria across all of its activities and throughout the lifecycle of its investments. Idinvest's responsible investment approach in private debt investments is adapted to the specificities of this asset class and uses a combination of screening and integration strategies:

  • ESG screening is used as a negative/exclusionary filter, to exclude investments in banned sectors and in companies with unethical practices (Idinvest's exclusion policy also includes a watchlist of sectors with high environmental or social-related risks).
  • ESG integration is used to assess and include ESG factors in investment decisions. It aims at identifying potential ESG-related risks and/or opportunities of target companies, including climate-risk mapping.

Idinvest implements plans for ensuring continuous progress throughout the investment lifecycle.

01.3. Additional information [Optional].

The Group's private debt business line is managed by Idinvest Partners.

Having signed the PRI and IC International (former Initiative Climate 2020) , Idinvest is convinced that solid and sustainable growth can only be achieved by taking into account the impacts of economic activities throughout the company. This is the reason why at Idinvest, ESG (the three pillars of extra-financial reporting) have become Sustainability and Impact. The difference is not purely semantic but reflects a change in mindset. Whilst ESG can have a passive dimension, Idinvest wishes to be active, an agent of change that makes a positive contribution to confronting the long-term challenges faced by society.

With its Sustainability & Impact philosophy, Idinvest is one of the pioneers in measuring the impact of its portfolio in relation to the United Nations Sustainable Development Goals (SDG) and is working towards making improvements day after day. As a result of this pioneer approach, Idinvest contributed to the development of an impact mapping tool and conducted an assessment of its portfolios' exposure to the SDGs in 2019. The assessment consisted of an analysis of the potential contribution and/or obstruction of its portfolio companies to the achievement of the SDGs and allowed for the identification of portfolio companies presenting high risks and opportunities for the transition towards a more sustainable and inclusive society. The impact mapping tool will be reviewed and improved in order to reconduct the assessment in 2020.


FI 02. ESG issues and issuer research (Private)


FI 03. Processes to ensure analysis is robust

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

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

03.3. Additional information. [Optional]

In light of the specificities of this asset class, Idinvest Partners has defined a tailored procedure to ensure the quality of the execution of the ESG process.

  • A comprehensive ESG assessment is conducted during due diligence phase and when appropriate, through an external ESG Due Diligence. The results of this initial assessment are included in investment documents and discussed with the investment committee.
  • An ESG clause is included within direct lending legal documentation.
  • ESG KPIs are reviewed on an annual basis through an ESG reporting sent to all portfolio companies, allowing for the identification of potential improvements or degradations of extra-financial performance.
  • In addition, an ESG and climate-risk mapping is made at portfolio level on an annual basis.
  • Idinvest Partners provides feedback to portfolio companies and improvement recommendations. Idinvest Partners provides dedicated support to portfolio companies when requested.
  • The results of the annual monitoring exercise are consolidated and publicly disclosed in the annual S&I report.

(A) Implementation: Screening

FI 04. Types of screening applied

04.1. Indicate the type of screening you conduct.

Select all that apply
Corporate (non-financial)
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

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

Idinvest Partners is committed to excluding certain sectors or activities that may constitute high ESG or reputational risks, and to analyse other sectors considered to be risk-sensitive.

Idinvest Partners' exclusion policy is therefore three-fold:

  • An exclusion list is defined and bans investments in pornography and arms (including anti-personnel mines and cluster bombs).
  • An ESG watchlist is defined and includes the following sectors, for which additional vigilance during due diligence is required: agriculture, alcohol, chemicals, defence, forestry, gaming/gambling, mining, GMOs, fishery, oil and gas, energy production, cigarettes.
  • Regardless of the business sector, certain practices lead to exclusion (namely corruption, money laundering, human rights abuses, negative impact on local communities or indigenous populations, child labour, forced labour and negative geographical footprint in conflict areas).

In addition to the exclusion policy, Idinvest Partners designed a proprietary ESG assessment grid which considers ESG and SDG impact criteria. The ESG pre-investment grid is systematically completed during investment selection processes and contributes to identify extra-financial risks and opportunities.

04.3. Additional information. [Optional]


FI 05. Examples of ESG factors in screening process (Private)


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 list of excluded sectors is among the control checks that the investment committee and the middle-office operate.
        
Norms-based screening

other description

          Idinvest has a dedicated 3-people Portfolio Monitoring team for Private debt investments. Their responsibilities include the monitoring and the risk management of the portfolio.
        

06.2. Additional information. [Optional]


(C) Implementation: Integration

FI 10. Integration overview

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

Idinvest Partners has determined several processes aiming at integrating ESG considerations into traditional financial analysis and throughout the investment life cycle.

Pre-Investment:

Private debt analysts systematically conduct a first assessment of the ESG and impact stakes of investment targets. The results are consolidated into an ESG and impact profile, which includes an initial score that is to be monitored throughout the investment lifecycle. This Profile is further discussed at the Investment Committee and integrated in investment documents such as the Investment Memorandum. This step is a requirement for the validation of the investment.

The initial review allows to identify potential ESG risks and improvement areas. When high ESG or reputational risks are identified, the investment may be dropped. Specific ESG due diligence may be conducted to assess whether the identified ESG risks may result in impacting the relevance of the business model, and hence the financial performance of the company (e.g. reputation risk, market risk - change in consumer demand, regulation/ taxation) and if these risks are mitigated.

Post-investment:

Idinvest Partners has put in place a comprehensive process to monitor ESG risks and opportunities during the holding period:

Direct lending legal documentation includes an information on Idinvest's ESG commitments and ESG reporting requested to portfolio companies annually.
Idinvest Partners monitors the ESG performance of portfolio companies through this annual ESG reporting. In its role as a responsible investor, Idinvest provides KPI dashboards with improvement recommendations to portfolio companies. The objective is to further empower them on the management of ESG issues.
When appropriate, specific ESG audit/ reviews may be conducted on some portfolio companies.
ESG matters are expected to be discussed at least once a year within portfolio companies at Board level.
Every year, ESG best practices identified at portfolio companies are highlighted within the Idinvest Partners' annual ESG report.

In addition, together with a strategy advisory firm, Idinvest Partners has developed in 2018 a proprietary Sustainability & Impact matrix aiming at identifying its portfolio's impact on the achievement of the Sustainable Development Goals. The matrix is reviewed on an annual basis and allows for the identification of companies contributing most/ having a negative impact on these SDGs. This mapping also serves as an educational tool for companies that are not fully aware of all the potential impacts their activity may have on society.

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

Corporate (non-financial)

Idinvest Partners only manages private debt within its fixed income activity. For more information please see question FI 10.1.

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
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
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.

Corporate (non-financial)

Idinvest Partners' responsible investment integration approach to its Fixed Income investments is broad as it includes both environmental, social and governance-related and SDG impact considerations. For example:

  • Environment: Environmental criteria are systematically considered as a part of Idinvest's overall ESG assessment. Idinvest Partners conducts climate-risk assessments of its largest fixed income portfolios. This assessment allowed for the identification of companies highly exposed to climate risks and to raise their awareness (and that of the investment directors) on these issues.
  • Social: Idinvest Partners closely monitors social indicators at portfolio level. This is specifically the case of the job creation indicator which is studied at portfolio companies and aggregated at portfolio level on an annual basis. In addition, Idinvest Partners encourages its portfolio companies to deploy social initiatives related to staff training or profit-sharing scheme for example.
  • Governance: Idinvest Partners can participate in governing bodies of portfolio companies (observer seat). Idinvest Partners encourages the nomination of independent Board members of portfolio companies and the formalisation of structuring policies and procedures.

Idinvest has issued an Engagement policy for Private debt investments which encompasses all three pillars.

12.3. Additional information.[OPTIONAL]


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