Since 2008, METROPOLE Gestion has established a methodological basis independent of the major ESG rating agencies by establishing an academic collaboration with the Clermont Auvergne University in order to produce an in-house company rating system proprietary to METROPOLE Gestion.
1. The reference framework:
The frame of reference is the architecture of the rating system. It is organised into 4 orthogonal pillars:
2. Quantitative analysis: data metrics and aggregation:
- We use Eikon (Thomson Reuters), one of the largest extra-financial databases (5000 companies worldwide), which provides stable data over time, combining official corporate data (annual reports, sustainable development reports) and details of any controversies sourced from press agencies.
- Using this data, we build 150 indicators to measure each element of our standards, favoring outcomes over drivers deployed (75% - 25%).
- Each pillar is equally weighted.
- Best in Class rating: each company is rated in relation to its sector to obtain a Best in Class rating.
- Best Effort rating (1 to 5 stars): this takes into account the change in extra-financial rating over the past four years, with additional weighting given to the last year.
- Ratings are reviewed annually.
3. Qualitative analysis:
The quantitative rating is verified and completed by the qualitative analysis. It is based on the following elements:
Consideration of current controversies
All the controversies relating to stocks held in the portfolios are fed back and monitored weekly.
On new companies studied, controversies are analysed over the last three years in addition to the quantitative score.
Analysis of specific sector risks
We also pay close attention to identifying specific ESG risks. We include these risks in our analysis for all companies in the same sector.
Dialogue with the companies
The dialogue with companies is through interviews with CSR managers and company managers (at least once a year for portfolio companies), which provide the opportunity to look in greater detail at the identified risks, pinpoint unidentified risks during the rating process and understand the company’s strategy.
Climate change principles and criteria
A set of climate change indicators is integrated within our in-house model. 35 indicators out of 150 indicators that we monitor are climate change criteria and are distributed among the 4 analytical pillars. In addition to these quantitative criteria, we engage with companies during direct dialogue with them and as a signatory of the CDP, we adopted the "Non Disclosure Campaign", a collective engagement campaign targeting companies not responding to information requested by the CDP.
4. Our Responsible Value Investment policy:
METROPOLE Gestion Responsible Value Investing is a global, integrated management process.
Our initial investment universe is composed of European companies with over 100 million euros of market capitalisation, with the exception of those subject to the exclusions specified in our policy (controversial weapons, coal production or consumption, tobacco and pornography).
As such, the systematic exclusion of mining companies that generate more than 30% of their revenue through coal production and energy-producing companies with more than 30% of its production coming from coal is a strong incentive for European companies to embark on the path of the Energy and Ecological Transition. Our eligible universe therefore constitutes the starting point for portfolio construction.
Financial analysis and the selection of discounted securities comparing to their industrial value constitutes the second filter that once again narrows the universe.
Exploiting non-financial analysis, the third filter consists of supplementing the financial analysis by favouring the discounted companies with the best ratings in their business sector and discounted companies making the best efforts in terms of transition to better ESG practices. This approach not only limits potential risk, whether financial or, more specifically, relating to ESG, but also encourages the companies to accelerate their transformation toward sustainable growth and seize the opportunities created by such transformation.
Lastly, the catalysts likely to reduce the valuation discount and ESG controversies represent the final filter applied to the selection of securities that may constitute the portfolio.
The investment universe established accordingly may evolve as time progresses in line with valuation movements in the markets and ESG transformation at company level. The fund management team adjusts the investment universe on a daily basis.
The portfolio is constructed via a collaborative decision-making process by the entire fund management team, weighting each security in accordance with its discount, the quality of the company’s balance sheet and its ESG qualities. Lastly, the fund management team applies a strict disposal policy if the valuation objectives are reached, if the quality of the company deteriorates in terms of ESG or in the event of a major controversy.
5. Impact measurement and ESG analysis
- We measure an average ESG footprint calculation (average rating calculated for each portfolio), which can be compared to their benchmark and published monthly.
- The carbon footprint of the portfolios is also published in each monthly factsheet alongside the carbon footprint of their benchmark.
The carbon footprint is calculated in equivalent tonnes of CO2 per year per million euros of revenue. The calculation covers Scope 1 and Scope 2 emissions.
- An annual impact report is published
One indicator has been selected per pillar (Environment, Social, Governance and Stakeholders):
· CO2 emissions (equivalent tonnes of CO2 per year per million euros of revenue; i.e intensity);
· Percentage of women managers;
· Integration of non-financial criteria within the compensation of senior management;
· Companies applying a policy to defend human rights.
- Finally we calculate a climate score specifically linked to the climate change risks and to the energetic and ecological transition risks.
This score includes physical risks, transition risks, and measures taken by the companies to limit global warming to below 2°C.