Integration and application
of sustainability criteria
Corrado Gaudenzi, Head of Long Term Sustainable Strategies at Eurizon, draws on his important experience to explain how we select sustainability-aware securities, and why these instruments could be competitive in the near future.
We integrate ESG criteria into the investment process
Internal considerations for the choice of issuers
Screening of issuers
Detection of the issuers most exposed to ESG risks, or that do not comply with the Sustainable and Responsible Investment principles.
The measures adopted by Capital SGR, consistently with the following SRI/ESG Strategies, take into account:
- SRI exclusions and restrictions: issuers active in sectors considered not “socially responsible” to which restrictions or exclusions are applied with respect to the investment universe of individual managed portfolios (so-called “SRI Binding screening”); exclusions are applied to all active management products, whereas Limited Tracking Error products and indexed products (with the exception of those that explicitly integrate ESG factors), the maximum direct investment allowed is equal to the issuer’s weight in the benchmark index; issuers that operate in sectors considered not “socially responsible” are (i) companies with an evident direct involvement in the manufacture of non-conventional weapons (landmines; cluster bombs; nuclear weapons; depleted uranium; biological weapons; chemical weapons; invisible fragmentation weapons; blinding lasers; incendiary weapons; white phosphorous munitions), (ii) companies that generate at least 25% of their revenues from extraction or power production activities tied to thermal coal, or (iii) companies that generate at least 10% of their revenues from oil & gas extraction activities through oil sand extraction);
- ESG exclusions and restrictions: “critical” issuers, for which an escalation process is activated that determines restrictions and/or exclusions with respect to the investment universe of individual managed portfolios (so-called “ESG Binding screening”); exclusions are applied to all active management products, whereas for Limited Tracking Error products and indexed products (with the exception of those that explicitly integrate ESG factors), the maximum direct investment allowed is equal to the issuer’s weight in the benchmark index; “critical” issuers are companies that are more exposed to environmental, social, and governance risks, and therefore have a lower ESG sustainability score in the stock and bond investment universe.
Integration of sustainability risks into the Investment Process
Selection of financial instruments taking into account the integration of sustainability risks in the investment process used for managed portfolios
- Integration of ESG factors: integration of ESG factors in the analysis, selection and building of managed portfolios (“ESG Integration”), with the aim of creating, in compliance with best governance practices, portfolios with (i) a higher “ESG score” than that of the investment universe addressed (“ESG Score Integration”); (ii) investment selection processes based on positive and negative screening criteria, as detailed in the offering documentation, for instance for Ethical and Thematic products (“Thematic Integration”); (iii) investment selection processes based on sustainable investment criteria as per the SFDR regulation; this objective is achieved by investing in issuers whose activities contribute to one or more sustainable development goals, such as the Sustainable Development Goals (SDG) promoted by the United Nations (“Sustainable Integration”); (iv) investment selection processes based on the screening of target UCITS, applicable to “wrapper” products, such as funds of funds, retail and unit-linked managed portfolios) (“Manager Selection Integration”), on condition of these products investing at least 70% of their assets in target UCITS that promote environmental, social, or sustainable investment objectives; (v) investment selection processes that take into account respective benchmark parameter construction logics, identified in function of environmental, social, and corporate governance criteria, on condition of these products – such as, for instance, Limited Tracking Error products and indexed products – investing at least 90% of their assets in issuers included in the (“ESG Index Integration”)
- Carbon footprint: integration of methods for measuring carbon dioxide (C02) emissions generated by issuers, aimed at building portfolios characterised by a carbon footprint lower than that of their own investment universe (so-called "Carbon Footprint");
- Impact investing: procedures to pursue, in respect of best governance practices, sustainable investment objectives (“Sustainable Investments”) through investment selection methodologies aimed at (i) contributing to sustainable development goals through investment selection processes based on sustainable investment criteria as per the SFDR regulation (“SDG Investing”); (ii) generating a social or environmental impact together with measurable financial return (“Impact Investing”);
- Active ownership: promotion of proactive engagement with issuers both by exercising participation and voting rights, and engagement with the participated companies, encouraging effective communication with their managements (“Active Ownership – Engagement”).
Monitoring of investments
The selected securities are constantly monitored.
The activity of monitoring the consistency of managed portfolios is supervised by the Compliance and Risk Management Function, both through ex-ante controls during the creation of orders for managed products and through ex-post controls during the valuation of the portfolios.
The main players involved in the ESG/SRI process
Environmental, Social and Governance Committee planned for ESG/SRI products
Defines the proposals to be submitted to the Board of Directors on sustainable and responsible issues; monitors the exposure of assets against identified ESG indicators; monitors the Critical Issuers’ escalation process.
Within Eurizon are also: Sustainability Committee for Ethical products
Collaborates with the Board of Directors to ensure the compliance of management choices with ethical principles for Ethical products
Oversees the activities of devolution and charity for ethical funds
* The Principles for Responsible Investment (PRI) were prepared by the United Nations in 2006 with the aim of promoting the dissemination of sustainable and responsible investment among investors.
The principles are:
1) Incorporation of environmental, social and governance factors into investment analysis and decision-making;
2) Integration of environmental, social and governance factors into active ownership policies;
3) Requesting investees to appropriately disclose information concerning their environmental, social and governance factors;
4) Promotion, acceptance and implementation of PRI in the investor community;
5) Collaboration with the financial community to improve PRI implementation effectiveness;
6) Disclosure of the Eurizon activity and progress reports in application of the principles.
To learn more, visit www.unpri.org.