Integrating ESG criteria into funds of funds
Within our open-architecture activity (funds of funds), we have also defined an approach that integrates ESG criteria into our selection process for long-only funds. We have set a unique due diligence questionnaire that integrates ESG criteria allowing us to benefit from a 360-degree analysis encompassing 3 axes of assessment, i.e., the ESG/SRI, investment and operational dimensions. It is conducted at the level of the portfolio management company and of the fund. We assess the following elements in particular: ■ The consideration of climate change risks and opportunities within the portfolio management company (existence of a CSR policy, systems for monitoring energy, water and paper consumption, commitments to reduce carbon emissions, etc.), in its investment processes and the company’s ability to produce carbon data on its investments, for example. ■ The management of human resources and the development of human capital: through our questionnaire and analysis, we seek to address specific criteria, such as the existence of formal employee satisfaction surveys, training structures (percentage of employees, hours of training per employee per year, etc.), as well as how challenges related to the presence of women in the company are considered and managed. We also verify the absence of social controversies and litigation between the company and its employees. ■ The governance: we assess the quality and stability of decision-making bodies based on criteria, such as the degree of independence of the management committee, audit and control systems, compensation mechanisms (whether performance-based objectives exist and are related to the management of sustainable development challenges), the capital structure with regards of tax issues, the existence of regulatory litigation, etc. ■ The engagement policies implemented by the portfolio management companies, particularly the voting and dialogue policy and their memberships in international initiatives aiming to promote good environmental practices, including the Carbon Disclosure Project (CDP), UNEP Finance Initiatives, Institutional Investors Group on Climate Change (IGCC), Montreal Carbon Pledge, etc. ■ The fund’s responsible investment process: the objective is to use qualitative analysis (1) to assess the adequacy between resources (human, IT and extra-financial databases) and the responsible investment process implemented within the fund; (2) to identify the relevance of process (filters, exclusions, ratings, etc.) compared to its philosophy and sustainable themes and its added-value compared to its peers. In addition, we consider the level of disclosure and transparency (including portfolio inventory and funds covered by MSCI ESG Research) and, the fund’s ESG rating in absolute and relative terms compared to its peers and/or its benchmark.. Based on information compiled through our proprietary questionnaire, during our discussions with the asset management company and from MSCI ESG Research and Morningstar Direct, the analysts produce an ESG assessment of the asset management company and of the fund. As most of the information used is from the portfolio management company, we are able to conduct these reviews independently of MSCI ESG Research coverage. If the fund is not rated by MSCI ESG Research, we have developed an internal tool to assign an ESG rating to the fund, in accordance with their methodology. To complement our internal analysis, we produce a scorecard, based on our proprietary methodology, and inspired by a risk/opportunity approach and the materiality challenges identified by MSCI ESG Research for the financial sector. The scorecard’s objective is to guide the analysts in their ESG assessment of the asset management company and of the fund. It provides homogenous research framework and a synthetic overview via the selection of key criteria. This synthesis is based on both tangible, systematic and objective criteria, and on factors that are more qualitative, including analysts’ evaluation. This process results in a score ranging from 1 (the best score) to 4. The criteria for analysis are as follows: ■ At the portfolio management company level: □ Environmental pillar: environmental policy at company level, exclusion policies regarding hermal coal, portfolios’ carbon emissions, etc. □ Social pillar: human resources management, signatory of UN PRI, exclusion policies related to controversial weapons and fundamental principles, etc. □ Governance pillar: board independence, compensation policy, etc. ■ At the fund level: ESG criteria integration into the investment process, ESG rating of the fund, carbon intensity, labels, etc.
Rothschild & Co Asset Management Europe | ESG policy
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