ESG Integration

ESG integration is an approach that incorporates sustainability issues into investment decisions. ESG integration is the adoption of ESG indicators into the investment process and traditional financial analysis. It can lead to a better risk/return profile of a portfolio. This is one of the most widespread ESG approach.

Inflection Point is the provider of ESG integration at La Française for securities. Our team combines financial market knowledge with sustainability expertise.

ESG integration can be taken into account in geographical allocation (countries), sectoral allocation (industries) and at individual share level (companies). The approach can be applied to all traditional and alternative asset classes.

In practice, our role at La Française comprises the following activities:

  • Inclusion of ESG scores and ESG indicators in the investment process
  • Consideration of ESG criteria in the investment regulations
  • Determination of sustainability principles
  • Optimisation of external communication
  • Workshops for interested parties

Formally, Inflection Point serves as a Sustainability Advisor for the corresponding investment product.

ESG Investment Universes

A sustainable investment universe is created by applying defined criteria that reflect investors’ requirements. At Inflection Point, we work with portfolio managers to develop bespoke sustainable investment universes – from traditional best-in-class universes to specific, themed universes, such as low carbon or sustainable real estate.

A broad application of universes exists including watchlists, positive screening, and portfolios construction. The implementation can be carried out with annual, quarterly or monthly updates. The process can include the reporting of the development of the universe over time and relative to a benchmark. Universes can be accessed directly in FactSet.

LFAM Equities has implemented an ESG watchlist by identifying companies with the lowest ESG scores given specific threshold criteria. The ESG watchlist is monitored and maintained by Inflection Point. The application of the ESG watchlist does not automatically lead to the exclusion of companies from the universe but serves as a monitoring tool for ESG risk management purposes. It does lead to an exclusion, however, if the team confirms the ESG score below the threshold level.

Controversies

Companies’ involvement in controversies is regularly monitored and analysed on a case-by-case basis depending on the severity of the event. The objective is to quantify the negative impact a company has caused through its behaviour and the level of responsibility attributable to a specific company. Companies are further assessed to determine how often such issues occur.

Depending on the type of incidence (strategic, financial, ESG) the assessment is led by a portfolio manager or analysts. For ESG-related incidents (e.g. environmental pollution, product contamination, human rights violation, CEO resignation) the analysis is usually carried out by an Inflection Point analyst.

The steps typically involved in managing an incident are as follows:

  • Information gathering: Desktop research (company disclosures, publicly available news sources, information from subscription services etc.), conversations with company representatives (usually IR as the first point of contact) and discussions with experts including sell-side analysts. In selected cases we would approach other investors to discuss the incidence and potentially to pursue joint measures.
  • Risk assessment: Scenarios with alternative probabilities of risk related to the incident occurring and the respective financial and reputational impact. The case information and the result of the assessment is documented on our Internal Research Platform (FactSet). If appropriate the ESG score for this company will be reduced accordingly.
  • Decision making: The portfolio manager will consult with the analyst. Based on the risk assessment the portfolio manager will decide whether to reduce the exposure or to divest. If the company remains a portfolio holding it will be subject to enhanced monitoring combined with regular engagement activity (e.g. meetings with company representatives and voting at AGM/EGM). Should the risk assessment deteriorate, a divestment decision will be reconsidered.

Exclusion Criteria

The purpose of exclusion criteria is to allow investors to reflect their personal beliefs or ethical values in stock selection and portfolio construction. These criteria can be a clearly defined set of specific values of an asset owners or reference to global norms like as the 10 principles of the UN Global Compact. Within the different sustainable investment approaches, exclusion strategies continue to be one of the most frequently used. Exclusion policies are also used by investors as a tool to mitigate reputational risks.

Inflection Point can provide detailed exclusion information in the following areas by screening a given universe if the investor subscribes to a suitable data feed:

  • Products and activities, e.g. armaments, tobacco, alcohol, gambling or fossil fuel production
  • Norms and standards, e.g. international treaties, embargos or sanctions
  • Corporate conduct, e. g. violation of human rights, antitrust violations or corruption

For products and activities it is possible to establish exclusion thresholds as a revenue percentage. For the application of norms and standards, portfolio managers can define, for example, which international treaties a country must have ratified in order to be investible. To assess corporate conduct or behaviour, a measure of controversy can be used to determine how serious an offence must be in order to exclude a company.

La Française Group currently excludes companies directly or indirectly involved in the production of controversial weapons such as cluster bombs or landmines. The respective data feed is sourced from Sustainalytics. The exclusions are directly implemented in the proprietary portfolio management system (LightTrade) by the Compliance team.