SOCIALLY RESPONSIBLE INVESTING - Global...2017/02/05 · 6 Head of SRI Research Generali Group’s life mandates. She manages a team of 6 analysts. From 2007 to 2009, she worked for

Generali Investments

SOCIALLY RESPONSIBLE

INVESTING

April 2017

www.generali-invest.com

Public

2

INDEX

1. Keys facts of the SRI 3

2. Generali Group's SRI convictions 4

3. Our ESG process 6

Step 1 Group Ethical filter 7

Step 2 Identifying ESG criteria & relevant issues 10

Step 3 Mapping of ESG risks & opportunities 14

Step 4 ESG Analysis 16

Step 5 Selection of SRI investment 17

4. ESG Engagement 19

5. The social and environmental footprint 23

6. ESG company profile 24

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1. Keys SRI facts

• A dedicated team of 6 Social Responsible Investments (SRI) analysts

• In addition to 2 SRI equity sub-funds (UCITS), Generali Investments SICAV (GIS) SRI European Equity and GIS SRI Ageing Population sub-funds, GI manages 3 SRI mandates (FGA, Eurossima, Netissima) on behalf of an insurance company of the Generali Group, mandates that are worth EUR 30,6 bn for which we apply the SRI methodology.

FUND LABEL/CERTIFICATION MORNINGSTAR

SUSTAINABILITY RATING*

GIS SRI EUROPEAN EQUITY

Label ISR (France) 5 Globes

GIS SRI AGEING POPULATION

Label ISR (France)

Label FNG - Novethic (2 stars) 4 Globes

*Source: Morningstar, data as at 30/03/2017

• Coverage and Environment, Social and Governance (ESG) analysis of the MSCI Europe index, for a total

of 478 issuers covered

• Analysis of issuers outside of the MSCI index on request from SRI portfolio managers. Overall, the

coverage includes 513 issuers, 39.5% of our coverage is not retained for GIS’ SRI sub-funds, one the highest

exclusion rate of the market

• Systematic ESG engagement with all companies covered in order to deepen the quality of the analysis. By

disclosing the results of our analysis to all the companies under our coverage, we offer companies the opportunity

to discuss the findings of the analysis and highlight areas of improvements

• Following Novethic’s latest survey (April 2016), Generali Investments is considered as having a high-

conviction SRI process

• Our corporate governance methodology has been reviewed in 2016 and the ESG internal analysis now

includes a ESG profile for each company covered which allows the exclusion of a company for governance matters

• The SRI team has a 6-year track record. Our 6 years of identifying and tracking the ESG performance of

the covered issuers enable us to precisely determine the main ESG trends of issuers and of sectors we cover (all

the information is available in our Database SARA)

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• Review of the Group Ethical Filter methodology

• Daily monitoring of ESG controversies and updating (twice a year) of the Group Ethical filter: worldwide

coverage of 5,000 companies.

• Social and Carbon footprint analyses for the SRI sub-funds of which Generali Investments is investment

manager

2. Generali Group’s SRI convictions

Generali has been paying great attention to sustainable development since 2006, when it decided to apply an Ethical filter to its investments. The Generali Group’s commitment is based on the conviction that:

Taking into account and foreseeing risks is at the heart of the insurance business; Preventing main systemic risks is key to preserve capital and create financial value.

With this in mind, Generali Investments’approach to SRI aims to produce value for the investors and for society

as a whole, following a medium to long term oriented investment strategy.

Generali Investments has had a dedicated SRI team since 2010 and a proprietary ESG methodology for analysing companies.

Based on this internal and proprietary ESG research, we select companies through a combination of traditional financial analysis and a disciplined Environment, Social and Governance screening methodology.

Currently, the methodology for selecting socially responsible investments is applied to EUR 30.6 bn of assets under management.

The methodology is not applied to all the assets under management as to make it mainstream it needs to make the managers aware of ESG issues. To this end, all ESG research is sent to the Investment Department.

SRI allows investors to take a more proactive role in the economy and in the way they invest in companies, without leaving aside financial performance.

Sustainable investing is gaining momentum and attracting interest due to a change in public perception and a cultural shift - especially with new generations - with regards to the direct or indirect impact of their investments.

Incorporating non-financial or ESG aspects when analysing and selecting companies makes more sense as it helps to improve our environment and society as a whole.

Our SRI convictions & beliefs

As one of the biggest insurer in the world, Generali Group has strong SRI convictions:

Social function of the insurance business; Risk prevention and management is a core activity of insurers; Generating value while preserving capital is key.

Generali Group’s commitment to sustainable investing is strong:

As a signatory of the UN Global Compact and of the Principles for Responsible Investment (PRI) supported by the UN, Generali Group discloses its activities in its annual Sustainability Report available online and is committed to the fulfilment of its principles.

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Generali Group participates to the European Forum for Sustainable Finance (EUROSIF), the French Forum for Sustainable Finance (FIR), the Italian Forum for Sustainable Finance (FFS) and the Spainsif: these working groups bring together the most important European players in the area of socially responsible investment. Generali Group adheres to the International Corporate Governance Network’s (ICGN) whose mission is to promote effective standards of corporate governance and investor stewardship to advance efficient markets and sustainable economies world-wide

Our beliefs

Responsible investing provides added value when selecting companies and delivers more sustainable performances over the long term;

Engaging and discussing with the management of companies is the best way to improve their behaviours and practice in terms of ESG;

ESG criteria reinforcing our risk management approach, with non-financial risks being carefully analysed to identify and avoid risks;

Generali Group applies for instance a Group Ethical Filter to direct investments (EUR 315 bn of AUM) to avoid the reputational risks of being invested in controversial activities.

Our definition of Sustainable & Responsible Investing (SRI)

SRI is a medium long term investment strategy that incorporates ESG criteria to the financial analysis.

For us, a SRI investment responds to the following:

Creating value for the investors and for society as a whole; Following a medium to long term oriented investment strategy; Selecting companies based on a disciplined environment, social and governance screening methodology.

Generali Investments’ SRI approach

Our SRI approach is based on different approaches:

Exclusion: applying Generali Group’ Ethical Filter “Best effort”: selecting companies showing improvements in their ESG compliance Engagement: continuous dialogue & follow-up with companies It is reasonable to assume that companies which are best positioned to meet ESG challenges should benefit more than others and perform above the average over the mid to long term. The SRI Resources in Generali Investments

Generali Investments’ (GI) SRI Research team comprises 6 dedicated SRI analysts, a team that was established in 2010 and developed a proprietary ESG screening methodology and database.

GI’s SRI Research team is led by Franca Perin and covers European markets (more than 500 companies).

Franca Perin Joined Generali Investments in 2010 as Head of SRI. She defined the ESG approach and created an ESG methodology used for both GIS sub-funds and 3

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Head of SRI Research

Generali Group’s life mandates. She manages a team of 6 analysts.

From 2007 to 2009, she worked for Intertek Group in Paris as Head of CSR/SRI projects.

From 2005 to 2006, she was Head of SRI Research & Analysis in Dexia A.M. and from 2001 to 2004 in Core Ratings (Fitch Group).

From 1998 to 2000, Franca was CSR Project Manager for Les Amis de la Terre.

Co-Author of « L’ISR: Valeur Financière - Valeur Ethique ? », Ed. ECONOMICA.

SRI equity sub-funds at GI are managed by 2 Portfolio managers who are members of a dedicated Equity Thematic team, with 7 Portfolio Managers / Analysts. This team is headed by Eric Biassette, who has been at GI since September 2000. They can rely on their experience as both analysts (with a sector focus for each team member) and portfolio managers (PMs).

The fund managers - lead PM and deputy PM - are responsible for the portfolio construction, stock selection, performance and continuous review of the sub-funds. They interact on a regular basis with their Equity Thematic team colleagues for investment ideas, on the desk but also during a more formal weekly meeting.

The fund managers and the SRI team are all based in Paris and interact on a regular basis to discuss sector reviews and companies’ analysis – MSCI Europe companies as well as ad-hoc reviews such as off benchmark but also on specific ESG topics / sub-themes.

This integrated approach allows greater communication between the Equity Thematic team - also covering MSCI Europe sectors as analysts - and SRI analysts, allowing them to share best ideas and different perspectives.

It is important to note that our SRI Research team is independent from the Investment function, with a direct report into Generali Investments’ CEO.

Please find our Eurosif Transparency Code available on the French Eurosif (FIR) website:

http://www.frenchsif.org/isr-esg/membre/generali-investments/

3. Our ESG process

Our ESG process relies on an innovative and transparent proprietary methodology presenting the following features and strengths:

Group Ethical Filter: exclusions applied to direct investments for the Generali Group

A team SRI analysts, in place since 2010

SRI analysis is stored in a proprietary database « S.A.R.A. » (Sustainable Analysis of Responsible Asset), with real time updated ratings

Screening is based on an ESG risk analysis covering the MSCI Europe universe, with the possibility given to portfolio manager to request ad-hoc ESG analysis of uncovered issuers (generally small and mid-caps that do not belong to the MSCI index)

We meet all the companies we analyse and we engage with them through dialogue - we typically analyse all companies in the universe over a 18-24 month cycle (we are currently in the 3rd cycle of our ESG analysis). Companies refusing such dialogue requests are automatically rejected from our SRI universe.

The team complements its own analysis with external research from specialised external providers: Sustainalytics, Ethifinance, Vigeo/EIRIS and MSCI ESG Research

Selection is focused on « best effort » companies - showing an improvement in their ESG compliance and behaviour within their sector

It is possible to personalise screening criteria through the use of our database

http://www.frenchsif.org/isr-esg/membre/generali-investments/

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An ESG engagement activity completes the ESG Research.

Over view of our ESG screening approach With our proprietary methodology we consider that companies making the “best efforts” to comply with ESG criteria should perform better as:

They have measures in place that should prevent them from costly litigations related to Environmental, Social and Governance issues

They are better positioned to benefit from long term demographic, regulatory and environmental trends

SCREENING METHODOLOGY: AN EXTRA-FINANCIALAPPROACH

The methodology follows 6 key steps covering all ESG topics.

Source: Generali Investments Europe S.p.A. Società di gestione del risparmio data as of March 2017

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Step 1: Group Ethical filter

The aim of the Group Ethical Filter is to identify:

Restricted Issuers List: Issuers with poor ESG practices not meeting minimum Group Responsible Investment requirements – to be excluded from Group Investment universe.

High Risk Issuers List: Issuers potentially exposing the Group to higher reputational risk due to their potential implication in relevant ESG issues – to be strictly monitored and possibly engaged.

The Restricted Issuers List includes Issuers:

Breaching the Non Proliferation Treaty for Nuclear Weapons1

Directly2 involved in cluster munitions, antipersonnel landmines and biological / chemical weapons

Involved in one or more of the following: serious or systematic human rights violations; severe environmental damages; gross corruption

The High Risk Issuers List includes Issuers:

Not breaching the Non Proliferation Treaty but directly involved in Nuclear Weapons

Indirectly3 involved in cluster munitions, antipersonnel landmines and biological/chemical weapons

Involved in one or more of the following: human rights violations; environmental damages; corruption

Generali Group applies an Ethical filter to all its direct investments since 2006, and the methodology of this filter has been revised end of 2016. The Group Ethical Filter currently applies to more than EUR 315 bn in assets.

Considering the global geographic scope, this filter relies on the ESG monitoring carried out by one of our external providers, EIRIS. The investment perimeter is global. EIRIS is an external provider that enables continuous monitoring of issuers on ESG issues. The perimeter covers approximately 5,000 issuers globally. After a first screening, on the 5000 companies on the basis of the controversy, we have identified 200 companies. For the 200 remaining companies we did a more in-depth analysis. We've searched other sources to validate or not the controversies of the companies. A profile for each company was made. The SRI Team, leveraging on EIRIS, provides an in-depth ESG risk assessment of controversies that may potentially be breaching the criteria defined in the Group’s Responsible Investments Guidelines.

a. Based on the nature of the controversies in which issuers are involved, different methodologies are applied:

o Case 1: Controversial weapons: the filter is based on the degree of involvement of the company and the category of controversial weapons, considering the relevant internal Treaties/Conventions

o Case 2: Other ESG Issues (serious or systematic human rights violations, severe environmental damages and/or gross corruption): the inclusion of an Issuer into either the Restricted or the High Risk List is based on a score, determined through a rating system. For these types of controversy we have created a risks table with nine questions concerning material risks, reputational risks and legal risks. Each company is rated for each question.

1 The Treaty on the Non-Proliferation (NPT) of Nuclear Weapons is an international treaty aiming at preventing the spread of

nuclear weapons, promoting cooperation in the peaceful uses of nuclear energy and achieving nuclear disarmament. While it is the only internationally-binding agreement to the goal of disarmament by the nuclear-weapon states, the NPT does not expressly and formally prohibits the production of nuclear weapons. 2 Direct involvement: "use, develop, produce, acquire, stockpile or trade controversial weapons or key components/services of

controversial weapons” 3 Indirect involvement: "use, develop, produce, acquire, stockpile or trade non key components/services of controversial

weapons”

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Group Ethical filter is updated: o At least twice a year o Anytime in case of recent and severe controversies (Alert System)

A daily monitoring of ESG events is carried out by the SRI team.

Materiality risks

Q1/ What is the impact on financial performance? Turnover, Sales, Profit etc.

Q2/ What is the impact on stock market quotation? Share price / debt rating

Q3/ What is the impact on business strategy? Evolution of regulation, customer requirements

Reputational risks

Q1/ What is the impact on civil society? Reactions of stakeholders as NGO, local population, employees etc.

Q2/ What is the media impact? Number of citations, words associated, duration of the press coverage

Q3/ What is the impact on the corporate image? Sales, star system

Legal risks

Q1/ What are the risks of judicial proceedings? Provisions

Q2/ What are the risks of class actions? Potential fines and fines announced by the Court

Q3/ What could be the consecutive costs? Legal sanctions (fines, detention, remediation costs, etc.)

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Illustration - Group Ethical Filter Process

GIE - SRI Team ESG Risk

Assesment

Controversial

Weapons

Other ESG

Controversies

Group Methodology

Proposal of Restricted

Issuers List

Proposal of High Risk

Issuers List

Decision of the Responsible Investments Committee

Group Investment Portfolio Analysis

EIRIS

Final Restricted

Issuers List

Final High Risk Issuers

List

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Step 2: Identifying ESG criteria & relevant issues

For the SRI funds (GIS SRI European Equity, GIS SRI Ageing Population sub-funds, FGA, Euronissima, Netissima), and following the Group Ethical filter, a complementary ESG methodology is applied in order to identify the responsible companies to invest in. The SRI team identified in this first step an ESG framework of 34 ESG criteria that are grouped into 4 main sections: Environment (11), Internal Social (11), External Social (8), and Governance (4).

This is an initial step to identify the relevant issues. Corporate Governance is the only criteria common to all the 26 sectors covered by the analysis. The other relevant issues will be identified thanks to our risk matrix for each sector.

Table below: 34 ESG criteria / topics

Source: Generali Investments Europe S.p.A. Società di gestione del risparmio data as of February 2017

When assessing the below 4 pillars we identified within Corporate Governance, the SRI team strictly follows the best practices identified.

Within the ESG analysis scheme, the Governance criteria is doubtless the most transversal criteria and with the potential greatness materiality impact on each issuer, regardless of the industry sector. Following this observation, the Responsible Investment research team has decided to give more visibility to the work done. The governance assessment is now systematically integrated in the company’s data sheet, which makes its review easier. This change is based on the conviction that poor corporate governance can have highly disruptive effects on a company. In the first instance, these effects might affect shareholders’ interests, but not only. Indeed, it has become obvious that poor governance might result in significant misconducts from a social and environmental perspective. At the contrary, according to studies realized by governance specialists, some evidences confirm that strong corporate governance is a catalyst for portfolio outperformance.

Corporate Governance is one of the most difficult criteria to assess, as it is a topic deeply shaped by each national Code of Governance as well as habits and customs in each country and each industry. Furthermore, the Corporate

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Governance does not present KPIs as obvious as the Environmental and Social pillars of the ESG analysis and can be subject to strong personal appreciation.

For this reason, Generali Investments developed its own methodology to assess the Corporate Governance of each issuer, with the duty to evaluate it as accurate as possible. In the first instance, the assessment is based on the analysis of governance data provided by our two external providers (MSCI, ECGS) and the analysis of the documentation traditionally issued by companies (minutes of Annual General Meetings, governance report, etc)

Within the SRI team, the Corporate Governance is assessed on 4 pillars that have been identified as being the most relevant. At the end of the assessment, depending on the risks inherent or the best practices identified in each issuer, the SRI analyst will consider the governance risk as low, medium or high.

As soon as a company presents a high governance risk, it can be considered as a high risk for its overall ranking. Although, even if a company can be considered as “best effort” in its Environmental and Social pillars, a high risk in its Governance pillar leads the issuer to be declared as non SRI-compliant. For instance, the last review of the Utilities sector made by the analyst in charge of the sector has given the opportunity to a new assessment of the governance of the utilities companies. As a result, one issuer has been ranked as SRI non-compliant for its poor governance (lack of Board independence, strong influence of the State as a shareholder that jeopardizes the interests of the minority shareholders); yet, the company demonstrates good efforts in its Environmental and Social performances. If a company is deemed low risk, it will have no impact on its overall score. A medium risk is meant to call the attention on some weak points but, however, will not make the issuer SRI non-compliant (at least for governance purposes).

For assessing the 4 pillars identified within the Corporate Governance, the SRI team is strictly following the best practices identified.

I. Corporate Boards This pillar includes the day-to-day functioning of the Board, such as the Committees that prepare the work or the independence of the Board’s Directors.

Regarding the segregation of duties, the SRI team considers the separation between the Chief Executive Officer (CEO) and the Chairman of the Board as a best practice. Indeed, this separation brings more balance within the Board. However, this separation can be considered effective only if the Chairman is deemed to be Independent regarding Generali Investments’ criteria. Failing that, the presence of a Senior Independent Director (or Lead Independent Director) can compensate, as he can lead some discussions regarding only the Independent Directors and can counterbalance the powers and influence of the Non-Independent Chairman.

Regarding the independence, the SRI team assessed the independence of each Director, either based on the biographical elements disclosed by the company itself, or using external data provider. If at least one criteria is not met, the Director is considered Non-Independent: he/she can have a too strong relation with the company and then cannot take the best decisions in the interests of the shareholders.

What matters for the proper functioning of a Board is to be sure that there are no conflicts of interests. A director is not considered as free of conflicting interests for many reasons, in particular if he is a former or current executive or employee, a relative of the managers and of the Directors, a shareholder or representative of a shareholder owning 3% or more of the voting rights, a supplier or service provider of the company, etc. The number of situations that would result in a conflict of interest is numerous, and makes the assessment of the Board challenging for the SRI analyst. However, being able to detect conflict of interest is a valuable insight.

Once each Director independency has been assessed, the SRI team evaluates if the Board as a whole presents a fair share of Independent Director, with at least half of the Board. A lower independency rate can be acceptable if the company is considered a controlled one.

The SRI team also looks through the detailed biographies to determine if each Director has sufficient work experience to be part of the Board. A best practice is therefore when a company has a great level of disclosure on each Director, with several of them having experience in the said industry. An even best practice is when the company presents a Board with a good level of diversity regarding its Directors: academic background, age, gender, nationalities, international and work experiences. Specifically on gender diversity, an increasing number of countries are requesting their corporates to appoint a certain proportion of female Directors within the Board. Appointments at the Board of employee representatives are also taken into account in our analysis.

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The detailed biographies can also provide SRI analysts with valuable information regarding the time-commitment of each Director. Indeed, a Director that presents multiple directorships can lack time to do his/her work at the said company. Generali Investments considers a Director to be overboarded if he/she exceeds specific limits, such as 5 non-executive directorships for non-executive Directors, or 2 non-executive directorships for executive directors.

A check of Directors’ integrity can also be necessary to be sure that none of them have been part of a past controversy, in an environmental pollution (e.g. BP DeepWater, Volkswagen Dieselgate), an accounting scandal (e.g. Tesco) or another large-scale scandal that impacted the company under Directors’ responsibilities.

Of importance too is the number of Directors present at the Board: while a Board too small may lack the right competencies, a too large Board can dilute the responsibility of each Director and they can lose efficiency. A commonly recognised best practice is a Board comprised of 5 to 15 Directors.

When assessing the Corporate Boards, the SRI team is also looking at the presence of Committees and will require at least 3 Committees, covering: appointment, remuneration and audit. A best practice is when a company has at least these 3 Committees, plus a Committee in charge of sustainability matters and with each Committee being chaired with an Independent Director. Whereas the appointment Committee and the remuneration Committee can have a majority of Independent Directors to be considered best practice, the audit committee should be composed exclusively of Independent Directors.

The combination of the Nomination and Remuneration duties in one Committee is usually considered as a bad practice as it can give to the Committee too much influence over the Board’s work. Of great influence can also be the Strategic Committee that exists in some companies: usually composed of Executive Directors, the Strategic Committee has broad prerogatives and by preparing upstream the work of the Board can have a too strong influence over it.

II. Shareholders rights This pillar includes all the relations between the company and its shareholders. Overall, Generali Investments considers at the uttermost importance the respect of each and every shareholder, as well as a fair balance between them (especially the minority shareholders).

As such, the SRI team condemns the use of anti-takeover mechanisms (also known as poison pills) that could prevent minority shareholders to act at their best interests, such as: the purchase of own shares when the company is the subject of a takeover bid, the creation of a holding company controlling a significant stake in the company, preliminary authorization to issue shares at any time, when the company is under a takeover bid, etc.

Equity issuances are also closely analysed to make sure that raise of equity funding are strategically justified and financially balanced in order to avoid considerable dilution in equity ownership. Regarding reserved equity transactions, such as mergers, contributions and spin offs, they will be assessed on the basis of their long-term value. They should neither compromise the liquidity nor the valuation of the shares, nor the “one-share, one-vote” principle.

At the opposite, the SRI team considers as best practices the respect of the “one share, one vote”; it is usually the case when the company has only one type of shares, therefore allowing each shareholder to weight equally, depending on the number of shares they own. On that topic, SRI analysts have been particularly alert with French issuers since the new Florange law gives them the opportunity to easily adopt double voting rights for shareholders holding shares for more than two years.

Another best practice is the disclosure of the main shareholders and the voting results. The minutes of the past Annual General Meetings can indeed enlighten the distrust of shareholders regarding the Board’s ability to take the best decisions for the company. This distrust can be even more alarming when the issuer is considered a controlled company (with one shareholder or a coalition of shareholders owning at least 50% of the votes), meaning that minority shareholders, as a block, express a strong opposition to Board’s recommendations, that can even lead to the discharge of a resolution.

III. Remuneration policy The remuneration policy is a key point when evaluating a company on its Corporate Governance practices.

Our conviction is that a fair Executive remuneration policy has to be linked with the company’s performance, in order to have strong incentives for Executives to act in the best interest of shareholders. On the other hand,

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remuneration policy has to be consistent with market best practices. For instance, variable remunerations should be linked to long-term financial and ESG performance, as well as to trends in the company’s intrinsic value. In order to best assess the quality and effectiveness of the policy, a great level of disclosure is expected from companies: performance criteria with quantifiable and suitable objectives or precise, sustainable and verifiable qualitative criteria.

Usually, an executive compensation policy includes both a fixed part and a variable one (for short-term and long-term performances). A best practice is when the variable remuneration is capped at a certain portion of the fixed part, but not too little: indeed, a small variable remuneration part cannot incentivize enough the executives and potentially lead to their departures; while at the opposite, a too large variable remuneration can make the executives take too much risk in the daily management of the company, in order to increase a specific metric linked to their remunerations for a short-term period.

To avoid that kind of situation, a best practice is the clawback provision: after receiving his/her remuneration, if the performance criteria on which the variable compensation was granted does not maintain, the executive can be asked to pay back his/her company. The SRI team also downgrades a company when its remuneration policy includes departure severance indemnities.

IV. Audit, disclosure and transparency This pillar refers to the accuracy of the financial information provided by the company, which are expected to be transparent and formed on the basis of true and complete information. Therefore, the ESG analysis will consider as best practice a company that gives the most possible disclosure on its financial situation, with all the elements audited by an external auditor.

The SRI team considers as a serious misconduct the discharge of responsibilities on Directors and key executives when there are serious concerns over the conduct of the Board of Directors or if the company is based in a country where the discharge of the Board can prevent shareholders to pursue future legal actions against them.

Regarding audit, the best practice consists for a company to change its auditors on a regular basis in order for both the company and its auditors to not enter into a conflict of interests: indeed, although a long relationship between a company and its auditors can be valuable (after several years auditing the same company, an audit firm can have a good and accurate knowledge of the company), this situation can be potentially a source of conflict of interests. Companies applying best practices usually put a tender to offers on a regular basis when changing the auditor. In a similar logic, the level of audit-related fees compared to the total amount of fees paid to the auditor can be a demonstration of the non-independence of an auditor: indeed, within a commercial agreement, when a company pays an audit firms more for its tax advice than for its audit activities, the auditor is tempted to certify the financial accounts and can lose all or part of its necessary independency.

In conclusion, assessing the Governance pillar is an essential part of the ESG analysis work. As shown with the examples, an accurate assessment requires a very good knowledge of the Corporate Governance Code of the country in which the company is registered, but also to have a long-term view of its history and past governance practices. For those reasons, the expertise of the Generali’s SRI team is very valuable as the SRI analysts have been covering their respective sectors for several years now and acquire an accurate knowledge of the governance particularities of each industry and issuer.

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Step 3: Mapping of ESG risks & opportunities

The above 34 relevant topics are reviewed from an ESG risks and opportunities perspective for each sector, based on the below 6 risks and opportunities, to determine a score between 0 and 9.

The maximum of the score is therefore 54 for each issue.

The issues with scores above 27 are retained for the sectors’ analysis.

On average, The SRI team typically selects 6/7 criteria considered as being the most relevant within a given sector and they are all equally weighted.

A risk can be defined as the combination of the probability of an event happening and its consequences and the likelihood of an event occurring. Its direct & indirect financial consequences are estimated at this stage.

The weights of extra-financial risks and opportunities enable us to estimate their impacts on the company.

The below chart describes the different ESG risks and opportunities we use as part of the risk matrix:

Source: Generali Investments Europe S.p.A. Società di

gestione del risparmio data as of February 2017

Note: 26 sectors are covered (3rd level of the MSCI sector’s classification).

Evolution of ESG relevant issues over time - Example of the Media sector

Over 18-24 months, the criteria are reviewed by the SRI team to identify the news ESG relevant issues for each sector, the most relevant issues within a given sector evolve, based on new concerns and/or issues having been addressed.


First review (2012-2013) Second review (2014-2015) Third review (2016-2017)

Media

Quality

Access and responsible use

Purchasing and consumption

Bribery

Working conditions

Career management

Community impact

Access and responsible use


Bribery

Working conditions

Career management

Safety

Career management

Community impact

Bribery


SectorRelevant issues

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For each sector, relevant issues and their materiality are explained: Relevant issues and materiality - Example of the Transport Infrastructure sector

Source: Generali Investments Europe S.p.A.

Società di gestione del risparmio data as of

February 2017

Scoring relevant issues in the Transport infrastructure sector

The below chart shows that the 5 most relevant issues for that sector - with scores equal or above 27 - are:

- Greenhouse gases - Work conditions - Safety - Quality - Green products & Services

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Step 4: ESG Analysis

Analysing and rating companies facilitate the identification of the “best-effort” companies with regards to the management of the main ESG risks identified at sector level and helps to determine whether they improve their ESG compliance and behaviour over time. We contact all the companies in the universe analysed (more than 500).

For each sector, companies with an overall rating above the sector’s average are included in the SRI approved list.

We therefore retain circa 50% of the initial universe (more than 500).

A sector report is done and sent to the entire Investment department.

Rating & selecting companies - Metals & Mining sector in 2016 (example)

The companies which are below their sector average rating are not considered as being ESG compliant and are not retained.


All ESG ratings are stored in the dedicated SARA database.

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Step 5: Selection of SRI investment

1- SRI Score

At the end of an issuer analysis, the next step is the issuer scoring. Scoring is never an easy aspect of the analysis, but it is the most efficient and objective way to rank issuers according to their ESG performances.

The score ranges from 0 to 100. To be considered SRI-compliant, it is mandatory to have an average score equal or superior to 50, otherwise, the issuer will be considered as SRI non-compliant.

As previously explained, each issuer is analysed according to different relevant ESG issues and this assessment is evidenced by a score given to each relevant issue. The final score will be simply the average of the scores obtained for each relevant issue (Note: the scores of relevant issues are equally weighted).

This scoring methodology applies to our overall issuer coverage (equity, corporate bonds). For government bonds we use external providers (Sustainalytics’ etc.). The score given to an issuer is supposed to reflect the issuer’s performance at a given time, and, in line with our “best effort” approach, the score also reflects the company’s trend over time in terms of its ESG performance - as well as the quality of the answers provided during the engagement phase. An issuer refusing our engagement request will therefore systematically see its average score falling under 50, leading to a SRI non-compliant status.

2 - Communicating ESG eligible universe to portfolio managers

Our methodology, based on identifying risk and opportunities within the European universe (MSCI Europe), allows us to limit the exposure to companies displaying more ESG risks compared to their peers within a given sector.

Those risks may have extra-financial impacts on the companies, which can lead to financial consequences.

The results of the process described in the previous sections is made available to the portfolio managers via the SARA database and the monthly communication by the SRI team (by email) of the SARA Filter list - which includes the companies eligible to the ESG universe (monthly updates).

The portfolio managers can then use the internal ESG ratings of companies when selecting their stocks based on financial metrics and fundamental bottom-up analysis, avoiding the “least virtuous” companies from an ESG standpoint in their portfolio construction.

Furthermore, our SRI analysts work in close cooperation with the portfolio managers, notably in the event of an IPO and/or the potential selection of a stock outside the initial investment universe. Indeed, portfolio managers are allowed, within the portfolios’ guidelines and limits, to include off-benchmark positions and/or mid-caps for instance - as long as the companies are vetted and approved by the SRI team prior to inclusion.

Indeed, following the ad-hoc analyses, only stocks approved by the SRI team can be selected by the portfolio managers for GIS’ SRI sub-funds, similarly to European companies featured in the MSCI Europe index.

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4. ESG Engagement

What is engagement for Generali Investments?

Engagement (i.e. dialogue with companies) is the basis of our ESG research. There are 3 steps:

1. The beginning of the analysis and the meetings with the company: we analyse all MSCI Europe companies plus a number of companies that are not in the MSCI for a total of 513 companies covered. We meet them individually. We contact 100% of companies. A company that refuses to meet us is not SRI compliant. We analysed 210 companies in 2016.

2. Once the analysis is completed, we send the results to all companies. We inform companies of their integration or exclusion from our investment portfolio by sending them a benchmark. In addition, the company has access to the results of its competitors. We are currently the only Asset Manager displaying such a degree of transparency in its analysis and results.

3. The exchange between GI and the company: we ask the company to revert back to us to obtain their feedback and give them additional information if they wish. This exchange is an opportunity for the company to discuss its results, its position relative to its competitors and to identify its areas of improvement.

Every 18-24 months we update all sectors. Currently (year 2016-2017), we are carrying out the 3rd revision of our analysis. Please find below the 11 sectors analysed to date:

Capital Markets Commercial Banks Insurance Utilities Food, Beverage, Tobacco Food Retailing Transport & Infrastructure Metals & Mining Construction & Engineering Diversified Telecommunications Services Media

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In the table below, we list the relevant issues we have concentrated our analysis on, for each sector:


SECTOR RELEVANT ISSUE

CAPITAL MARKETS Safety

Quality

Green products and services

Bribery

COMMERCIAL BANKS

Green products and services

Safety

Quality

Community impact

Bribery

INSURANCE Greenhouse gases (climate change)

Safety

Quality

Access & Responsible Use

UTILITIES

Greenhouse gases

Quality

Access & Responsible Use

Community impact

Bribery

FOOD, BEVERAGE, TOBACCO Environmental : Waste Management, Greenhouse gases, Purchasing

& Consumption

Ext. Social : Quality, Safety

Int. Social : Work Conditions

FOOD RETAILING Environmental : Waste Management, Greenhouse gases, Purchasing

& Consumption



TRANSPORT & INFRASTRUCTURE Environmental : Greenhouse Gases, Green products and services



METALS & MINING

Community impact

Biodiversity

Greenhouse gases

Social dialogue

Working Conditions

CONSTRUCTION & ENGINEERING

Greenhouse gases

Biodiversity

Green Product & Services

Health & Safety

Ethics

Local impacts

Human Resources

DIVERSIFIED

TELECOMMUNICATIONS SERVICES

Environmental : Waste Management, Greenhouse gases


Ext. Social : Access and responsible use, Unfair competition, Safety

MEDIA Environmental : Purchasing & Consumption

Int. Social : Career management

Ext. Social : Community impact, Safety, Bribery

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In the below table, we present the percentage of environmental and social relevant issues analysed for each

sector:


SECTOR % ENVIRONMENT % SOCIAL

(EXTERNAL) % SOCIAL

(INTERNAL)

Capital Markets 25 75 0

Commercial Banks 20 80 0

Insurance 20 80 0

Utilities 20 80 0

Food, Beverage, Tobacco

50 33 17

Food Retailing 50 33 17

Transport & Infrastructure

40 40 20

Metals & Mining 40 20 40

Construction & Engineering

43 29 29

Diversified Telecommunications Services

33 50 17

Media 20 60 20

TOTAL 33 53 14

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In the below table, we list the number of companies subject to our dialogue & engagement.

SECTOR

MEETING

ENGAGEMENT

COMPANY

DIALOGUE

FOLLOWING

THE

BENCHMARK

COMPANY

CAPITAL MARKETS 36 6 (17 %) Azimut Holding, ING Groep, Investor AB, Julius Baer,

Investment AB Kinnevik, UBS

COMMERCIAL BANKS 31 3 (10 %) CaixaBank, Crédit Agricole and RBS

UTILITIES 21 1 (4.76 %) Enel

DIVERSIFIED

TELECOMMUNICATIO

NS SERVICES

23 3 (13.04 %) Millicom International Cellular, Telefonica / Telefonica

Deutschland, Telia Company

BUSINESS SERVICES 20 9 (45 %) Adecco, Aggreko, Capita, Carillion, Experian, Intertek,

Randstad, Rentokil Initial, Serco

INSURANCE 33 20 (60 %)

Admiral, Ageas, Allianz, Axa, CNP Assurances, Direct Line

Insurance, Gjensidige Forsikring, Helvetia, Hiscox, Legal &

General, Muenchener Rueck, NN Group, Prudential, Scor,

Standard Life, Storebrand, Swiss Re, Tryg, Vienna Insurance

Group, Zurich Insurance

FOOD, BEVERAGE,

TOBACCO 20 8 (40 %)

ABI, Carlsberg, Lindt & Sprüngli, Danone, Diageo, Orkla,

Pernod Ricard, Rémy Cointreau

REAL ESTATE 19 2 (10 %) Icade, Gecina

AUTOMOBILE AND

COMPONENTS 13 2 (15 %) Renault, Michelin

TRANSPORT

INFRASTRUCTURES 7 1 (14%) Aena

AIR FREIGHT,

AIRLINES &

LOGISTICS

14 1 (7%) AP Moller-Maersck

Source: Generali Investments Europe S.p.A. Società di gestione del risparmio data as of February 2017 During the meetings we held (on the basis of the benchmark we sent them beforehand) we explained to the companies the reasons for their positioning and we explained in detail the positive and negative points in relation to some relevant issues. We also engaged with them regarding their areas of improvement.

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Engagement example: Focus on the Carbon impact As an engaged long-term investor and active shareholder, Generali Investments focused on the engagement strategy – to better address this issue in terms of risks and opportunities. Since 2010, when Generali Investments created its proprietary SRI methodology, the carbon impact was included among the six risks/opportunities that we weight for 26 sectors. More specifically, we have been studying how the carbon exposure impacts 34 ESG criteria over a period of six years and assessed its materiality. We concluded that the materiality of the carbon impact is highly relevant, especially for the companies belonging to 15 sectors out of a total of 26 analyzed. We regrouped the sectors most sensitive to carbon in the following categories: Energy, Materials, Transportation, Utilities and Auto. Our methodology also integrates the opportunity linked to the climate change via a specific topic that we name “green products & services”. We deemed this as relevant for 10 sectors out of 26, regrouped as followed: Capital Goods, Auto, Chemical, Construction and Telecommunications. As part of our engagement process, one to one meetings with each company allowed us to have first-hand answers concerning the management of the carbon-related risks and opportunities, for which we identified specific indicators measurable over a period of three years. As regards risks, the main indicators are: the CO2 emissions, electrical capacity evolution, fossil reserves. As regards opportunities, the main indicators are: R&D (research and development), Energy Mix, investments in Renewables, product LCA (Life Cycle Assessment), number of employees in the “green” activities, positioning marketing (e.g. Green Premium Products in Schneider) and finally the integration in the strategic vision of the company (e.g. Iberdrola discloses the objective of carbon neutrality by 2050). Ours is a best effort approach: we take into consideration the best performing companies in the medium term, and we encourage the others to improve. After the analysis, our results are sent to all companies, and most importantly, we engage with them and support them along an improvement path. We firmly believe that this activity is crucial and at the same time complementary to other types of strategies. Indeed, for example, the outright divestment from carbon intensive sectors requires other allocations in “green” sectors that may not be big enough yet to absorb all the divested funds. Also, fossil fuels are systemic. They are embedded in every aspect of our daily lives. Suddenly removing them would do some damages to society (e.g. layoffs). The divestment from the companies exposed to fossil fuel reserves is, in a sense, also disinvestment from a significant part of the ecosystem. The engagement approach may be an option for investors to help these big emitters evolve into responsible businesses, such as turning the Oil & Gas industry into a more diversified and eco-efficient Energy sector. To be responsible for us is to discuss with the company we might invest in, to vote at its annual meetings as an active investor on these issues, and, as a last option, to disinvest from companies that don’t want to change.

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5. The social and environmental footprint

In 2017, we decided to analyse the social and environmental footprint of our SRI funds to measure their performance and their contribution to value creation. This is a first exercise that we will repeat in the following years to follow the trend. We chose the following two sub-funds: GIS SRI European Equity and GIS SRI Aging Population and we chose the following 4 criteria:

- the % of independent directors (Governance) - the % of women in boards of directors (Governance & Social) - the employee turnover rate (Social) - and the carbon footprint (Environmental).

Regarding the independence of the Board, the SRI team assessed the independence of each Director, either based on the biographical elements disclosed by the company itself, or using external data provider. If at least one criteria is not met, the Director is considered Non-Independent: he/she cannot take the best decisions in the interests of the shareholders. What matters for the proper functioning of a Board is to be sure that there are no conflicts of interests. A director is not considered as free of conflicting interests for many reasons, in particular if he/she is a former or current executive or employee, a relative of the managers and of the Directors, a shareholder or representative of a shareholder owning 3% or more of the voting rights, a supplier or service provider of the company, etc. The situations that would result in a conflict of interest are numerous and make the assessment challenging for SRI analysts. However, being able to detect a conflict of interest is a valuable insight. Regarding the topic of the number of women on Boards of Directors: diversity on Boards of Directors is essential to improve its functioning. Furthermore, the number of women on boards of directors is a relevant issue because there are many national laws which today impose a legal minimum. Employee turnover helps to determine whether a company is able to keep its employees and understand its resources management policy. Here are the results for each portfolio based on criteria:

GIS SRI European Equity: 95 companies in total*

The rate of independent directors is 56.71% out of a total of 86 companies, i.e. 90.5% of coverage. The rate of women on Boards of directors is 28.51% out of a total of 94 companies, i.e. 98.9% coverage. The employee turnover rate is 8.24% out of a total of 67 companies, i.e. 70.5% coverage. The carbon footprint of the portfolio is 301.61 tons CO2e per EUR million revenues compared to the MSCI Europe Index which is 322.17. Coverage is 100%.

GIS SRI Ageing Population: 57 companies in total*

The rate of independent directors is de 59.86% out of a total of 53 companies, i.e. 93% of coverage. The rate of women on Boards of directors is 24.97% out of a total of 54 companies, i.e. 94.7% coverage. The employee turnover rate is 7.82 % out of a total of 34 companies, i.e. 59.7% coverage. The carbon footprint of our portfolio is 125.55 tons CO2e per EUR million revenues compared to the MSCI Europe Index which is 322.17. Coverage is 100%. In order to measure the environmental footprint of the 2 SRI sub-funds we chose to take the greenhouse gas emissions of all the issuers present. We have integrated the carbon footprint of companies by using the publication of their greenhouse gas emissions reports.

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A carbon footprint of all the Group's portfolios will be produced and published before June 2017, in response to Article 173 of the French Energy Transition Law. *The data used comes from Trucost, MSCI, Bloomberg, sustainable development reports and our SARA Database. It refers to the year 2015.

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6. ESG company profile Below is an example of what we produce for each company analysed in our universe covered by our analysis.

The first section point relates to the existence of controversies which have been taken into account through the Group Ethical Filter.

The second section relates to the analysis of governance with a rating based on the level of risk.

The last section relates to the analysis of relevant issues based on quantitative and qualitative data, the ranking and trends.

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Disclaimer

GIS SRI Ageing Population and GIS SRI European Equity are sub-funds of Generali Investments SICAV (an investment company qualifying as a “société d’investissement à capital variable” with multiple sub-funds under the laws of the Grand Duchy of Luxembourg) managed by Generali Investments Europe S.p.A. Società di gestione del risparmio. The information contained in this document is only for general information on products and services provided by Generali Investments Europe S.p.A. Società di gestione del risparmio. It shall under no circumstance constitute an offer, recommendation or solicitation to subscribe units/shares of undertakings for collective investment in transferable securities or application for an offer of investments services. It is not linked to or it is not intended to be the foundation of any contract or commitment. It shall not be considered as an explicit or implicit recommendation of investment strategy or as investment advice. Before subscribing an offer of investment services, each potential client shall be given every document provided by the regulations in force from time to time, documents to be carefully read by the client before making any investment choice. Generali Investments Europe S.p.A. Società di gestione del risparmio, periodically updating the contents of this document, relieves itself from any responsibility concerning mistakes or omissions and shall not be considered responsible in case of possible damages or losses related to the improper use of the information herein provided. Past performance is not a guarantee of future performance the subfunds present a risk of loss of capital. The client shall carefully read the KIID, which must be delivered before subscribing the investment, and the prospectus which are available on our website (www.generali-invest.com), on Generali Investments Luxembourg S.A. (management company of Generali Investments SICAV) website (www.generali-investments-luxembourg.com), and by distributors. Generali Investments is part of the Generali Group which was established in 1831 in Trieste as Assicurazioni Generali Austro-Italiche. Generali Investments is a commercial brand of Generali Investments Europe S.p.A. Società di gestione del risparmio.

www.generali-invest.com

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SOCIALLY RESPONSIBLE INVESTING - Global...2017/02/05 · 6 Head of SRI Research Generali Group’s life mandates. She manages a team of 6 analysts. From 2007 to 2009, she worked for