This content is an extract of the <strong>Task Force on Climate-related Financial Disclosures (TCFD<a href=”#_ftn1″ name=”_ftnref1″>[1]<\/a>) aligned Report released by the company ISS ESG. It details results for the analysis conducted, for the first year, on the Fund Etica Impatto Clima (Linea Futuri Responsabli) which investment strategy is focused on climate change related topics, among others environmental considerations<\/strong>.<\/p>\n
All asset classes have been analyzed accordingly to the TCFD recommendations: Portfolio of Equity plus Corporate Bonds together, and Portfolio of Sovereign bonds.<\/p>\n
The document discloses <strong>results achieved at the year-end 2019 in the four areas of interests in line with TCFD recommendations<\/strong>: Governance, Strategy, Risk Management, Metrics and targets.<\/p>\n
The related carbon metrics used in the Equity and Corporate Bonds analysis are the following ones (please refer to Appendix for more details):
\n<ul>
\n<li><strong>Relative Carbon Footprint<\/strong>: a normalised measure, defined as the total carbon emissions of the Portfolio per million EUR invested. Any reference to relative carbon metrics in the Analysis refers to tCO<sub>2<\/sub>e \/ EUR million Invested;<\/li>
\n<li><strong>The Weighted Average Carbon Intensity (WACI):<\/strong> is the metric explicitly recommended by the TCFD for asset managers. The WACI allocates Scope 1 & 2 GHG emissions based on Portfolio weights. and has among its positive aspects the fact that is simple to calculate and easy to communicate to investors and, most notably, it can be applied across asset classes as it does not rely on the ownership approach. Any reference to carbon intensity in the Analysis refers to tCO<sub>2<\/sub>e \/ EUR million Revenue;<\/li>
\n<\/ul>
\nThe Data Analysis goes beyond the sole carbon footprint assessment by providing various metrics used to assess climate-related risks and opportunities in forward-looking perspectives. Those metrics include<a href=”#_ftn2″ name=”_ftnref2″><sup>[2]<\/sup><\/a>: <strong>carbon risk rating, scenario analysis, transitional climate risk and physical risk exposure<\/strong>.<\/p>\n
_____________________________
\n<h2>GOVERNANCE<\/h2>
\nThe Board of Directors (hereinafter the \u201cBoD\u201d) is Etica Sgr\u2019s decision-making body and is final accountable for climate-related matters, which are incorporated into Etica Sgr\u2019s overall investment strategy focused on issuers that adopt good practices from an ESG viewpoint. The BoD oversees climate risks and opportunities via three main channels:
\n<ol>
\n<li>the supervision of integration of climate-related considerations into the investment process by defining the final Countries and Companies investible universe;<\/li>
\n<li>the definition of climate-related issues for engagement in the form of dialogue with issuers and\/or the exercise of voting and other shareholders\u2019 rights;<\/li>
\n<li>the supervision of key initiatives in the climate change domain such as the annual carbon footprint of investments.<\/li>
\n<\/ol>
\nAs the first Italian asset management company to have signed the Montreal Carbon Pledge in 2015, Etica Sgr is committed to measuring and reporting on the carbon footprint of its investments in line with the TCFD on an annual basis. Every year, the BoD of Etica Sgr oversees the results of the investment carbon footprint analysis with strategic objectives, such as:
\n<ul>
\n<li>Positioning the Portfolio towards more sustainable companies in relation to environmental and climate change strategies (i.e. companies committed to keep global warming well below under 2\u00b0C in line with the Paris Agreement);<\/li>
\n<li>Collecting climate-related data (e.g. GHG emissions reduction targets) that can be used as a basis for engagement with companies in the equity Portfolio.<\/li>
\n<\/ul>
\n<h2>STRATEGY<\/h2>
\nThe investment strategy of the fund Etica Impatto Clima focuses on climate change and the selection of securities is implemented through an assessment of the climate profile of the issuers. Corporate issuers are excluded if involved in thermal coal mining and\/or the revenue share from fossil fuel is larger than 33% of the total revenue and\/or the revenue share from shale oil or oil sands is larger than 10% of the total revenue and\/or the oil shale reserves are larger than 33% of the total revenue. Moreover, several industries are excluded also because of their climate impact. Those industries are oil exploration and production, integrated oil, oil and gas services and equipment, oil transportation, coal and coal mining, precious metal and other metal mining, mining services. Several climate-linked factors are included in the issuer-specific negative screening based on controversies (e.g. pollution, environmental and climate impact of value chain). It is also important to note that the Etica Impatto Clima fund does not invest in the Financial sector, but green bonds issued by financial institutions can be purchased after a careful analysis of the bond’s Prospectus by the ESG Analysis and Research Area.
\n<h2>RISK MANAGEMENT<\/h2>
\nThe Etica Impatto Clima fund incorporate considerations on lower-carbon energy:
\n<ul>
\n<li>By excluding the fossil fuel industry, for the majority, from the investible universe;<\/li>
\n<li>By including criteria related to renewable energy in the sustainability assessment of issuers (e.g. revenue share from renewable energy power generation and\/or from the production of turnkey solutions for the renewable energy industry etc.).<\/li>
\n<\/ul>
\nAs a thematic fund focused on climate change, the Etica Impatto Clima fund includes additional criteria on fossil fuel involvement and lower-carbon energy. For instance, issuers that derive more than a given share of their revenue from certain fossil fuel activities are excluded. At the same time, green bonds, whose proceeds may be used to finance projects targeting renewable energy, energy efficiency, circular economy, sustainable water management, green buildings, and whose prospectus is in line with the Green Bond Principles outlined by the International Capital Market Association (ICMA)<a href=”#_ftn3″ name=”_ftnref3″>[3]<\/a>, can be purchased.<\/p>\n
Etica Sgr\u2019s consideration for lower-carbon energy is also reflected in its engagement activities where, most notably, disclosure on energy use from renewable energy sources is one of the long-term strategic issues Etica Sgr aims to discuss and to vote in favour of in related shareholder resolutions, and it is one of the topics for shorter-term dialogue with companies.<\/p>\n
ESG considerations are in fact integrated into Etica Sgr\u2019s risk management through the proprietary methodology \u201cRischio ESG\u201d (i.e. ESG Risk). \u201cRischio ESG\u201d is built on an ESG score that inter alia includes the climate-related indicators.<\/p>\n
Rischio ESG is a statistic and predictive tool that calculates the risk arising from ESG-related issues that impact the performance of stocks in a mutual fund. Every security in Etica Sgr\u2019s Portfolio holdings is assigned an ESG score. This score is higher for the securities of corporate and sovereign issuers that have a better ESG profile, and securities are then categorised in terms of classes of Rischio ESG. Considering this distribution, the ESG Risk is lower when the best performing securities (in ESG terms) are concentrated in the classes with a higher score.<\/p>\n
Etica Sgr has measured a strong statistical correlation between Rischio ESG and the traditional financial risk represented by non-diversified Value-at-Risk (VaR), which consists in the potential loss on an investee in a given timeframe. This statistical correlation applies to both sectors and countries. A fund with a higher VaR also has a higher Rischio ESG and vice versa. Therefore, Etica Sgr approach to the risk\/return analysis of a Portfolio can be regarded as holistic since it includes traditional as well as non-financial (ESG) variables.<\/p>\n
Regarding the metric of VaR<sub>ESG<\/sub>, for the portfolios belonging to the Linea Valori Responsabili, in order to have a coherent and complete integration between financial risk and ESG risk, Etica Sgr calculates an expected loss, affected by both the risk dimensions, i.e. a VaR<sub>ESG<\/sub>, which represents a more prudential risk measure. Etica Sgr is looking for extending this metrics also to the Fund Etica Impatto Clima, so that is possible to predict portfolio drawdowns than simple traditional VaR (even if calculated with skewness, kurtosis and volatility jumps).
\n<h2>METRICS AND TARGETS<\/h2>
\nClimate change is regarded as a systemic issue with a focus on climate mitigation (GHG emission reduction targets and SBTs, disclosure and TCFD recommendations), climate adaptation, just transition and green bonds due diligence.<\/p>\n
<em><img class=”size-full wp-image-27587 alignleft” src=”https:\/\/www.eticasgr.com\/app\/uploads\/2019\/10\/luca-mattiazzi-settimana-sri.png” alt=”luca mattiazzi settimana sri” width=”30%” \/>\u201cThe results of the TCFD Analysis of the Fund confirm Etica Sgr\u2019s effort over the past 20 years to invest in businesses and countries adopting virtuous practices from a climate prospective. Many of the recently observed climate changes are unprecedented and this is why we are reinforcing our commitment by applying TCFD recommendation and taking more ambitious steps.\u201d<\/em><\/p>\n
<em><strong>Mr. Luca Mattiazzi \u2013 Etica Sgr\u2019s General Manager<\/strong><\/em><\/p>\n
<hr \/><\/p>\n
<em><img class=”size-full wp-image-27682 alignright” src=”https:\/\/www.eticasgr.com\/app\/uploads\/2019\/10\/paolo-capelli-mefop.png” alt=”paolo capelli mefop” width=”30%” \/><\/em><em>\u201cThe results seem to confirm Etica Sgr\u2019s effort in order to elaborate new risk metrics, which consider both financial and ESG spheres. Indeed, our risk management aim to control the risk in a holistic perspective, i.e. following a more complete approach than traditional one, as the final goal is to reduce the Portfolio\u2019s drawdowns\u201d.<\/em><\/p>\n
<em><strong>Mr. Paolo Capelli\u2013 Etica Sgr\u2019s Head of Risk Management<\/strong><\/em><\/p>\n
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