Here too, we expect companies to respect their fundamental obligations in the areas of human and labor rights, environmental protection and the implementation of anti-corruption measures, wherever they operate. operate in accordance with our responsible business conduct policy. This follows the principles of the United Nations Global Compact and the OECD Guidelines for Multinational Enterprises as well as our own guidelines regarding investable and excluded sectors in our portfolios.
Admittedly, the implementation of ESG rules can limit the range of eligible investment opportunities and affect portfolio performance, but we believe that avoiding controversial practices and integrating ESG considerations are key to unlocking sustainable returns over the long term. term.
Responsible Business Conduct
under our responsible business conduct policy, we have policies that define the conditions for investing in particular sectors. For example, we exclude issuers such as tobacco or coal companies, although this may limit the returns that can be obtained on the portfolio in the short term.
In accordance with our coal policy, for example, we exclude companies that generate 10% or more of their revenue from thermal coal. It should be noted that out of the broad monetary investment universe made up of nearly 3,100 issuers, there remain more than 2,800 eligible after this initial selection.
Our RBC policy should be seen as an enhanced risk management tool that can help avoid reputational, regulatory and stranded asset risks. Excluding issuers linked to controversies such as tobacco, controversial weapons or unconventional oil and gas is sound risk management.
Note that issuers in these sectors may have lower credit ratings affecting portfolio eligibility. Their issues may also be less liquid, and therefore less attractive to us, given the reluctance of investors to invest in these sectors.
Monetary investment labeled ESG and SRI
Before quantifying the effect, we must clarify that our money market fund universe follows two approaches:
- Money market funds incorporating ESG criteria
- Money market funds using a best-in-class selection (“SRI labeled funds”).
All our money market funds are classified Article 8 under SFDR, requiring a minimum extra-financial coverage of 90% of portfolio securities or assets under management. They are also aiming for a better ESG score than their investment universe. The best performing funds have an additional selection criterion: they exclude the bottom 20% in terms of ESG score.
What does this mean for the investment universe? For ESG money market funds, we have identified more than 550 issuers covered by internal credit analysts. About two-thirds – more than 380 – can be considered to be of “high credit quality” and are eligible for investment by all BNPP AM money market funds.
For SRI-labeled money market funds at BNPP AM, the process involves excluding issuers with a poor ESG score in each sector. This leaves 280 issuers eligible for SRI labeled funds after excluding ESG laggards. This represents a reduction of approximately 100 transmitters, or approximately 25% of our internal buy list. We calculate the opportunity cost of this selectivity to be negligible by one basis point.
Beyond this exclusion criterion, SRI-labelled funds aim for a better CO26 footprint and greater diversity in relation to their investment universe.
Source: BNP Paribas Asset Management, as of February 28, 2022
This underscores our belief, as part of our sustainable investing approach, that ESG integration improves risk-adjusted returns, although, as with money market funds, there could be a trade-off. between ESG score and performance. A high ESG score could mean lower performance.
However, this stands to reason, as a higher score often reflects lower risk, which means a higher credit score on average. This in turn allows an issuer to borrow cheaply in the market.
We found that even with this inverse relationship, we were able to outperform fund benchmarks, confirming that ESG integration doesn’t have to come at the expense of performance.
Beyond ESG integration and an exclusion policy, we believe that active ownership through management creates value for clients when it comes to money market funds.
This means that we engage with issuers and seek to use our influence to advocate for a low-carbon and inclusive economy and encourage them to improve their practices.
In the universe of companies eligible for money market funds, we have committed to 80 issuers in 2021.
References In connection with environmental, social and governance issues  Also see Responsible Business Conduct Policy at BNP Paribas Asset Management  Other restrictions apply to thermal coal mining; please see our RBC policy for more details  Socially responsible investment  See also SFDR – Understanding and implementing it – Investors’ Corner (bnpparibas-am.com)  Also see ESG Rating Framework at BNP Paribas Asset Management  Also see ESG integration guidelines at BNP Paribas Asset Management
Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience.
All opinions expressed herein are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may have different views and make different investment decisions for different clients. The opinions expressed in this podcast do not constitute investment advice.
The value of investments and the income from them can go down as well as up and investors may not get back their initial investment. Past performance does not guarantee future returns.
Investing in emerging markets, or in specialized or restricted sectors is likely to be subject to above average volatility due to a high degree of concentration, greater uncertainty as less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of developed international markets. For this reason, portfolio transaction, liquidation and custody services on behalf of funds investing in emerging markets may involve greater risk.