Director General Sergio Carfizzi explains ESG at Fondo Pensione Nazionale delle BCC/Cra, Roma
Director General of Fondo Pensione Nazionale delle BCC, Dr. Sergio Carifizzi, is one of Italy’s most innovative investors often seeking to educate and pave the way in places where others might fear to tread. The fund’s successes speak for themselves. Read on to know how the fund is developing and integrating an ESG approach in their investment process and manager screening.
Which were the unexpected challenges during the integration and approval process of the new ESG Sustainability Report of the fund? Why is this such an important step for you?
By 2019, the pension fund undertook a gradual process of growing awareness about sustainability and its surrounding thematics, and deemed it opportune to base the first Sustainability Report on the uncorrelated component of the portfolio. Keeping in mind the underlying nature of these assets, such a component requires finer analytical attention, given the lower standardization of data in this space. Notwithstanding the ample diversification of investment strategies of our illiquid component, the first aspect that we had to consider was how to find objective and comparable parameters with which we could evaluate the degree of sustainability in relation to both the structure of the fund manager and that of their underlying assets.
To this end, questionnaires were drafted, which, based on the market’s best practice, would take into consideration the differences between fund managers given the idiosyncrasies of the respective asset classes and the nature of the assets managed. We therefore required the Private Equity and Private Debt fund managers, to compile a questionnaire based on the PRI guidelines, whereas with the Real Estate and Infrastructure funds we sent the questionnaire drafted by the GRESB guidelines.
The analysis we conducted from their responses allowed us to extrapolate those criteria that are significantly and objectively recurring in all asset classes and through which one can reach a harmonious comparative view, allowing us to express our own view on their degree of sustainability.
Observing that 71% of the total of uncorrelated fund managers had drafted an ESG policy, in a second round of questionnaires, we moved our attention to the aspect of compliance, requiring these funds to identify which of the 17 SDGs (Sustainable Development Goals) were being pursued by every single asset.
Starting from this phase, the analysis was conducted based on the responding 20 funds, effectively 83% of the total funds, so as not to “dilute” the missing statistics. What emerged is that only 50% of funds had begun analytical studies of the SDGs of their assets, therefore having to detect "by default" our aggregate exposure to the SDGs.
The final section of the questionnaire, but not of any less significance, regarded the detection of performance indicators (ESG KPI), via which every single asset pursues SDGs. Thereupon the funds were, on average, less prepared to provide data in a uniform and transparent fashion.
Ultimately, the detection of such metrics allowed us – through the implementation of a proprietary model – to define a graduatory that, via a holistic approach, enabled us to screen the most sustainable funds.
We trust that the strong awareness we dedicated to this case in the course of 2019 on our uncorrelated fund managers, will translate in a stronger ability to detect our very requirements as soon as next year.
Our objective in the short term is to have:
- 100% of uncorrelated fund managers pursing an ESG Policy;
- 100% of uncorrelated fund managers to declare which SDGs every underlying asset pursues;
- 100% of uncorrelated fund managers to detect and provide the ESG KPIs of the underlying assets and SDGs via employing the SABS methodology (Sustainability Accounting Standards Board); and
- detect ESG metrics also in the listed component of our portfolio.
The entirety of the data analysed and the harmonization of best practices we seek to implement will enable us on one hand to face the challenges of the IORP II normative, and on the other, to marry our fiduciary mandate on behalf of our pensioners with an economic model that is more sustainable and circular.
Is the integration of ESG principles in your investment process principally an instrument for mitigating risk, the expression of the fund’s values or has it more to do with generating a positive impact altogether?
Whilst complying with the requirements of the IORP II normative, the work we conducted this year lay the foundations for the basis to pursue in an optimal way the integration of ESG factors in our investment processes, starting with the due diligence phase and moving on to the monitoring phase, to then make it known to the different stakeholders. From the first analysis, we understood how an asset, managed in a “virtuous” way, can also offer a significant level of risk-adjusted returns. In summary:
- On the Environmental front: we found that especially for the real and infrastructure assets, the management of energy resources exercised through instruments which favor efficiency, translated into a bettering of profitability indices, resulting in greater economic and financial solidity of the assets.
- On the Social front: the companies that demonstrate a minor turnover of employees better the efficiency of processes, in turn inducing greater productivity by cost containment.
- On the Governance front: we found that the companies that dispose of a structured Governance result to be less risky. In financial terms, this translates in a lower risk factor enabling to actualize future cash flows, benefiting valuations.
This kind of mapping that took place in 2019 allowed us to detect which percentage and towards which SDGs the capital of Fondo Pensione BCC is directed, in terms of asset class and in terms of specific fund.
From the data received, over €300 million has been invested thus far in assets that have pursued sustainable objectives, with a percentage of these predominantly environmental (renewable energies and energetic efficiency, sustainable cities, responsible production and consumption.)
The picture resulting so far represents the fundamental bottom-up approach upon which our ESG Policy will be drafted.
How do you face the challenges arising from a lack of standardized processes and data that comes with ESG integration?
To manage the absence of standardization in processes and ESG data available to us it is necessary, beyond the continuous engagement of investors, that the Regulator exercises greater attention in the legislative framework already outlined, and defines clear references and instruments of common usage for the integration of ESG factors in business practices. It is opportune to define a market standard, which establishes the criteria to determine the variables associated to ESG factors.
This aspect is of fundamental significance to those who decide to adopt an ESG approach given that the assumptions at the basis of the analysis have an enormous impact on the results. If we do not reach a level of quality and adequate reliability, the risk is that of forming deliberations and valuations of sustainability impacts that are poorly representative. For this reason, the support of those institutions, which contribute to the Asset Management industry, through agreements and collective as well as individual initiatives, should favor a bettering of the quality and access of ESG data to allow the industry to reach an adequate level of standardization.
The ESG analysis developed by Fondo Pensione BBC, now solely for the uncorrelated component of the portfolio, was very complex. In the specific case for private equity and venture capital, the activity was particularly complex in light of the typology of companies such activities engage in.
In private equity, for instance, the counterparts are largely family run SMEs with a simple organisational structure, whereas in venture capital we find ourselves facing new institutions, oftentimes small and unstructured in which there is no dedicated ESG function.
In these cases, it would be opportune for fund managers to commit to bettering the company culture on sustainable terms, by fortifying internal competences, modifying the valuation system of their human resources in order to reach those objectives in line with ESG thematics, and integrating environmental, social and governance aspects in the different phases of the investment process, by drawing on an international standard and experiences to better their context.
During these turbulent and unprecedented times, did you register a better performance thanks to your ESG approach?
Measuring the impact of ESG on investments is now necessary for those who have decided to look at the value of sustainability, integrating them in their very own decision-making and monitoring processes.
The growing activism of Fondo Pensione BCC in this field is due to the will to positively influence business culture and strategy, offering a positive contribution to the environment, social policy and governance. We believe that paying attention to ESG factors can first benefit asset management in terms of risk-return and represents an opportunity to help locate those non-financial risks, which up until now have not being monitored, as well as favor a greater degree of transparency of specific asset classes.
Fondo Pensione BCC has conducted a complex analysis to screen the weight of ESG on the uncorrelated component, but to this day, it is challenging to quantify with precision the contribution to the performance of every single asset on the ESG front. After all, the results from the analysis showed that from 20 fund managers, 85% resulted ESG compliant.
In the context of these results, the highest performing assets were real estate, followed by infrastructure – both expressing particular attention to environmental aspects.
The private equity component, on the other hand, showed a far smaller degree of sensibility to sustainability practices, perhaps due to the fact that the majority of the funds in which we are invested (typically Italian enterprises), has only recently started an ESG integration process in their own investment policies. In any case, this component demonstrated a greater propensity for social policy integration. The private debt fund managers, on the other hand, showed little to no regard for sustainability objectives in their portfolios, with some rare exceptions.
The results abovementioned represent only the beginning of a long process of sensitization and awareness growth towards ESG factors and thematics, which the fund started undertaking last year. We maintain that in the long term, virtuous management of assets will favor the performance of our investments and offer a concrete contribution to the environment, social policy and to a sound governance culture.
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