ESG Approach-en | Flabfunds

fLAB fUNDS ESG Approach

From March 10, 2021, the main parts of the European Sustainable Finance Disclosure Regulation ((EU) 2019/2088 – SFDR) will apply
Investor demand is rising for strategies that integrate environmental, social or governance (ESG) considerations with financial objectives.
Taking such an approach, using S&P Global Corporate Sustainability Analysis for Equity Screening and MSCI ESG Government Ratings for Bonds Screening, meaningfully improves the ESG characteristics of our flagship fund portfolio, fLAB Core, without significantly altering the risk-return profile.

In accordance with article 8 of EU Sustainable Finance Disclosure Regulation, fLAB Core promotes environmental and social characteristics.

Our investment process includes ESG factors using a “best-in-class” approach in order to identify those companies with the best practice and standards in terms of ESG and sustainable development for inclusion in fLAB Core portfolio. ESG criteria is integrated as part of the quantitative investment process for stock selection. The model penalizes issuers with low relative rating.

Sustainability risks are integrated into the investment decision by following the S&P Global Corporate Sustainability Assessment (the “S&P Global CSA”) for all investments in equity securities (in the United States and in the Euro Zone). The S&P Global CSA, provided by Bloomberg, serves as a sustainability roadmap helping participating companies to prioritize corporate sustainability initiatives that are most likely to enhance the company’s competitiveness.

fLAB Core uses this S&P Global CSA ranking as follows: for each equity sector where we invest in the United States and in the Euro Zone, we use the ranking as another factor for stock selection, overweighting the companies with the best ranks and underweighting the companies with the lowest. The Sub-fund will not be invested in any company under the 33% rank.

fLAB Core also uses the MSCI ESG Government Rating for government bonds and will not invest in bonds with rating under BB as rated by the MSCI ESG Government Rating. MSCI ESG Government Ratings identify a country’s exposure to and management of environmental, social, and governance (ESG) risk factors and explain how these factors might impact the long-term sustainability of its economy. By providing a long-term view on sustainability the ratings aim to complement traditional government debt analysis for analysing a country’s credit worthiness.

The ESG Rating Providers:

Since 1999, the Corporate Sustainability Assessment (CSA) and the collaboration with Dow Jones Indices (now S&P Dow Jones Indices) has been used to create the foremost global sustainability benchmark. The CSA applies a best-in-class approach, meaning no industries are excluded from the assessment, and the CSA compares companies across 61 industries via questionnaires assessing a mix of 80-100 cross-industry and industry-specific questions

On the basis of their performance, companies receive scores ranging from 0 to 100 and percentile rankings for approximately 20 financially relevant sustainability criteria across economic, environmental and social dimensions.

All assessed companies’ industry rankings are published on the Bloomberg Platform

S&P Global ESG Scores, calculated from the CSA, are available publicly and accessible to the financial community on the S&P Global Market Intelligence platform.

MSCI ESG Government Ratings provide an overall sustainability assessment of 198 countries/regions and 45 Local Authorities covering Developed, Emerging and Frontier Markets, containing historical time series results since 2012 with data backfilled to 2008. They offer unique matching capabilities by containing a file matching more than 13,000 issues updated on a monthly basis. Coverage is designed to provide ratings on 99% of government bonds issued in the marketplace.

MSCI ESG Government Ratings scores and rates countries on a seven point scale from ‘AAA’ (best) to ‘CCC’ (worst). Ratings are derived from 0-10 scores on underlying factors in three pillars: Environmental, Social, and Governance. The model contains scores on all of these sub-factors to provide granular insight on a country’s performance on the issues.

Our other fund, fLAB Satellite is classified under article 6.2: no integration of sustainability risks.

fLAB Satellite is a Relative Return Fund with a Minimum Sharpe Ratio Target. In a game of non-stable correlations, fLAB Satellite role is trying to find the best combination between assets to provide positive returns. In essence, fLAB Satellite target is to maximize the Sharpe Ratio.

The most important part of the portfolio is composed by fixed income securities. Then we add an overlay of liquid assets, mainly through UCITS compliant ETFs and ETNs: Commodities (Metal, Energy, Agriculture, Precious Metals), Currency Products, Inflation Linked, High Yield, Convertible Bonds, Credit Markets, Equity Strategies, and a few more sub-assets. As far as we cannot assure that the underlying securities that compose these UCITS ETFs and ETNs follow any type of sustainability criteria, we will not implement any due diligence policy with respect to the principal adverse impacts of our investment decisions on sustainability factors.

Adverse Sustainability Impacts Statement

We consider ESG as one additional factor in our investment process. We do not foresee any adverse sustainability impact of investments on ESG factors

In the Equity Side, we only invest in those stocks with S&P Global ESG rating above 33 (In a scale between 0 and 100). We adopt this stock screening factor when we create our baskets of stocks in US and Eurozone Areas. The basket of US stocks are composed by a number of 60 shares and the basket of the Eurozone are composed by a number of 15 stocks. The initial universe will be S&P500 for the US and Eurostoxx 50 for the Eurozone. This means we have a wide universe of shares to choose from, and ESG will be another factor on our screening process.

Our backtesting results of our selected equity baskets against these benchmarks show a robust performance and controlled tracking error. The rebalance of the portfolios in our backtesting is monthly or quarterly, depending on the strength of the results. The ex-ante Active Risk used has been 2.5% and the sector deviation from the sector real distribution in the benchmark has been done with a maximum difference between +/- 1%.

In the fixed income side, fLAB Core only invests in Government Bonds. The ESG approach we have taken lets us invest in those Government Bonds with a MSCI ESG Rating equal to or greater than BB. The MSCI ESG Government Rating shows a seven point scale and fLAB Core will not invest in the 2 worst ratings: B and CCC. All our current investments in Government Bonds are fully compliant with these conditions as we only invest in US Treasuries, UK Gilts, Japanese JGB and Eurozone Governments. All these Government Bonds are already included into the 5 best ESG ratings.

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