DEXIA AM S CORE SRI FUNDS. European SRI Transparency Guidelines

Transcription

1 DEXIA AM S CORE SRI FUNDS Septembre 2009

2 DEXIA ASSET MANAGEMENT STATEMENT OF COMMITMENT Sustainable and Responsible Investing (SRI) is an essential part of the strategic positioning and behaviour of Dexia Asset Management. We have been involved in SRI since 1996 and welcome the. This is our statement of commitment for all our core SRI funds and describes our sustainability process as of. Our full response to the can be accessed below and is available on our web site Please note, that we have also drafted the Transparency Guidelines for our: Dexia AM s Thematic SRI Funds which invest in companies that are best-placed to benefit from environmental challenges and opportunities that lie ahead; Dexia Money Market Euro Sustainable fund which invests in short-term instruments issued by sustainable and responsible governments and corporations; and Dexia Equities L Sustainable Emerging Markets which invests in sustainable and responsible emerging markets. Our full response to the for all those funds can be found on our above mentioned website. DEXIA ASSET MANAGEMENT COMPLIANCE WITH THE TRANSPARENCY GUIDELINES Dexia Asset Management is committed to transparency and we believe that we are as transparent as possible given the regulatory and competitive environments that exist in the countries in which we operate. Dexia Asset Management meets the full recommendations of the. 1. Page 2 of 28

3 TABLE OF CONTENT 1 - Basic Details SRI Investment Criteria Research Process Evaluation and Implementation Engagement approach Voting policy Periodic activities Appendix Page 3 of 28

4 1 - Basic Details 1a - Provide the name of the fund(s) and fund manager to which these guidelines apply These guidelines apply to all the following funds 1 managed by Dexia Asset Management: SRI FUNDS Investment Universe Asset Class Fund ISIN Companies Countries Supranationals Dexia Sustainable Emu BE Dexia Sustainable Europe BE Dexia Sustainable Pacific BE Equities Dexia Sustainable North America Dexia Sustainable World BE BE Dexia Equities L Sustainable EMU LU Dexia Equities L Sustainable World LU Dexia Sustainable Global Equity Fund AU60AAP00013 Dexia Fund Sustainbale Equities Europe LU Dexia Sustainable Euro Corporate Bonds BE Dexia Bonds Sustainable Euro LU Dexia Sustainable Euro Bonds BE Fixed Income Dexia Sustainable Euro Short Term Bonds Dexia Sustainable Euro Long Term Bonds BE BE Dexia Sustainable World Bonds BE Dexia Sustainable Euro Government Bonds BE Dexia Bonds Sustainable Euro Government LU Dexia Sustainable European Balanced High BE Balanced Dexia Sustainable European Balanced Medium BE Dexia Sustainable European Balanced Low BE b - Provide contact details for further information regarding the funds Detailed information regarding the funds can be obtained via by clicking funds in the main menu and selecting the corresponding fund. All requests for additional information may be sent by to Investor.support-dam@dexia.com. 1 Please note that the list of funds shown in the table may contain UCITS which are not registered in the reader s jurisdiction. Hence such UCITS cannot be publicly offered to this reader. We invite readers to consult our internet webpage, in order to check whether the funds are commercialised in their country. Click on Funds in the main menu and insert the name of the corresponding fund you are looking for. If the fund appears, this means it is commercialised, in the opposite case, it is not. Page 4 of 28

5 1c - What is the size of the funds 2? (In currency at a specified date) Asset Class SRI FUNDS Fund ISIN AUM in million EUR as at 31/07/2009 Dexia Sustainable Emu BE Dexia Sustainable Europe BE Dexia Sustainable Pacific BE Dexia Sustainable North America BE Equity Dexia Sustainable World BE Dexia Equities L Sustainable EMU LU Dexia Equities L Sustainable World LU Dexia Sustainable Global Equity Fund AU60AAP Dexia Fund Sustainable Equities Europe LU Dexia Sustainable Euro Corporate Bonds BE Dexia Bonds Sustainable Euro LU Dexia Sustainable Euro Bonds BE Fixed Income Dexia Sustainable Euro Short Term Bonds Dexia Sustainable Euro Long Term Bonds BE BE Dexia Sustainable World Bonds BE Dexia Sustainable Euro Government Bonds BE Dexia Bonds Sustainable Euro Government LU Dexia Sustainable European Balanced High BE Balanced Dexia Sustainable European Balanced Medium BE Dexia Sustainable European Balanced Low BE Total Dexia AM s SRI Core Best-in-Class funds d - Where can financial performance history data about the funds be found? All details on the funds can be found on our funds webpage at (click on Funds in the main menu and insert the name of the corresponding fund). Financial performance history, key statistics and fund managers comment are summarized in the funds quarterly on-line management reporting. 1e - Provide details of the content, frequency and means of communicating information to investors Annually + Semi-annually The information compliant with the will be updated once a year or more frequently if relevant. The information included clarifies SRI investment criteria, the SRI research process, the integration of the SRI criteria in the investment process, etc. The Transparency Guidelines can be downloaded on our SRI webpage ( choose Investment processes by pointing to Funds in the main menu, select the SRI section and go to the Transparency Guidelines under Documentation/Publications). Quarterly Performances, key statistics and manager s comments are updated in the funds quarterly reporting (see 1d). 2 Please note that the list of funds shown in the table may contain UCITS which are not registered in the reader s jurisdiction. Hence such UCITS cannot be publicly offered to this reader. We invite readers to consult our internet webpage, in order to check whether the funds are commercialised in their country. Click on Funds in the main menu and insert the name of the corresponding fund you are looking for. If the fund appears, this means it is commercialised, in the opposite case, it is not. Page 5 of 28

6 Furthermore, a lot of relevant information is publicly communicated through our quarterly newsletter, Looking Ahead, which reports on the results of our sustainability analysis, changes in our SRI methodology/investment process, sustainability related topics and provides an overview of the performance of our SRI funds ( choose Investment processes by pointing to Funds in the main menu, select the SRI section and go to the Looking Ahead under Documentation/Publications). Permanently Our funds webpage is permanently updated ( click on Funds in the main menu and insert the name of the corresponding fund). Additional SRI publications (such as our quarterly newsletter Looking Ahead ) are available on-line at Dexia Asset Management s Internet site ( choose Investment processes by pointing to Funds in the main menu, select the SRI section). For all other queries, please see contact details in the above section 1b. Additional - briefly describe the corporate responsibility policies of the organization that manages or promotes the fund(s), or give direction to where this information can be located. Being a responsible asset manager goes beyond managing clients' assets. It is about establishing long-term relationships with all our stakeholders. For us, managing our clients assets is a great responsibility and we want to do it to the best of our ability and by being fully transparent. In our Sustainability Reporting, we outline Dexia Asset Management s contribution to sustainable development in the asset management industry in This report discusses new trends, evolutions and noteworthy events under five headings: Clients : the way we display responsible behaviour vis-à-vis our clients; Employees : giving our staff members the best way to develop their talents; Responsible Investment Management : full transparency and our focus on SRI; Community & the Planet : what do we do ourselves to reduce our environmental footprint; and, finally Sustainable Outlook & Governance: corporate governance and transparency). Because it s our goal to say what we do, and do what we say. For specificities pertaining to Dexia Asset Management s activities, measures and plans in the field of sustainability please refer to our Sustainability Report 2008 published on Page 6 of 28

7 2 - SRI Investment Criteria 2a - How do the funds define SRI? SRI is an investment strategy that systematically takes environmental, social and governance (ESG) criteria into consideration when making investment decisions. The SRI philosophy underlying the funds hinge on the idea that investments in issuers that manage their sustainability-related challenges in the best way generate added value in two areas: investors can count on competitive financial performances, confident of investing only in issuers who address their ESG responsibilities. 2b - What are the SRI investment criteria of the fund? In order to optimally assess the sustainability of issuers, Dexia Asset Management has developed an in-house sustainability analysis differentiated by type of issuers. 2b 1- Criteria applied to companies issuing shares and/or bonds Dexia AM s core SRI funds only invest in companies managing at best their sector-specific sustainability-related challenges. This approach is based on the idea that while financial results published periodically provide a true picture of a business in the short and medium term, sustainability related-challenges are source of risks and opportunities which are reflected in longer-term results. Our proprietary Best-in-Class sustainability analysis is designed to assess companies ability to manage sustainability-related challenges within each sector from two distinguishable, but interlinked, angles during the Macro and Micro analysis. The Macro analysis assesses a company s exposure to longterm trends (such as climate change, ageing populations ) that may strongly influence the business environment in which companies operate and may shape future market challenges and long-term growth opportunities. The Micro analysis evaluates a company s ability to take the interests of stakeholders (customers, employees ) into account in their long-term strategies as they represents both risk and opportunity for businesses. Moreover, the Best-in-Class analysis is followed by a norms-based check designed to exclude those companies for which there is definite proof of systematic breaches of one or more of the ten principles set out in the United Nations Global Compact that covers human rights, labour standards, the respect for the environment and anti-corruption. Please refer to the first part of question 3a for a more detailed description of the investment criteria applied to companies. 2b-2- Criteria applied to countries, i.e. public issuers of bonds such as governmental bodies and alike 3 Dexia AM s core SRI funds intend to finance only public issuers of countries that manage their human, natural and social capitals in the most sustainable way. This Best-in-Class methodology relies on the conviction that investing in their human capital (labour, knowledge and health) while properly managing both natural resources and social capital (norms, institutions and social cohesion) enables countries to develop themselves in a sustainable way, finally resulting in stronger economic growth on the long term. Besides this Best-in-Class analysis, countries are also assessed according to a norms-based screening founded on the ratification and observance of the main international conventions (e.g.: Human Rights and International Labour Organisation conventions ). Please refer to the second part of question 3a for a more detailed description of the investment criteria applied to countries. 3 The group of public issuers is composed of governmental bodies at several administrative levels, ranging from national/federal to local authority institutions. In the selection of all those institutions, we apply the top-of-the-pyramid-rule: if a country passes the sustainability analysis, then all governmental bodies belonging to this country pass the sustainability analysis and are considered to be sustainable and responsible public issuers. Page 7 of 28

8 2b-3- Criteria applied to supranational organisations issuing bonds Dexia AM s core SRI funds only finance supranational institutions whose mission is to contribute positively to the economic and social development of regions and countries. Moreover, the analysis of the mission statement is followed by a norms-based check designed to make sure we only finance supranational organisations that respect the ten principles set out in the United Nations Global Compact that covers human rights, labour standards, the respect for the environment and anti-corruption. Please refer to the third part of question 3a for a more detailed description of the investment criteria applied to companies. 2c - How are the SRI criteria defined, how frequently and by whom are they revised? The SRI criteria used in the sustainability analysis are revised on a 24-month basis, by the SRI team in collaboration with the SRI Advisory Board, which ensures that the sustainability analysis methodology is relevant and its application is consistent. The board s also helps identify the emerging challenges regarding sustainability, and contributes to Dexia Asset Management s SRI strategy. Dexia AM has used a number of different sources to determine what types of sustainability-related needs to be included in the sustainability analysis. These sources include, among others, governmental organizations such as the United Nations, companies themselves, industry associations, NGOs, ESG research agencies, consultants and think tanks. Please refer to the questions of part 3 for a more detailed description. 2d - How are criteria changes communicated to investors? Relevant changes are communicated by means of our quarterly publication on sustainable development and sustainability analysis, Looking Ahead. This reports on the results of our sustainability analysis, changes in our SRI methodology/investment process, sustainability related topics and provides an overview of the performance of our SRI funds ( choose Investment processes by pointing to Funds in the main menu, select the SRI section and go to the Looking Ahead under Documentation/Publications). Further, the information with regard to SRI on our corporate website is updated on a regular basis. Finally, the are updated annually or more frequently in the case of changes in methodology, investment process, etc. Page 8 of 28

9 3 - Research Process 3a - Describe the SRI analysis methodology and process 3a-1- Sustainability analysis of companies issuing shares and/or bonds In order to select within each sector the most sustainable and responsible corporate issuers, Dexia AM has developed a structured and rigorous sustainability analysis that can visually be presented as follows: Best-in-Class Sustainability Analysis Assess current and future impacts of sectorspecific sustainability-related issues on companies long term value (=materiality) Norms-based Sustainability Analysis Check companies compliance with major international treaties and conventions Armament Exclusion Company SRI Universe The whole idea of the company Best-in-Class sustainability analysis is to assess companies ability to manage sectorspecific sustainability-related challenges. Sustainability-related challenges are approached from two distinguishable, but interlinked, angles during the Macro and Micro analysis: First, the Macro analysis assesses companies exposure (e.g. services, products ) to Key Sustainability Challenges (KSCs). KSCs are long-term trends that may strongly influence the business environment in which companies evolve and may shape future market challenges and long-term growth. Dexia AM has identified six KSCs: Climate Change, Resource Depletion, Ageing Populations, Interconnectivity, Health & Wellness and Growing & Developing Populations. Secondly, the Micro analysis assesses companies ability to take into account stakeholders interests into their long-term strategies. Relationships with stakeholders are a source of both risks and opportunities which may influence companies long-term value. Dexia AM has identified six stakeholder domains: Customers, Employees, Investors, the Environment, Suppliers and Society. Both the Macro analysis and the Micro analysis consist of three parts: a sector study, company analysis and company ranking. «Best-in-Class» Analysis Assess current and future impacts of sector-specific sustainability-related issues on companies long term value (=materiality) Macro Analysis Sector Study Company Analysis Company Ranking Micro Analysis Sector Study Company Analysis Company Ranking «Best-in-Class» Universe Page 9 of 28

10 1. Sector Study: In the sector study of the Macro analysis, the sustainability analysts will determine whether there are relevant relationships between the six KSCs, displayed below, and the sector (e.g. products offered, geographical location ). Key Sustainability Challenges Climate change Resource depletion Ageing populations Growing & developing populations Health & wellness Interconnectivity When a relationship is identified, the analysts will determine how groups of companies that display similar characteristics or business models (operations, geographic location, products/services...) within the sector are exposed to the relevant KSCs and whether these exposures are positively or negatively impacting the KSCs. For example, with regards to the transport operators sector and the KSC climate change, aviation would be more negatively assessed compared to shipping. When looking at the food and beverage industry and its exposure to the KSC health and wellness, healthy food will be positively scored while junk food will be negatively assessed. Transport operators Climate change Food & beverage sector Health & wellness Aviation Shipping Junk food Healthy food The goal of the sector study of the Micro analysis is to assess material risks and opportunities resulting from interactions with stakeholders in order to identify sustainability themes relevant to a sector. For this purpose, the six stakeholder domains are broken down into 28 themes, as shown below. By analysing the sector indepth and its interactions with stakeholders with regard to the different themes, the sustainability analysts determine the relevance (weightings) for the different themes. Based on sector-specific qualitative, and where available, quantitative historical information, the relevance of each theme is determined by the occurrence, financial impact and outlook of the themes. Occurrence is the degree to which certain events like accidents, fine, litigation and publication of news reports take place and the associated level of public attention they receive. Financial impact is the level of the impact of a sustainability theme on sales, marging, assets (tangible and intangible) Outlook is the likelihood that an issue will increase or decline in importance over time through a change of occurrence and/or financial impact during the next five years. Having defined the relevance of each theme, sector-specific weightings for each theme, sub-domain and stakeholder domain are subsequently defined. Page 10 of 28

11 Stakeholder Domains Employees Customers Suppliers Investors Society Environment Sub-Domains Themes Diversity & discrimination Employability Training & career management Responsiveness to change Staff relations Dialogue with employees Work time & flexibility Working Conditions Remuneration Health & safety Anti-competitive practices Commercial practices Commercial behaviour Quality & safety assurance Quality & safety assurance Client relations management Sustainable relationships Working practices of suppliers Practices of suppliers Environmental practices of suppliers Board accountability Audit & reporting corporate governance Investors' right Remuneration Sustainable governance Sustainable outlook Sustainable business modes Long-term profitability Community Interactions Process-related social impacts Site safety/security Product-related social impacts Access to products/services Public authority relations Public authority relations Water consumption & emissions Energy & climate change Process-related impacts Other atmospheric emissions Land use & biodiversity Raw materials & waste Use Product-related impacts Disposal & recycling As way of illustrating relevant stakeholders themes, the theme training and career management is very important to the banking sector in order to attract, develop and retain high profile employees. When looking at the chemical industry, proactively applying high environmental standards in the production process may enable actors in the industry to benefit from competitive advantages (e.g. savings due to higher energy efficiency). 2. Company Analysis Based on the findings of the Macro sector studies, each company s exposures (operations, geographic location, products/services...) to sector-relevant KSCs are assessed and rated during the Macro company analysis. A global Macro score varying between -10 and +10 is calculated for each company. A negative score indicates the company is negatively exposed to the KSCs while a positive score indicates the company is positively exposed to the KSC. During the Micro company analysis, the ability of each company to manage its sector-specific stakeholders interests is assessed on two dimensions. For every theme, the sustainability analysts evaluate on the one hand the strategies implemented by the company to tackle the sustainability issue theme and on the other hand the resulting company s performance in addressing the theme. By combining this theme assessment with the Page 11 of 28

12 weightings obtained during the Micro sector study, a global company Micro score on a scale of 0 to 100 is obtained for each company. Company strategy - Relevance of the strategy developed for each issue - Human and material resources engaged - Pro-activity and follow-up Company performance - Versus its peers in the sector -Trends 3. Company ranking Based on the resultant companies Macro and Micro scores, companies within each sector are plotted on a graph, as illustrated below: Macro Micro Analysis Micro Best-in-Class Universe 0 Macro Analysis Companies with both a high Macro- and Micro score are eligible for Sustainable and Responsible investments and make up the Best-in-Class universe. The Best-in-Class equity universe is composed of the top 35% of equity issuers. The best-in-class bond universe is composed of the top 50% of bond issuers. Besides the Best-in-Class analysis, Dexia AM also conducts a Norms-based analysis of corporate issuers. The goal of this analysis is to check whether companies comply with the ten principles of the United Nation s Global Compact which encompasses four main areas of Human Rights (HR), Labour Rights (LR), the Environment (ENV) and Anti-Corruption (COR), as outlined below: Area Human Rights Labour Standards Environment Anti-Corruption Principle 1. Businesses should support and respect the protection of internationally proclaimed human rights; and 2. Make sure that they are not complicit in human rights abuses. 3. Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; 4. The elimination of all forms of forced and compulsory labour; 5. The effective abolition of child labour; and 6. The elimination of discrimination in respect of employment and occupation. 7. Businesses should support a precautionary approach to environmental challenges; 8. Undertake initiatives to promote greater environmental responsibility; and 9. Encourage the development and diffusion of environmentally friendly technologies. 10. Businesses should work against corruption in all its forms, including extortion and bribery. This analysis, which aims to filter out companies that have significantly and repeatedly breached any of the ten key principles, is done in accordance to Dexia AM s proprietary Norms-based Analysis Assessment Framework that encompasses three main steps: Page 12 of 28

13 1. Identification of Breaches With the use of an external research provider, coupled with additional in-house analysis conducted by our sustainability analysts, information is collected on actual, suspected and/or reported incidents/violations of international norms. It is then determined if incident(s) identified potentially breach one or more widely accepted international norms in the four mains areas of HR, LR, ENV and COR. 2. Assessment of the Breach A combination of parameters is used to assess the gravity/severity of a breach, namely: the temporal proximity (when and for how long has the incident occurred), size (financial costs, land polluted etc associated with the incident), credibility (allegations, legal action taken etc), and repetitiveness (is the incident a one-off incident or it is evidence of systematic failings over a period of time). Emphasis is also placed on a company s response to an incident, with favourable consideration for positive and responsible practices taken by the company to ensure that such a breach does not occur again. 3. Categorisation of Breaches The goal of the last step is to categorize the assessed breaches of one or more of the four areas (HR, LR, ENV, and COR) into three classes: Green - No evidence of repeated or significant violations of the Global Compact principles Orange - Evidence of repeated violations of the Global Compact principles but these do not appear to be significant, or vice versa; or - Evidence of repeated and significant violations of the Global Compact principles, but the company has an appropriate response/approach Red - Evident of repeated and significant violations of Global Compact principles and the company has no appropriate response/behaviour For a corporate issuer to pass positively the Norms-based Analysis filter, it must not be flagged any red in one of the four areas of the UN Global Compact. Up to 10% of companies submitted to this analysis are filtered out. Continual monitoring of companies occurs and updates are made accordingly on an ongoing basis. As a final layer of our corporate sustainability analysis, the Armament Exclusion implies that companies involved in the production and sales of weapons will be excluded from SRI investments. More precisely, companies are excluded from our Sustainable en Responsible Universe if they: are embroiled in the production or sale of anti-personnel landmines, cluster bombs, depleted uranium weaponry and/or chemical/nuclear/biological weapons, regardless of the revenues generated; and/or generate more than 3% of their revenues from the production or the sale of conventional weapons. On average, about 2% of companies passing both the Best-in-Class and Norms-based analysis are filtered out by the Armament Exclusion. Consequently, the Company SRI Universe is composed of all companies passing positively the Best-in-Class Analysis, the Norms-based Analysis and the Armament Exclusion filter. Page 13 of 28

14 3a-2- Sustainability Analysis of countries, public issuers of bonds such as governmental bodies and alike In order to select bonds issued by sustainable and responsible countries 4, Dexia AM has developed a structured sustainability analysis that can visually be presented as follows: Best-in-Class Sustainability Analysis Analyse countries ability to manage their human, natural and social assets in order to ensure sustainable welfare Norms-based Sustainability Analysis Check countries' compliance with major international treaties and conventions Country SRI Universe The goal of the country Best-in-Class Analysis is to select countries that are well managing their sustainable development, i.e. ensuring their present welfare and economic prosperity without compromising the ability of future generations to ensure their welfare and economic prosperity. In order to achieve this objective, Dexia AM has developed a structured approach based on the principle that a country is a portfolio of assets that encompasses: Economic capital: is the most well-known and generally only assessed form of capital; it gathers real (produced) capital and financial capital; Human capital: is embodied in individuals in the form of labour, knowledge, and health; Natural capital: consists of all types of environmental resources; and Social capital: consists of the interactions between individuals and gathers democratic and well functioning institutions, equity and peace. Hence, we analyse the sustainable development of a country as the process of successfully managing its portfolio of assets in the long term, which means ensuring current welfare without compromising future welfare. As economic capital of countries is already assessed in traditional macro-economic and financial analysis, our country Best-in-Class sustainability analysis focuses on the management by countries of the remaining three forms of capital: human, natural and social. In our proprietary analytical tree, these three capitals are broken into 12 sub-domains, which consist of 22 themes. 4 The group of public issuers is composed of governmental bodies at several administrative levels, going from national/federal to local authority institutions. In the selection of all those institutions, we apply the top-of-the-pyramid-rule : if a country passes the sustainability analysis, than all governmental bodies belonging to this country pass the sustainability analysis and are considered to be included in our SRI universe. Page 14 of 28

15 Asset Domains Human Capital Natural Capital Social Capital Sub-Domains Themes Basic Labour Rights Labour Participation Productivity Health Healthcare System & Outcomes Education System & Outcomes Knowledge Innovation Atmospheric emissions Energy & climate change Land use & biodiversity Water consumption & emissions Wastes Basic Political / Civil Rights Democracy Freedom of the Media Anti-Corruption Rule of Law Governance Government Efficiency Market Efficiency Domestic Fairness Fairness International Fairness Inter-generational Fairness Internal Security Peace External Security Our research and evaluation process of countries encompasses two major steps: Country «Best-in-Class» Analysis Analyse countries ability to manage their human, natural and social assets, so that they ensure their present welfare without compromising the ability of future generations to ensure their own welfare, including economic prosperity Country Analysis Country Ranking «Best-in-Class» Universe 1. Country analysis & scoring Countries are evaluated through an in-depth structured analysis. For each theme, countries actions are assessed on two dimensions: Country strategy - Commitment to international conventions - public institutions & policies - allocation of resources Country performance - comparison with peers -evolution in time - efficiency assessment taking account of countries initial stocks of assets/resources and of the constraints they face Page 15 of 28

16 First, we assess the commitments that countries take with regards to the management of their assets and the policies they implement to fulfil those commitments (creation of institutions, definition of policies, allocation of budgets). Second, we assess countries performance over time and relative to other countries. Countries can either build and reinforce their assets or weaken and ultimately destroy them. In carrying out this analysis, 200 to 400 quantitative indicators are used (depending on the available data) as a starting point in the process of scoring at theme level. We subsequently review publicly available qualitative information, most notably reports from different international organisations, so as to set a definitive score for each theme. To avoid any bias, it is necessary to take into account the specific geographic and demographic conditions a country is facing. We then synthesise the theme scores at a sub-domain level and then domain level, in order to obtain the overall score for a country (between 0 and 100). 2. Country ranking: Initially, countries are grouped into four major categories according to their aggregate credit ratings established by Bloomberg (AAA s, AA s, A s and BBB s), which are allocated by using the ratings of Standard & Poor s, Moody s, Fitch and Dominion Bond Rating Services. This categorisation permits a best comparison between countries having similar level of risks and economic development. Within each of these four categories, countries are subsequently ranked according to the overall sustainability score obtained in step 1. Sustainability scoring % 50% 50% 50% Best-in- Class Universe 0 AAA AA A BBB Aggregate credit ratings The Best-in-Class country universe is composed of the top 50% of most sustainable and responsible countries within each aggregate credit rating. Continual monitoring of countries occurs and updates are made accordingly on an ongoing basis. In case of major events (wars, massive environmental disaster, coup), an alert could be launched on a country and its analysis could be updated. The Norms-based analysis of countries reviews and assesses the ratification of and compliance with the principal international conventions. The countries retained in the Dexia Asset Management SRI Universe must have ratified and applied the following international conventions: The principal conventions on Human Rights; The conventions of the International Labour Organisation; The Treaty of Ottawa on anti-personnel mines; The convention on biodiversity and the protocol on bio-security; The convention on dangerous chemical products (Rotterdam Convention). About 25% of countries assessed through this analysis do not pass the filter. Continual monitoring of countries occurs and updates are made accordingly on an ongoing basis. Based on the results of both the country Best-in-Class and Norms-based analyses, the Country SRI Universe is defined as the top 50% of most sustainable and responsible countries within each aggregate credit rating that have positively been assessed in the Norms-based analysis. This SRI Universe has the merit to have all types of sovereign credit risks Page 16 of 28

17 represented in the SRI Universe, which allows fund managers to make the best allocation in any market environment to generate an optimal risk/return ratio in the fund. 3a-3- Sustainability Analysis of supranational organisations issuing bonds In order to select bonds issued by sustainable and responsible supranational organisations, Dexia AM has developed a structured sustainability analysis that can visually be presented as follows: Mission Statement Sustainability Analysis Assess supranational organizations mission to positively contribute to the economic and social development of regions and countries Norms-based Sustainability Analysis Check supranational organisations compliance with major international treaties and conventions Supranational SRI Universe The goal of the Mission Statement Sustainability Analysis is to select only supranational organisations whose mission is to contribute positively to the economic and social development of regions and countries. Most of the current supranational organisations by default comply with this condition because of the very nature of their activities, which means a vast majority pass this analysis. Besides the Mission Statement Analysis, Dexia AM also conducts a Norms-based analysis of supranational issuers. The goal of this analysis is to check whether the supranational organisations comply with the ten principles of the United Nation s Global Compact which encompasses four main areas of Human Rights (HR), Labour Rights (LR), the Environment (ENV) and Anti-Corruption (COR), as outlined below: Area Human Rights Labour Standards Environment Anti-Corruption Principle 1. Businesses should support and respect the protection of internationally proclaimed human rights; and 2. Make sure that they are not complicit in human rights abuses. 3. Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; 4. The elimination of all forms of forced and compulsory labour; 5. The effective abolition of child labour; and 6. The elimination of discrimination in respect of employment and occupation. 7. Businesses should support a precautionary approach to environmental challenges; 8. Undertake initiatives to promote greater environmental responsibility; and 9. Encourage the development and diffusion of environmentally friendly technologies. 10. Businesses should work against corruption in all its forms, including extortion and bribery. This analysis, which aims to filter out issuers that have significantly and repeatedly breached any of the ten key principles, is done in accordance to Dexia AM s proprietary Norms-based Analysis Assessment Framework that encompasses three main steps: 1. Identification of Breaches With the use of an external research provider, coupled with additional in-house analysis conducted by our sustainability analysts, information is collected on actual, suspected and/or reported incidents/violations of international norms. It is then determined if incident(s) identified potentially breach one or more widely accepted international norms in the four mains areas of HR, LR, ENV and COR. 2. Assessment of the Breach A combination of parameters is used to assess the gravity/severity of a breach, namely: the temporal proximity (when and for how long has the incident occurred), size (financial costs, number of persons affected, etc. Page 17 of 28

18 associated with the incident), credibility (allegations, legal action taken etc), and repetitiveness (is the incident a one-off incident or it is evidence of systematic failings over a period of time). Emphasis is also placed on the organisation s response to an incident, with favourable consideration for positive and responsible practices taken by the organisation to ensure that such a breach does not occur again. 3. Categorisation of Breaches The goal of the last step is to categorize the assessed breaches of one or more of the four areas (HR, LR, ENV, and COR) into three classes: Green - No evidence of repeated or significant violations of the Global Compact principles Orange - Evidence of repeated violations of the Global Compact principles but these do not appear to be significant, or vice versa; or - Evidence of repeated and significant violations of the Global Compact principles, but the organisation has an appropriate response/approach Red - Evident of repeated and significant violations of Global Compact principles and the organisation has no appropriate response/behaviour For a supranational organisation to pass positively the Norms-based Analysis filter, it must not be flagged any red in one of the four areas of the UN Global Compact. Up to now, none of the supranational organisations whose mission is to contribute positively to the economic and social development of regions or countries has been filtered out on the basis of this analysis. Continual monitoring of companies occurs and updates will be made accordingly on an ongoing basis. Consequently, the Supranational SRI Universe is composed of all supranational organisations that issue bonds and pass positively both the Mission Statement Sustainability Analysis and the Norms-based Sustainability Analysis. 3b - Does the fund manager use an in-house research team and/or an external research team? Please explain Dexia Asset Management employs a team of 11 dedicated sustainability analysts (including the head of SRI) combining various areas of experience in the field of the environment, sustainability screening, industry and finance. These analysts use numerous external sources of information within the context of their in-house sustainability analysis, including the services of external rating agencies. These agencies are Vigeo Group, Innovest Strategic Value Advisers, Governance Metrics International (GMI) and Ethix SRI Advisors for research pertaining to corporate issuers, and Vigeo group for research related to government bond issues. Furthermore, other sources of information are used during the sustainability analysis, such as media, NGOs, industry associations, academic experts, etc. 3c - Is there an external control or external verification process in place for the research process? Where an Advisory Committee is used, please state its responsibilities. Dexia Asset Management has established an SRI Advisory Board made up of 5 independent experts in order to ensure that the sustainability analysis methodology is relevant and its application is consistent. The board s also assists in identifying the emerging challenges regarding sustainability, and provides contributions towards guiding Dexia Asset Management s SRI strategy. The Board meets three to four times a year and is composed of: Page 18 of 28

19 Dominique Bé: Deputy Head of Unit, ESF Coordination, DG Employment, Social Affairs & Equal Opportunities, European Commission Beat Bürgenmeier: Professor of Economics at the University of Geneva, Director of the Centre for Human Ecology and Environmental Sciences Gilbert Lenssen: Chairman of EABIS (European Academy of Business in Society) and Professor of Management at the University of Leiden Céline Louche: Associate Professor, Vlerick Leuven Gent Management School, Ghent, Belgium Gérald Pachoud: Special Advisor to the Special Representative of the UN Secretary General on Business and Human Rights, Geneva. An external consultant, Deloitte, audits whether Dexia Asset Management has implemented procedures to ensure that the funds solely invest in issuers included in the SRI Universe. Deloitte also checks whether Dexia Asset Management has the resources (such as dedicated analysts, access to multiples sources of SRI data, etc.) and internal monitoring procedures and tools (such as an appropriate database) needed to deliver relevant sustainability analysis. 3d - Does the research method include stakeholder consultation? If yes, please provide details. The Dexia Asset Management sustainability analysis includes stakeholder information in the different stages of its research process. Indeed, the relevance of sustainability issues is partly determined through the importance attributed by the stakeholders to the specific themes. Furthermore, when analysing companies, countries or supranational organisations, sustainability analysts take into account many different sources of stakeholder information and companies disclosures in order to have a well-balanced opinion and analysis. For companies: The corporate Best-in-Class sustainability analysis includes stakeholder information in its research process in two major steps, the sector studies and the company analysis. Indeed, the relevance of sustainability issues (determined in the sector studies) are partly determined through the importance attributed by the stakeholders to the specific themes. Also, when analysing companies, sustainability analysts take into account stakeholder information (such as industry associations and experts, unions, specialised NGOs, media, governmental organisations, company research provider ) and companies disclosures in order to have a wellbalanced opinion and analysis. In the assessment of a company (non)-compliancy with the four categories of UNGC, or the possible involvement in arms systems, analyst will also consult stakeholders through both their publications and direct dialogue. For countries and supranational organisations: all information used for the sustainability analysis comes from stakeholders such as international organisations (OECD, World Bank, UNDP, FAO, Eurostats ), national organisations (UK Home Office, US Department of State ), NGOs (Transparency international, WWF, Reporters without Borders ), research institutions (World Resource Institution, Joint Research Centre of The European Commission ) and others. 3e - Do companies have access to their profile or analysis? If so, how often? The results of our analysis are available on request. Also, it may form the basis for discussion in the course of engagement with companies. Furthermore, in our quarterly SRI publication Looking Ahead, we always provide a detailed sector study and explain the respective sector s main challenges and opportunities and trends. Moreover, we discuss best practices of some companies in detail. Looking Ahead is publicly available and is published on our website. 3f - How frequently is the research process reviewed? The sustainability analysis is reviewed at least every 24 months. In case of major events which could impact a corporate (merger and acquisitions, scandal revelations ) or governmental/supranational (wars, massive environmental disaster, coup ) issuer s rating, an alert could be launched on a company or a country that is part of the SRI Universe and its analysis will be updated in the following 3 months. Page 19 of 28

20 3g - What research results are disclosed to the public? How is this done? With a view to increasing awareness as well as transparency and promoting SRI, information about our sustainability analysis, with examples of sector studies and analyzed companies and countries, and our SRI products are published periodically by Dexia Asset Management in several publications intended for investors as well as the general public. Looking Ahead, our quarterly flagship publication, is providing such information to the public in an accessible, comprehensive yet rigorous way. It contains, among other sections, detailed sector studies, interesting news items in the field of SRI, an overview of Dexia AM s SRI fund performances and interviews with SRI professionals. Research papers on specific sustainability topics are regularly published on our SRI webpage. The monthly reports of the funds, i.e. the monthly summary of funds performance and key figures, also list the major sustainable and responsible issuers that are hold in the fund. The annual and semi-annual reports of the funds list all the sustainable and responsible issuers that are hold in the portfolios. Page 20 of 28

21 4 - Evaluation and Implementation 4a - How are the results of the research integrated into the investment process, including selection and approval of companies for investment? The sustainability analysts at Dexia Asset Management define ratings for each issuer and supply an investment universe of eligible sustainable and responsible issuers (= SRI Universe) using the research process set out above. This list is fully integrated into the investment process as it constitutes the initial investment universe. No investment is authorised outside this eligible sustainable universe. Consequently, to establish the final SRI portfolios, the selection of issuers within this sustainable universe is based on financial analysis and optimal portfolio and risk management. This well established investment process guarantees that all companies the funds invest in are well positioned towards long-term challenges and are undervalued. 4b - What internal or external measures are in place to ensure portfolio holdings comply with SRI investment criteria? The internal procedures of the investment process guarantee that only SRI-compliant securities are taken into consideration when building up a SRI portfolio. In addition, the Dexia Asset Management risk management department ensures that the securities held in the portfolio are in line with the SRI Universe. This department is independent of the fund management department and reports directly to the Executive Committee at Dexia Asset Management. In terms of external measures, the custodian carries out checks to ensure that the portfolios comply with the SRI universe. Deloitte/PricewaterhouseCoopers, an external party, audits that all the positions and all the transactions carried out in the funds correspond to the SRI universe defined above, bearing in mind the authorised alignment period in the event of changes to the sustainable universe. 4c - What is the policy and procedure for divestments on SRI grounds? The selection of sustainable and responsible issuers is confirmed by the sustainability analysis team on a monthly basis and at specific times for exceptional reasons. When an issuer is excluded from the SRI Universe, the approach adopted by Dexia Asset Management consists of divesting it from the portfolio within six months depending on the market conditions (very rare exceptions may be allowed in order to take account of a possible liquidity problem). 4d - Are investors informed about divestments on SRI grounds? If yes, how frequently and by what means? To date, divestments on SRI grounds are not formally communicated to investors. 4e - Does the fund manager inform companies of portfolio exclusions or divestments due to noncompliance with its SRI policy and criteria? Not on a systematic way. Page 21 of 28

22 5 - Engagement approach 5a - What are the aims of the engagement policy? Dexia Asset Management s objective is to actively use engagement during the process of conducting sustainability analysis for corporate issuers. It takes the form of a dialogue between sustainability analysts and company representatives. The objective is to raise the awareness and induce the reflection of the company as well as its transparency on a specific sustainability-related theme, and indirectly, its accountability in relation to the theme. 5b - How do the funds prioritise which companies it will engage with? Dialogue depends upon the relevance of the analysed sustainable-related issues and the level of company information readily available. Also, Dexia Asset Management is a member of some specific initiatives at industry level, like the Carbon Disclosure Project and the Investors Statement on Transparency in the Extractives Sector, that do engage with companies on a non-discretionary basis. 5c - Who undertakes engagement on behalf of the funds? Engagement is undertaken by sustainability analysts when it comes to dialogue/engagement with companies. Also, the management of Dexia Asset Management intervenes in some specific sustainability-related collective initiatives (see 5b). 5d - What methods of engagement are employed? See question 5a. In addition, Dexia Asset Management deploys collaborative engagement initiatives, which entails participation to working groups, professional organisations, etc. This allows us to have a good view on current market discussions and trends. Please find an overview of our major collaborative initiatives we take part to on the next page: Dexia Asset Management is a signatory of Principles for Responsible Investment A framework for cooperation between asset owners and asset managers An initiative to foster transparency and openness in the field of SRI Investors Statement on Transparency in the ISTES aims to foster a business environment for extractive companies characterised by Extractives Sector sound governance and transparency Carbon Disclosure Project CDP promotes company disclosure on climate change and greenhouse gas emissions Investor Statement on Sustainability Reporting in An initiative encouraging emerging market companies to enhance transparency and Emerging Markets disclosure on sustainability issues Dexia AM is a member of professional organizations promoting SRI and exchanging information on market trends and evolutions, such as - BEAMA: Belgian Asset Managers Association SRI working groups within - AFG: Association Française de la Gestion Financière -Eurosif - Belsif (Belgium), Social Investment Forums - Swesif (Sweden) - VBDO(The Netherlands) -SIO (Canadian Association for Socially Investment) Sustainable Development Information Centres - ORSE: Observatoire sur la Responsabilité Sociétale des Entreprises (Club Finance) Dexia Asset Management is a sponsor of - «Chaire de recherche Finance Durable et Investissement Responsable», organised by Research initiatives on SRI AFG (Association Française de la Gestion financière) Page 22 of 28