ING Investment Office Publication date: 10 October 2018 10:30 a.m. Sustainable investment Assessment of the sustainability of investment funds To quickly provide insight into the sustainability of an investment, we have developed the Non- Financial Indicator (Nfi). We apply this indicator to companies and (semi-)governmental institutions, but also to investment funds. This summer, we reassessed all the investment funds on the master list and awarded them a new Nfi score. This publication contains the results of this assessment. But first we would like to explain how we calculate the Nfi score of investment funds. And when an investment fund is sustainable according to our standards and when it is not. Part 1: how do we proceed? Jochen Harkema has been a sustainable investment analyst since 2012. He studied economics at the University of Maastricht and Sevilla and investment analysis at the VU University The assessment is usually carried out in two steps Method similar to individual equities The method used by our analysts to determine which investment funds we believe are sustainable and which are not, is similar to the assessment of the sustainability characteristics of companies that we apply when selecting individual equities and bonds for our investment strategy. As with the analysis of companies, the assessment of investment funds usually takes place in two steps: 1) Quantitative assessment The first step is a test in which we assess the policy of the fund house against dozens of sustainability aspects. This appraisal leads to a Non-financial indicator (Nfi) score. Only funds that score at least above average (and therefore belong to the best 50%) are eligible Peter Tros has been working at the Investment Office as a sustainable investment analyst since 2015. He studied business economics at Ichthus University of Professional Education Rotterdam and philosophy at Tilburg University.
for inclusion in our sustainable investment universe. This is the list of investments that qualify for our Sustainable investment strategy. 2) Qualitative assessment This second test examines the background to the fund s investment policy and its implementation. We talk to the fund manager and analyse the investments in the fund s investment portfolio. An investment fund must pass both the first (quantitative) and this second (qualitative) test in order to be admitted to ING s sustainable investment universe. If it does, the Investment Manager of the Sustainable investment strategy can include the fund in the strategy. Does the fund take its responsibility seriously in the field of sustainability? Does the fund s vision on sustainability match ours? For example, does the fund use a best-in-class approach? Questionnaire: see appendix Nfi ++ means: ranks among the best 10% in terms of sustainability of Quick insight into how an investment fund scores on sustainability ING s sustainable investment analysts developed the Nfi in 2001 to help sustainable companies distinguish themselves from other companies in the sector. The Nfi is the result of an assessment of companies in respect of their policies and performance in the field of sustainability. We also use this methodology to determine the degree of sustainability of an investment fund. Of course, the factors that determine how an investment fund scores on sustainability differ from those of a company. But the effect is similar: the Nfi value provides rapid insight into how an investment fund scores on sustainability policy in relation to comparable others. An investment fund with a high Nfi score (+ or ++) distinguishes itself positively by the level of responsibility it takes on various sustainability aspects. Examples include the voting policy at shareholders meetings where themes such as people, the environment and society are concerned. We determine an investment fund s Nfi score by means of a survey To determine a fund s Nfi score (- -, -, =, + or ++), we first submit a questionnaire to the fund manager of the investment fund. By means of specific questions we examine how the fund, but also the company behind it (the fund house), incorporates sustainability in its policy. The list contains 103 questions in ten categories in the field of sustainable investment: from the selection process to controversial weapons. We convert the answers into points scores. We then compare the total of the points with the final scores of other investment funds whose questionnaires we processed. A central question in our assessment of investment funds is: to what extent does the fund s vision on sustainability match our own? List of 103 questions in ten categories for fund manager We ask the fund manager or the fund house questions about the following ten areas: Responsible investment policy (formal principles). Has the fund documented its sustainable investment policy? Corporate initiatives in the field of sustainable investment. For example, has the fund or fund house committed itself to the United Nations Principles of Responsible Investors (UNPRI)? Voting policy at annual meetings Engagement policy (engaging with companies to influence them) Exclusion from specific business activities (such as tobacco, coal or alcohol) Exclusion of companies with controversial conduct (such as bribery, environmental offences) Selection methods (e.g. best-in-class: setting the high performers as the standard) Inclusion of sustainability data in the investment selection process The corporate governance of the fund, such as remuneration or securities lending (temporary lending of securities for payment) Policy on controversial weapons (such as cluster munitions). Answer to the question How does the fund give shape to sustainable investment? For each category, we therefore ask the fund managers a number of questions. For the responsible investment policy category, we want to know, for example, whether the fund has formally established its policy, who is responsible for this, whether it is published and whether the relevant documentation is also accessible to all investors. The answers to these questions provide us with an initial insight into the way in which the fund gives shape to sustainable investment. We assess all the answers and award a score to them. The complete list of questions (in English) is annexed to this article. The Nfi assessment is relative The assessment (points score) of the answers ultimately leads to an overall score for an investment fund. We compare this total score with the final scores of the other funds on our master list of investment funds. If a fund with its score ranks among the best 10% in the field of sustainable investment, it is rated Nfi ++. Assessment of investment fund sustainability October 2018-2
the (examined) funds on our master list In our sustainability strategies, we do not invest in funds with Nfi or lower For the second assessment we enter into a personal discussion Are the differences limited and explainable? Financial and sustainable analysis converge The five Nfi scores: - -, -, =, + and ++ Nfi ++ belongs to the best 10% Nfi + belongs to the best 30% Nfi = better than average (best 50%) Nfi lower than average (excluded from ING s sustainable universe). Nfi - - belongs to the worst 10% (also excluded) If an investment fund scores lower than average and thus receives a negative Non-financial indicator (Nfi or Nfi - -), we do not include the fund in the Sustainable investment strategy. Nevertheless, a negative Nfi does not automatically mean that the investment fund is not acting socially responsibly. The qualification does mean, however, that according to our analysis the fund has less or worse policy in the field of sustainable investment than other investment funds. In our assessment we take account of the investment category or categories in which a fund invests. Qualitative assessment: only if we include an investment fund in the Sustainable investment strategy The quantitative assessment using the questionnaire may be followed by the qualitative assessment, which goes one step further. Because this second selection process is timeconsuming, we only assess those funds that we expect to complement our sustainable investment strategies. We then comprehensively analyse the various policy documents of the fund or fund house in the field of sustainable investment and enter into personal discussions with the fund manager(s) and the management of the fund house to hear their views on sustainable investment. We compare the fund portfolios with our own sustainable rating During the qualitative assessment, we also assess whether the fund adheres in practice to its own sustainable principles. This is done by analysing the fund s investments. We compare these with our sustainable universe, which is created by means of our positive and negative assessment. This comparison highlights the differences in the sustainability assessment of companies between the ING Investment Office and the investment fund concerned. This is important because the term sustainable has very different interpretations and almost all investment funds have a different view of sustainability than we do. The question then is which considerations have been made by the relevant fund managers, not so much to question their choices, but much more to gain insight into the other approach to sustainability. A positive assessment depends on whether the differences in approach to the concept of sustainability are minor and explainable. In such cases, companies excluded by ING from the sustainable universe may be included in an investment fund. Application in the Sustainable investment portfolio Our Sustainable investment strategy is not managed by the sustainable investment analysts but by the Investment Manager of the strategy. The latter can only select investments for the Sustainable investment strategy from the sustainable investment universe that has been constructed by the analysts. The investment funds included in this have successfully passed both the quantitative and qualitative sustainability tests. Together with the analysts of the ING Investment Office, the Investment Manager assesses the financial performance of the investment fund and the broader investment policy. If this financial assessment also leads to a positive opinion, the Manager can include the fund in the Sustainable investment strategy. Sustainability characteristics such as the Nfi are also examined when selecting investment funds for ING s regular investment strategies. Financial and non-financial performance thus converge in the investment process of investment strategies. Assessment of investment fund sustainability October 2018-3
Part 2: what are our findings? We have assessed 500 investment funds and classified them in an Nfi category Outcome of the sustainable assessment of ING fund master lists in the Netherlands, Belgium and Luxembourg In the summer of 2018, we assessed the funds on the master list of ING Netherlands, ING Belgium and ING Luxembourg for sustainability. As explained above, we asked 103 questions to the managers of the (in total five hundred) investment funds. A maximum of 350 points, divided between the questions, could be scored for each fund. We then divided the funds into one of the five Nfi categories according to their final score: from the worst 10% (Nfi - -) to the best 10% (Nfi++). Dutch fund providers are among the most sustainable Our master lists of investment funds includes 76 different fund providers ( fund houses ) from eight countries. On average, the Dutch suppliers score well on sustainability. Three of the five most sustainable funds come from the Netherlands. More than 20% of the funds are from Dutchproviders. These funds score best: ASN Milieu & Waterfonds ASN Duurzaam Aandelenfonds Triodos Sustainable Equity Fund Wheb Sustainability Fund Sycomore Sélection Responsable The fund house making the most progress compared to the previous assessment (2015) is NN Investment Partners (NNIP). All funds from this provider now have an Nfi + or Nfi ++. The funds that have a very low score are mainly index trackers and exchange-traded funds (ETFs), where both the investment fund and the fund house have no or only minimal policy on sustainability. We continue to strive for further sustainability We not only assess sustainability by means of the questionnaire. We also hold regular personal discussions with the fund managers to see where sustainability can be strengthened and also encourage fund managers to urge the companies in which they invest, or that are considering investing, to adopt more sustainable behaviour. In this way we aim to contribute to a more sustainable economy. Want to know more? See ING.nl/beursnieuws Assessment of investment fund sustainability October 2018-4
Appendix: questionnaire for fund managers Survey Responsibility of Investment Funds Group-level questions (questions to the organisation) Responsible investment policy (formal principles). Does your company have a responsible/sustainable investment policy? Please provide us with the link to the policy on your website What are the greatest changes to your RI policy made by your company in the last three years? What changes do you expect in the coming years? Could you provide us with a link to your RI activities? Corporate initiatives in the field of sustainable investment. Is your company a signatory to the UN PRI (United Nations Principles for Responsible Investments)? If so, please state when you became a signatory. If you are a signatory, please provide the PRI scores where applicable Is your company a signatory to any other initiatives with respect to responsible investing? If so, which one(s) and please provide us with some examples of other initiatives Voting policy at annual meetings Do you have a policy on ESG voting? Are environmental and social issues covered in this policy? Do you vote on ESG issues? Do you execute the voting policy yourself? On how many ESG issues have you voted last year? What percentage of your holdings does this represent? How often did you vote against the board? Is this information public? Could you provide us with a link and any other relevant information? Engagement policy Do you have a policy on ESG engagement? Are environmental and social issues covered in this policy? Do you engage with your holdings on ESG issues? If so, do you execute this yourself? How many companies have you engaged with in the past year? What percentage of your holdings does this represent? Have you ended an engagement process? What if the engagement does not lead to improvement? Can you give an example of this? Can you provide us with a link and other relevant information? Fund-level questions (questions to the fund manager) Do you categorise this fund as a sustainable fund? Can you please explain why? Does the fund have any sustainable labels? For example, European SRI Transparency code. Exclusion from specific business activities Alcohol Animal testing Arctic drilling Cluster munition Coal Defence general Assessment of investment fund sustainability October 2018-5
Fast food Fossil fuels Fracking Fur and speciality leather Gambling Genetic engineering Meat Nuclear energy Oil sands Other controversial weapons Palm oil Pesticides Pornography Predatory lending Sugar Tobacco Weapons Exclusion of companies with controversial conduct Do you exclude violators of the UN Global Compact principals? Which other behaviour-related exclusions do you employ? Animal welfare Breaches of regulations and/or social code Bribery/corruption Child labour Environmental impact Violations of labour rights Violations of human rights Are these exclusions based on international conventions such as ILO, OECD, UN Guiding Principles on Human Rights? Have you excluded (companies from) countries due to ESG-related issues in those countries? If so, which are these? Sustainable selection methods Positive selection on ESG issues (e.g. best in class). If so, can you please explain how this is done? For example, what percentage of the universe is excluded by this approach? Thematic/sector based approach (e.g. innovation, water, human capital, climate change, renewables or a combination) If so, can you please explain how this is done? Is the complete fund portfolio subject to this approach? Is this fund an impact investment fund? If so, what impact would you like to achieve? How do you measure this? Can you provide us with an impact report? Inclusion of sustainability data in the selection process Is ESG information integrated in the financial analysis? If so, can you please explain how? Can you provide us with an example? Are ESG analysts involved in the investment process and/or decision making? How many ESG analysts do you employ? Do you receive ESG information from ESG data providers? If so, from which provider? Governance questions Can you describe the remuneration policy of the fund management? Do the fund managers themselves hold participations in the fund? What is the fee structure of the fund? Is there a performance fee? What is the turnover of the fund? Does the fund participate in securities lending? If so, which collateral does the fund receive? Assessment of investment fund sustainability October 2018-6
What happens with the net income of the securities lending? What percentage of the income flows back to the fund? How many basis points are saved by using securities lending? What is your cash policy? Where do you hold the fund s cash position? Do you screen this party on sustainability? What is the timeframe for selling a financial instrument when this instrument no longer complies with your ESG criteria? Are there any control procedures to ensure compliance with your ESG policy? If so, please explain. Does the fund report on non-financial indicators? For example, waste, water, employees, etc. If so, please provide a document or a link to the documents. Questions for the assessment of countries Do you use ESG criteria to exclude countries from the fund? If so, could you indicate what ESG criteria you use? Do you incorporate positive selection on ESG issues (e.g. best in class)? If so, can you please explain how this is done? For example, which percentage of the universe is excluded by this approach? Policy on controversial companies (weapons), tobacco and Global Compact offenders Has the fund excluded all companies involved in controversial weapons from the list below? If not, is the total percentage of holdings in these companies maximised to five percent? If not, please indicate in the column for the specific fund for each company if the company is excluded, or the current percentage of the holding. Does the fund invest in one or more of the other excluded companies? If so, what is the fund s current holding percentage? Has the fund excluded all companies involved in the production of tobacco (revenues of 5% or more)? If not, does the fund currently invest in tobacco companies? Has the fund excluded all companies marked as offenders of the Global Compact Guidelines? Assessment of investment fund sustainability October 2018-7
Disclaimer This investment recommendation was prepared by Jochen Harkema and Peter Tros, sustainable investment analysts, and was published and first distributed on 10 October 2018, 10.30 a.m. by the ING Investment Office, part of ING Bank N.V. For the preparation of this investment recommendation, use was made of the following substantive sources of information: Bloomberg, CreditSights, Standard & Poor s, Moody s, Fitch, ING FM, HSBC, Citi, J.P.Morgan, Thomson Reuters Datastream, Sustainalytics, UBS Neo and/or Reuters Metastock. This investment recommendation was based on the following accounting principles, methods and assumptions: price/earnings ratio, price/book value ratio and/or net asset value (NAV). No protected models were used for this investment recommendation. A description of the ING policy regarding information barriers and conflicts of interest can be found here. Unless otherwise stated, ING Bank N.V. will not update the investment recommendation. Developments that have occurred after the preparation of this investment recommendation may affect the accuracy of the assumptions on which this investment recommendation is based. Investment recommendations are generally revised two to four times a year. This investment recommendation does not constitute individual investment advice, but only a general recommendation on which investors can also base their investment decisions and does not constitute an invitation to enter into any contract or commitment whatsoever. This investment recommendation is based on assumptions and does not represent any guarantee for a particular development or result. No rights can be derived from this investment recommendation. Decisions based on this investment recommendation are for your own account and risk. Neither ING Bank N.V., nor ING Groep N.V. nor any other legal entity belonging to the ING Group, accepts liability for any damage to any extent whatsoever, arising from the use of the above investment recommendation or the information contained therein. Investing entails risks. You could lose all or part of your initial investment. The value of your investment may fluctuate. Past performance is no guarantee of future results. ING Bank N.V. is not registered as a broker dealer and investment advisor as referred to in the US Securities Exchange Act of 1934, respectively, the US Investment Advisers Act of 1940, as amended from time to time, nor within the meaning of other applicable legislation and regulations of the individual states of the United States of America (hereinafter jointly referred to as: US investment law ). This investment recommendation is not addressed to and not intended for US Persons within the meaning of US investment law. Copies of this may not be sent or brought to the United States of America or provided to US Persons. ING Bank N.V. has its registered office in Amsterdam, Commercial Register no. 33031431, and is supervised by the Netherlands Authority for the Financial Markets (Stichting Autoriteit Financiële Markten) ( AFM ). ING Bank N.V. is part of ING Groep N.V. All rights reserved. This investment recommendation may not be reproduced, copied, published, stored, modified or used in any form, online or offline, without the prior written consent of ING Bank N.V. 2018 ING Bank N.V., Amsterdam. Assessment of investment fund sustainability October 2018-8