2017 Lyxor Asset Management REPORTING ON INTEGRATION OF ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) CRITERIA Article 173 (D 533-16) of the French Law on the Energy Transition for Green Growth
CONTENT 1. General overview of ESG approach (D533-16-1 II-1 ) 3 2. Impact on investment policies and decisions (D533-16-1 II-2 ) 7 2
INTRODUCTION LYXOR PUTS SRI AT THE HEART OF ITS INVESTMENT SOLUTIONS. IN CREATING SOLUTIONS THAT ACCOUNT FOR ENVIRONMENTAL, SOCIAL AND GOVERNANCE FACTORS, WE ADDRESS THE CHALLENGES OF THE FUTURE AT THE CORE OF OUR CLIENT S CONCERNS. Lyxor is a group of asset management companies that provides transparent and customized solutions to investors, via alternative, indexing, structured and other research-based investments. We are a signatory to the Principles for Responsible Investment set out by the United Nations (www.unpri.org). We are committed to adhering to these principles: 3
21- GENERAL OVERVIEW OF ESG APPROACH (D533-16-1 II-1 ) Pursuant Article 173 (D 533-16) of the French Law on the Energy Transition for Green Growth, The following section provides a general overview of ESG reporting requirements (article 1, subsection II, paragraph 1) 1. General approach with regard to the inclusion of ESG issues in the investment policy and risk management within Asset Management Company At present the SRI Policy includes the following key areas: A SRI approach in line with our Commitments. In compliance with the Environmental & Social Policies and sector specific Policies, LYXOR applies exclusions of the firms associated with serious and repeated violations of regulatory requirements related to controversial sectors and products Shareholder Engagement: As part of the SRI Policy, Lyxor Voting Policy has been published as an independent document but referenced in Lyxor's SRI Policy. UN PRI: Lyxor is a signatory of the UN Principles for Responsible Investment since 2014. 2. Content, frequency, and means used by the entity to inform subscribers, affiliates, contributors, beneficiaries or clients about the integration of ESG criteria as reflected in the investment policy and risk management Lyxor's SRI Policy is available under its website and is revised each year. http://www.lyxor.com/en/the-company/corporate-governance/sri/ Several others publications are available on Lyxor.com: Lyxor Voting Policy is published as an independent document but referenced in Lyxor's SRI Policy, Lyxor voting reports Pursuant Article 173, Lyxor will integrate a description of the main criteria s nature considered for ESG issues and the reasons for choosing them in relevant fund annual reports in 2016. 4
3. List and the % share of funds (in assets under management) that integrate ESG criteria As of December 31st 2016, 49% of Lyxor s Assets under Management is covered by an ESG approach. 4. The use of (or membership in) labels, initiatives, charters, and codes related to informing on the quality of ESG practices At Lyxor Level: We are a signatory to the Principles for Responsible Investment set out by the United Nations (www.unpri.org). We are committed to adhering to these principles. By incorporating ESG (Environmental, Social and Governance) issues in our policies and practices we will influence companies to move towards more sustainable practices. Our organization is involved in discussions conducted at domestic and European level within our trade associations (AFG, EFAMA) via dedicated working groups on Responsible Investment. Lyxor is member of the AFG's Socially Responsible Investment Committee. 5. Identification and description of the risks associated with ESG issues, including exposure to climate risks As part of Lyxor's reputational and ESG risk management, we identify companies that are associated with serious and repeated breaches of norms and standards adopted by Lyxor and/or mandatory requirements related to controversial sectors and products. Lyxor s other actions: Development of Sustainability Themed Investment solutions: Sustainability themed investments inherently contribute to addressing social and/or environmental challenges such as climate change, eco-efficiency and health. Transparency: Lyxor extends gradually an ESG & Carbon rating capacity with a proprietary approach for its vehicles. Measuring the GHG emissions of its investments is seen as a first step. This will provide investors with an indication of their current financed emissions. Analysis of direct exposure should be the primary focus. Shareholder engagement: Lyxor through its active ownership encourages Companies to determine the environmental and social impact of the company s operations and identify the potential business and reputational risks, while ensuring that appropriate controls and procedures are in place to manage them. 5
REPORTING ON INTEGRATION OF CLIMATE RISKS AND THE CONTRIBUTION TO THE ENERGY TRANSITION After carefully analyzing the Indicators and data available to take into account and measure the transition risks that climate change poses to Issuers, Lyxor will not report on those matters at this time. We will work with our external providers in order to enhance our knowledge to report and better reflect the risk of transition in the coming years. 6
2- IMPACT ON INVESTMENT POLICIES AND DECISIONS (D533-16-1 II-2 ) SRI IS NOW A CORE INVESTMENT ISSUE FOR OUR CLIENTS. TAKING EXTRA-FINANCIAL CRITERIA INTO CONSIDERATION PLAYS A KEY ROLE IN THE GROWTH OF OUR BUSINESS. Capitalizing on our financial engineering expertise and ability to innovate, we are already creating solutions for our clients that wish either to have a positive and measurable impact on their investments or to restrict or refrain from investing in companies with a major ESG risk profile. Pursuant Article 173 (D 533-16) of the French Law on the Energy Transition for Green Growth, 1. Description of LYXOR s ESG approaches Funds that apply exclusion lists: To restrict or refrain from investing in companies with a major ESG risk profile, our clients can benefit both from applying our exclusion lists and from implementing dedicated online lists with their own concerns. Themed Investment Funds: Sustainability themed investments inherently contribute to addressing social and/or environmental challenges such as climate change, eco-efficiency and health. Funds with ESG selection: This approach involves the selection or weighting of the best performing or most improved companies or assets as identified by ESG analysis, within a defined investment universe. This approach includes Best-in-Class, best-in-universe, and best-effort. Funds with ESG integration: The explicit inclusion of ESG risks and opportunities into traditional financial analysis and investment decisions based on a systematic process and appropriate research sources. The integration process focuses on the potential impact of ESG issues on company financials (positive and negative), which in turn may affect the investment decision 7
Shareholder engagement: Our clients also benefit from our involvement as a shareholder in certain vehicles managed by Lyxor. This stake lets us motivate companies to improve their ESG practices in the long term. By developing these solutions at Lyxor and leveraging on our fund selection expertise, we will be able to advise our clients on how to successfully transition their investments towards greater transparency and environmental & social responsibility. Hereafter, the detail by different ESG approaches by AUM: ESG Approach Outstanding ( 31/12/2016) % of Outstanding Negative Screening 38,444,224,880 36.18% SRI ESG themed investment 492,459,494 0.46% Selection of ESG issues 6,339,162 0.01% Integration of ESG issues 23,607,950 0.02% Total 38,966,631,486 36.67% ESG Approach Outstanding ( 31/12/2016) % of Outstanding Shareholder Engagement 12,965,942,110 12.20% Total 51,932,573,596 48.88% Base AUM = 106,250,528,089 excluding AUA, including SG Fortune 2. Shareholder Engagement and Active Ownership practices Within the 'domain of engagement' a variety of engagement strategies can be distinguished to influence corporate and managerial behavior. At present Lyxor s engagement activities includes the following key areas: Proxy voting at annual general meetings (AGMs): Lyxor Voting Policy has been published as an independent document but referenced in Lyxor's SRI Policy. Class-action Lawsuits after evaluation of the process and benefits in the best interest of its clients Thematic engagements on a sector level Lyxor is convinced that good corporate governance should in the long term result in improved corporate performance and therefore improved shareholder value. In exercising its voting rights Lyxor can contribute to the enhancement of the economic and financial performance of the companies of which shares it manages on behalf of its clients, with the aim of driving best practice and reducing the risk of corporate failure. 8
The key areas of good corporate governance in the context of Lyxor's Voting Policy are the following: Protection of the long term interests and rights of shareholders, supporting the "one share, one vote" principle, where shareholders have voting rights in direct proportion to their economic interest in a company. Independence and diversity of boards to avoid conflicts of interests and to foster optimal effectiveness and efficiency of boards. Fair and transparent executive remuneration in line with the performance of the company. Quality and integrity of financial information and related communication to shareholders. Integration of corporate environmental and social responsibility in the company's operations for the benefit of the company, its shareholders and other stakeholders. Our voting Policy and voting reports are available on Lyxor website: http://www.lyxor.com/en/the-company/corporate-governance/sri/ Lyxor reserves the right to modify this document at any time in order to reflect the evolution of Responsible Investments standards and market practices. The Responsible Investment Policy is publicly available on Lyxor s website. This document cannot be interpreted as a contractual commitment. 9
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Lyxor Asset Management Tours Société Générale 17 Cours Valmy 92987 La Défense Cedex France www.lyxor.com - solutions@lyxor.com Lyxor Asset Management (Lyxor AM) is a French société par actions simplifiée (simpled private limited company) with a capital stock of 161,106,300 euros Nanterre Trade Register n 418 862 215. Lyxor AM is an investment managment compagny autorized by the Autorité des marchés financiers under the UCITS Directive (2009/65/EC) and the AIFMDirective (2011/31/EU). Copyright February 2016 Lyxor AM. All rights reserved. 11