Sustainability Risk Integration Policy
The AFI ESCA group is active in the insurance sector with three insurance companies based in France and Luxembourg: AFI ESCA and AFI ESCA Luxembourg (life insurance and capitalization bonds companies), and AFI ESCA IARD, all the above-mentioned companies are hold by AFI ESCA HOLDING (Luxembourg).
This policy applies to all those insurance companies.
The AFI ESCA group has been working for several years to introduce a sustainable development approach within its activities and its relations with its employees, policyholders, clients and partners.
Sustainable development is globally the reunion of three pillars: social, economic and environmental, and the concrete application of sustainable development in the company’s represent CSR (Corporate Social Responsibility).
Insurance companies have a strong social, environmental and economic impact, even more than company’s belonging to other financial sectors. In fact, being an institutional investor and distributing life insurance contracts and capitalization bounds induces a strongest responsibility.
This policy therefore details how the entities of the AFI ESCA group take into account sustainability risks in their investment decisions, and in their distributing of insurance products and their underlying assets.
1- The regulatory environment : From the Solvency II Directive to the SFDR regulation
Insurance companies are crucial within the financial industry.
Furthermore, insurance companies are, inherently, risk management professionals.
As such, they are in a privileged position in promoting sustainable development.
Thus, insurance companies are responsible for all their investment decisions, which must respect the following objectives :
Comply with regulations that require the tying up of capital to meet legal requirements ;
Search for the right remuneration for risks ( risk/reward analysis) ;
Manage assets within liability restrictions ;
To be able to meet at any time uncertain future commitments (to settle non-life
claims, to honor commitments and to guarantee the security and liquidity of capital in relation with life insurance policyholders).
These objectives lead insurance organizations to be cautious by taking into account the risk of default of counterparties and by seeking recurring revenues in order to honor their commitments.
The AFI ESCA group is subject to the Solvency II Directive, which leaves companies free to make their own investment choices, but introduces the prudent person principle, which requires that :
“Investments must be secure, reliable, liquid and cost-effective, in the best interests of policyholders and beneficiaries”.
AFI ESCA group is also subject to the European Parliament and Council Regulation 2019/2088 on the disclosure of sustainability information in the financial services sector (SFDR or Disclosure). This regulation is part of the European Commission’s action plan.
One of its goals is to contribute to the reorientation of capital flows towards sustainable and responsible activities and to create new transparency obligations in terms of sustainable finance for market players and financial advisors. This regulation entered into force, for Stage 1, on 10 March 2021.
2- The concept of sustainability risk
Sustainability risk (or ESG risk) may be defined as an environmental, social, or governmental event or circumstance, the occurrence of which could have an actual or potential material negative impact on the investment’s value. This concept combines three main risks as defined hereafter :
Environmental risk : climate change factors ( emission of greenhouse gases, land use change, etc.) are taken into account.
Social risk : addressing aspects such as the gender pay differential or any other type of discrimination, with respect for the rights defined by the International Labor Organization, social protection for employees, child labor, protection against work accidents.
Governance risk : factors examined such as the independence of governance boards, the gender balance of management teams, the management structure, prevention policies for money laundering and terrorist financing, and anticorruption policies.
3- How sustainability risks are taken in consideration
3.1 – Assets representing euro liabilities (for life insurance)
• The asset management mandate of DÔM FINANCE
AFI ESCA France has delegated the management of the fixed income portfolio of its Euro fund to the asset management company DÔM FINANCE. AFI ESCA Luxembourg also delegated to the same asset manager the entire management of two of its Euro funds, as well as the management of its general assets.
DÔM FINANCE’s Socially Sustainable Investment (SRI) strategy is characterized by :
Regulatory restrictions linked to international treaties, such as the Oslo Treaty and the Ottawa Convention, but also in line with the guidelines of the AFG (Association Française de Gestion). These exclusions relate to sub-munitions and anti- personnel mines, but also to so-called controversial weapons such as chemical, biological, uranium, blinding laser, inflammatory, non-localizing fragment and nuclear weapons. Whether through blindness, burns, mutilation by non-localizable
fragments, or the use of uranium, which has devastating long-term civilian consequences, all these weapons cause excessive or unjustified suffering to soldiers, and can also indiscriminately affect populations, even in periods of decreasing tension sector.
Specific exclusions (charcoal), in line with the 2015 Paris Climate Change Agreement, whose objective is to lower global warming to below 2°C and if attainable to 1.5°C by 2100.
Indeed, thermal charcoal represents more than 44% of global greenhouse gas emissions.
On the other hand, developed countries have committed to stop using thermal charcoal by 2030. DÔM FINANCE is therefore committed to progressively move away from this sector, by excluding from its investments any company linked to thermal charcoal exceeding 27%. This threshold will reach 0% in 2030, which will coincide with the exclusion of any company having an activity linked to thermal charcoal.
In addition, DÔM FINANCE incorporates, for the selection of financial providers, an analysis matrix that takes into account extra-financial criteria so as to generally only select financial providers whose rating is higher than that of the investment universe, after excluding the 20% worst performers.
The taking into account of the challenges of climate change, in the execution of the mandate, is also demonstrated in the assessment of the carbon footprint and its monitoring.
DÔM FINANCE’s management mandate fulfils all the conditions required to receive the SRI label granted by the public authorities.
Lastly, DÔM FINANCE supports two major market initiatives, namely :
The Principles for Responsible Investment (PRI)* The Carbon Disclosure Project (CDP)**
Assets outside the management mandate of DÔM FINANCE
Regarding diversifying assets, the Group Finance Department is carrying out a strategy of developing investments in infrastructure, an asset category that naturally complies with ESG criteria :
Long-term investment in infrastructure must necessarily include an assessment of the ESG criteria specific to these assets.
The environmental and social acceptability of infrastructure at all stages of its development is a critical element in the analysis of the long-term sustainability of the infrastructure.
In addition, AFI ESCA Group has a policy of exclusion, seeking not to invest in the coalfield industry, tuna fishing vessels, etc…
In terms of real estate investments, AFI ESCA Group has a real estate portfolio invested predominantly in office assets.
In its acquisitions, AFI ESCA Group selects downtown assets, close to communication hubs (train station, subway, streetcar) in order to promote public travelling and gentle mobility.
For assets in the portfolio, development and transformation work is carried out in view of minoring energy losses.
In the case of assets undergoing renovation, the work carried out is designed to ensure the building to be compliant with environmental standards (asbestos removal, pollution control). They are carried out in compliance with environmental standards (BREEAM, HQE, BBC).
In 2021, the AFI ESCA Group initiated an audit of the energy performance of its assets.
3.2 – Underlying assets (for life insurance)
The underlying assets result from investment decisions made by the policyholders.
This is particularly true for SCPIs and structured products in the AFI ESCA range of units linked.
The selection of these types of products, AFI ESCA is based on the expertise of Exclusive Partners, a company incorporated by the ACPR as an Investment Services Provider (ISP).
Exclusive Partners integrates the SRI dimension into the in-depth analyses it conducts on the financial products it proposes.
With regard to AFI ESCA’s SCPI offering, Exclusive Partners introduced, as early as 2015, a strong belief in the performance potential of a green strategy.
In 2017, Exclusive Partners suggested expanding the SCPI range to a socially useful theme: Education.
Regarding the selection of structured funds, also steered by Exclusive Partners, AFI ESCA has set up, in parallel to the call for tenders, an internal validation process involving, in particular, the Risk, Marketing, Legal and Compliance Departments, and integrating the following criteria: reputation of the fund management company, risk of mismatch between supply and demand and cannibalization, remuneration conditions, presence of ESG criteria, etc…
A panel of unit linked compliant with Pact Law.
The portfolio of units linked available through AFI ESCA includes several investment vehicles with the SRI (Socially Responsible Investment) label.
As of January 1, 2022, AFI ESCA will also offer at least one “green” unit of account and at least one “solidarity” unit of account, as required by regulation.
Infrastructure funds referenced by AFI ESCA Luxembourg
Infrastructure is a set of real assets and services of an economic, social or technological nature, available to the community. It plays a key role in economic growth.
Their characteristics (services to the community, high barriers to entry, predictable and recurring revenues, controlled risks) and the framework in which they evolve make them a natural ESG investment: long-term investment in infrastructure necessarily includes an evaluation of ESG criteria.
In addition, investments in infrastructure assets are made through special funds, often managed by management companies that have signed the PRI*.
AFI ESCA Luxembourg structures and manages its own internal infrastructure funds in order to better monitor compliance with ESG criteria.
With regard to external funds offered as investment vehicles in life insurance and capitalization contracts, AFI ESCA Luxembourg has signed an agreement with Quantalys to provide information on compliance with ESG criteria, some of which have already received a label.
4- Monitoring and control of these sustainability risks
Sustainability risk is integrated in the Risk matrix of each entity.
AFI ESCA group monitors and regularly updates its written policies, including its risk management policy, which is partly dedicated to the investment policy.
The obligation to reference green and solidarity-based units of account by 1 January 2022 has been integrated into AFI ESCA’s 2021 compliance plan.
5- Addressing the main negative impacts
The AFI ESCA group,
with AFI ESCA’s agent, DÔM FINANCE, on the scope of the financial and physical assets representing commitments in euro funds,
with its referral service providers for unit-linked policies,
initiated the development of a policy to identify and prioritize key negative sustainability
This policy will aim to achieve, among other things :
the inclusion of ESG issues in the investment decision-making process ;
the evolution of the collaboration of the concerned entities of the AFI ESCA group with
partner management companies ;
the evolution of the listing of investment supports proposed as units of account in
multi-support contracts ;
the drafting of a report on the activities and progress achieved.
6 – Remuneration policy
As currently drafted, the remuneration guidelines of the AFI ESCA Group entities do not mention sustainability risks in any detail.
Nevertheless, these policies aim at managing risks of all kinds in a sound and effective manner, including ensuring internal fairness and conflicts of interest and ensuring that they do not lead to excessive risk-taking or unethical behavior. These policies are also intended to ensure that AFI ESCA Group compensates its employees in a manner that does not violate the obligation of employees to act in the best interests of the policyholder or member.