Sustainability Reporting on Financial Services

1. Foreword

In March 2018, the European Commission published the Action Plan for Sustainable Finance, implementing the Paris Agreement on Climate Change and the United Nations 2030 Agenda for Sustainable Development, in which it outlines the strategy and measures to be taken to achieve a financial system capable of promoting sustainable development in economic, social and environmental terms. Specifically, the Action Plan identifies the following three objectives:

1. redirecting capital flows towards sustainable investments in order to achieve sustainable and inclusive growth;
2. managing financial risks related to climate change, resource depletion, environmental degradation, and social issues; and
3. promoting transparency and long-term vision in economic and financial activities.

Included in this Plan is the enactment of Regulation (EU) 2019/2088 on sustainability reporting in the financial services sector (Sustainable Finance Disclosure Regulation - SFDR) and the related Delegated Regulation (EU) 2022/1288.

One of the objectives of this Regulation is to provide end-investors with information on the integration of sustainability risks and adverse impacts on sustainability factors in the decision-making processes of financial market participants (entities that make financial products such as portfolio management services available) and financial advisors (entities that provide investment or insurance advisory services).

The provisions introduced by the SFDR apply:

• to the Subsidiary Banks and Cassa Centrale, in their capacity as financial advisors since they are credit institutions providing investment or insurance advice on the following financial products and investment services:
  • an insurance investment product (IBIPs);
  • units of UCITS (mutual funds and SICAVs);
  • a pension product;
  • portfolio management service.
• to Cassa Centrale, with regard to the rules applicable to financial market participants, as a credit institution providing portfolio management services.

In accordance with the provisions of the SFDR, Cassa Centrale and the Subsidiary Banks make available in this section of their respective websites information regarding:

• integration of sustainability risks in investment decisions or in investment or insurance advice (Art. 3 SFDR);
• disclosure of due diligence policies regarding adverse impacts on investment decisions or advice on sustainability factors (Art. 4 SFDR);
• consistency of remuneration policies with the integration of sustainability risks (Art. 5 SFDR).

In order to facilitate the understanding of the information in the following paragraphs, these definitions under the SFDR are provided:

• sustainability risks: environmental, social or governance events or conditions, the occurrence of which could cause a significant actual or potential adverse impact on the value of an investment (e.g. climate risk related to extreme weather events that may negatively impact a company's products, services, and supply chains);
• sustainability factors: environmental, social and personnel issues, respect for human rights and issues related to the fight against active and passive corruption;
• principal adverse impacts (PAIs): the impacts of investment decisions and advice on sustainability factors.

2. Integration of sustainability risks into investment decision-making processes (Art. 3 SFDR)

As part of its investment decision-making processes, Cassa Centrale has defined a specific strategy to integrate and monitor sustainability risks, where relevant, and their likely impacts on the performance of financial products.

In particular, the integration of environmental, social, and governance sustainability risks into the investment decisions in reference to Cassa Centrale's asset management lines offered by the Subsidiary Banks to their customers is based on an investment strategy that envisages the application of a combination of ESG safeguards (i.e. negative and positive screening) distinguished as follows:

• absolute negative screening, aimed, through specific valuation logics, at excluding certain financial instruments and issuers from the customers' assets under management;
• conditional negative screening, aimed at activating an enhanced decision-making process to assess the appropriateness of investing in issuers and financial instruments with limited environmental and/or social characteristics;
• positive screening, aimed at directing, through specific analysis logics, the investments of customers' assets towards issuers and financial instruments with environmental and/or social characteristics or objectives.

To support the effective implementation of the above-mentioned safeguards, Cassa Centrale uses various ESG information sources, including:

• an ESGC Score used to assess the overall sustainability level of corporate issuers, derived from the combination of the ESG Score (performance in ten ESG categories) and the ESG Controversies Score (presence of relevant controversies), according to a conservative logic that penalises profiles with recent negative events;
• lists aimed at excluding corporate issuers involved in the production of non-conventional weapons banned by international conventions;
• a Score to monitor the sustainability profile of funds, in particular by identifying the share of underlying assets with an ESG Risk Rating classified as 'severe';
• Sustainable Development Goals Country Scores to assess the alignment of Countries with the SDGs.

In particular, the following ESG safeguards are applied to all management lines:

• Negative screening for corporate issuers: exclusion from the potential investment universe of corporate issuers operating in unconventional weapons production sectors;
• Conditional negative screening for government issuers: in the case of investments in financial instruments of non-OECD government issuers, there is a dedicated analysis aimed at assessing a specific Country's compliance and alignment with the 17 Sustainable Development Goals (SDGs) defined by the United Nations;
• Conditional negative screening for UCIs (mutual funds and SICAVs): in the case of UCIs that are found to have a severe risk, according to the use of the ESG rating, investment in the product is conditional on the specific assessment of the appropriateness of the investment;
• Negative screening reserved for speculative financial instruments on food commodities: exclusion from the potential investment universe of financial instruments (ETCs, futures, etc.) having as their underlying asset agricultural products (e.g. coffee, cocoa, sugar, maize, soya, rice, cereals), in order not to encourage speculation on food commodities.

In addition, the following additional ESG safeguards are in place for asset management lines classified under the SFDR:

• Positive screening for corporate issuers: selection of corporate issuers with a satisfactory level of sustainability on the basis of the ESG rating. For this purpose, only corporate issuers with an adequate rating are selected;
• Negative screening for government issuers: exclusion from the potential investment universe of all financial instruments of non-OECD government issuers;
• Positive screening for UCIs: inclusion in the investable universe of UCIs with at most a residual share of the total underlying assets invested in financial instruments with an ESG rating classified as severe;
• Positive screening for Green bonds, Social bonds and Sustainability bonds: inclusion in the investable universe of all bonds classified as Green bonds, Social bonds or Sustainability bonds, regardless of the screenings adopted for the issuer;
• Positive screening of supranational organisations: inclusion in the investable universe of all financial instruments issued by supranational organisations.

To find out which portfolio management lines are classified under the SFDR and for more information on the integration of sustainability safeguards into the investment processes for management lines (Art. 10 SFDR), click here.

The Parent Company and the Subsidiary Banks combine economic and profitability objectives with ESG objectives in their product selection process when providing investment advice and distributing insurance investment products.

In particular, it is envisaged that the information provided by producers regarding any relevant elements for sustainability preferences (i.e. presence of investments aligned with the Taxonomy, sustainable investments, or consideration of PAIs), as well as sustainability risks and their impact on the performance of financial products, will be examined. This information, if available, is presented to customers through the delivery of documentation (including that made available by producers) provided as part of the distribution process.

In addition, with regard to individual financial instruments, special negative screening safeguards have been defined to identify and exclude from the customer's investable universe issuers involved in ESG controversies and/or active in sectors characterised by strong exposure to sustainability risks, such as: controversial weapons; nuclear weapons; light weapons production; military procurement.

The approach, thus defined, allows the Parent Company and the Subsidiary Banks to recommend financial instruments or products considering not only traditional risk/return criteria, but also the main sustainability risks. These safeguards have the effect of reducing potential exposure to sustainability risks in customers' investment portfolios.

The analyses described also take into account evaluations carried out by leading specialised info-providers, who have developed proprietary methodologies to examine the market's major issuers.

3. Statement on Adverse Impacts on Sustainability as a Financial Market Participant (Art. 4, paras. 2 and 3, SFDR)

Cassa Centrale, considering its size, the nature and breadth of its business and the type of financial products made available, considers the principal adverse impacts on sustainability factors in investment decisions within its portfolio management service.

Below is the 'Statement on the Principal Adverse Impacts of Investment Decisions on Sustainability Factors' pursuant to Delegated Regulation (EU) 2022/1288.
 

STATEMENT ON PRINCIPAL ADVERSE IMPACTS OF INVESTMENT DECISIONS ON SUSTAINABILITY FACTORS

4. Statement on the principal adverse impacts of investment and insurance advice on sustainability factors (Art. 4, par. 5 SFDR)

Cassa Centrale and the Subsidiary Banks understand the relevance that customers' investment choices may have on sustainability factors and therefore, when providing investment advisory services, including the distribution of insurance investment products, take into account the Principal Adverse Impacts (PAIs) of investment decisions on these factors. In order to ensure a greater granularity of information, Cassa Centrale and the Subsidiary Banks collect the specific PAI indicators considered by the products or valued for the issuers and relate them to certain macro-categories corresponding to the response options which customers may choose during profiling, in relation to the sustainability preference on PAIs, and applied in the assessment of the suitability of investment recommendations. These categories are:

• PAI - emissions of greenhouse gases and other pollutants;
• PAI - biodiversity;
• PAI - water use and waste management;
• PAI - hazardous waste;
• PAI - social factors.

In particular, with regard to products, the adverse impacts of investment decisions on sustainability factors are assessed through the analysis of the information provided by the issuers - who qualify as financial market participants under Article 2, no. 1 SFDR - of the financial products relevant under the SFDR⁽¹⁾. For each product considered in the scope of the offer, Cassa Centrale and the Subsidiary Banks analyse the documentation made available by the producer (such as, for example, the European ESG Template - EET).

With regard to the advisory activity for individual financed instruments (so-called "single name"), Cassa Centrale and the Subsidiary Banks take into consideration the adverse impacts of investment decisions on sustainability factors by processing information on individual issuers (e.g. CO₂ emissions, gender pay gap, etc.) in order to measure their PAI indicator values and their calculation with respect to the above-mentioned issues. 

¹Pursuant to Article 2 no. 11 of Regulation (EU) 2019/2088 (SFDR) the relevant financial products for financial advisors are: alternative investment funds (AIFs); insurance investment products; UCITS (e.g. EU harmonised open-ended mutual funds and SICAVs); the portfolio management service.

5. Remuneration policy (Art. 5 SFDR)

The Group adopts and periodically updates a multi-year Sustainability Plan, identifying, inter alia, specific performance and monitoring indicators.

The Remuneration and Incentive Policies adopted by Cassa Centrale and its Subsidiary Banks reflect the commitment to achieving sustainable performance through the inclusion of ESG indicators, including those related to climate and environmental risks linked to business activities, in the formalised "MBO" incentive scheme for the most relevant Personnel at consolidated level.

These Policies are consistent with the integration of sustainability risks in consideration of the implementation, in business processes, of the Group's principles and values and its mutual system aims (e.g. the centrality of the individual with respect to their choice of investment, promotion of the economic/social/cultural development of local communities). In particular, the principles used to define the variable remuneration of all personnel include:

• commitment to aligning performance with corporate objectives and values and long-term strategies;
• the appropriate balance between economic and non-economic objectives (both qualitative and quantitative), depending on the role, also considering the adherence to the Code of Ethics that has led to the definition of policies promoting sustainability, some of which are also considered in the selection of investments (e.g. armaments policy, anti-corruption policy, etc.).