EuRoSIf EuRopEaN SRI TRaNSpaRENcy coDE - DEcEmbER 2021 This investment case details the extent to which a stock Typically, a high conviction stock will have an active posi- meets the team’s quality, growth and valuation criteria, as tion size of between 200-300 basis points. If a stock goes well as its ESG performance. The investment case is pre- beyond a 300 basis point active position, it will be trimmed sented and discussed, with further research or company in order to mitigate any downside risk. Stocks with an meetings potentially required before the discussion is active position of 100 basis points are typically lower conclusive. conviction investments. These will either be recent, new Stocks which are approved by the team are then free to be additions to the fund or alternatively, positions due to be included in all team portfolios, subject to any respective exited that are sources of cash for new ideas. guidelines. once a stock has been approved, the Stock Each stock that is added or removed from the portfolio Sponsor is responsible for maintaining research coverage. is considered for its marginal contribution to risk at the The Stock Sponsor can be any portfolio manager within aggregate portfolio level which further controls the risk the investment team. Having a Sponsor for each stock is an profile of the strategy. The portfolio managers do not excellent tool for keeping the discipline of the investment make any active sector, country or market capitalization process and ensuring that all stocks adhere to a shared allocation decisions. factor risk is monitored and minimi- philosophy. Likewise, regular discussion and anonymous zed so that stock-specific risk is the largest driver of returns. voting ensures a collegiate approach to intellectual The primary risk model used to gauge the effect of new debate. position on the factors driving the portfolio’s ex-ante tracking error is apT. Given that our SRI ratings are sector-relative, at each weekly meeting, the investment Growth team also we are not forced to be structurally underweight certain reviews the structure and performance of its existing port- sectors in order to maintain the ESG integrity of the portfolio. folios, focusing on approved stocks and possible additions or replacements. Discussion centres on the most recent Allianz Securicash SRI, Allianz Euro Oblig Court periods of performance, highlighting those stocks which Terme ISR, Allianz Epargne Monetaire ISR, have added value but also any negative contributors and Allianz Pee Monetaire ISR, Allianz Monetaire (2C), the reasons behind this. This provides the Global Growth Allianz Euro Short Term Bonds SRI, team with a means of measuring stock selection success. Step 4: Portfolio Construction Allianz Rentenfonds (*) Gunnar miller and Robbie miles construct allianz Global our stock-picking strategy is based on the dual focus of Sustainability portfolios at a separate weekly meeting. financial and “Social Responsibility” criteria. The nonfinancial The strategy invests primarily (up to 75% of portfolios) in analysis of securities, based on attention to environmental, companies that are considered best-in-class according to human, sustainable development issues, and societal rela- allianzGI’s proprietary SRI ratings. It can also invest up to tions, allows us to assess the value of a security differently, 25% of the portfolio in ‘average’ rated stocks that have by identifying risks and potential value destructions asso- demonstrated a commitment to improving ESG perfor- ciated with a given issuer, which cannot be revealed by mance. financial analysis alone. This flexibility incentivises the portfolio managers to engage The investment process starts with top down analysis to with investee company managements in order to press for anticipate money market trends and rate changes based continued ESG improvements. We believe that superior on regular studies of the macroeconomic environment, on ESG performance will ultimately translate into share price forecasts of central bank policies and the assessment of appreciation. as a result, this mechanism is an important risk appetite in the market. In the second step, the portfolio source of alpha for the strategy, as well as positive, societal is constructed integrating the active strategies derived from impact. The strategy cannot hold any worst-in-class rated the top-down analysis with portfolio constraints and the names. bottom-up selection supported by our credit and ESG as per the investment philosophy, position sizes are decided research teams. according to the portfolio manager’s level of conviction in The interaction between financial criteria and ESG criteria a stock’s future financial and ESG performance. This may is a permanent aspect in our bottom-up selection process. be further supported by recent Grassroots® Research which The overall SRI rating is calculated for each company within substantiates our longer-term investment case, or clear posi- the investment universe, and these ratings are then used tive momentum in terms of the company’s ESG performance. to populate a proprietary database. This SRI ratings data- 16