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Colonial First State Global Asset Management (including First State Investments)

PRI reporting framework 2017

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You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income

ESG incorporation in actively managed fixed income

Implementation processes

FI 04. Incorporation strategies applied

04.1. Indicate 1) Which ESG incorporation strategy and/or combination of strategies you apply to your actively managed fixed income investments; and 2) The proportion (+/- 5%) of your total actively managed fixed income investments each strategy applies to.

SSA
0 Screening alone
0 Thematic alone
0 Integration alone
100 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (financial)
0 Screening alone
0 Thematic alone
0 Integration alone
100 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (non-financial)
0 Screening alone
0 Thematic alone
0 Integration alone
100 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Securitised
0 Screening alone
0 Thematic alone
0 Integration alone
100 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%

04.2. Describe your reasons for choosing a particular ESG incorporation strategy and how combinations of strategies are used.

We have five fixed income and credit teams:

  • Global Unconstrained Fixed Income (USA based)
  • Asian Fixed Income
  • Emerging market Debt
  • Australian Fixed Income & Global Credit.
  • Short term investments (cash)

In addition we have recently added a high yield team who were not managing client funds at the end of the reporting period. 

Like our equity teams our fixed income teams have developed their own approaches to ESG integration which complements their investment processes. The Asian and USA FI&C teams share significant elements of their investment process with the Global credit team, including analyst resources. The US team joined the firm in 2014.

We believe that ESG issues have a direct impact upon a company's risk and therefore its probability of default. As risk turns into a liability for company, it impacts cash flow and therefore both its debt cost and credit ratings.

ESG issues can impact on a sovereign's ability to generate sustainable revenues or potentially increase its future costs, affecting its ability to repay bond holders.

We screen out cluster munition and land mine manufacturers in accordance with our cluster munitions policy. We also screen sanctioned and some high risk (of sanction) countries, businesses and people. 

04.3. Additional information [Optional].


FI 05. ESG issues and issuer research

05.1. Indicate which ESG factors you systematically research as part of your analysis on issuers.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
Environmental data
Social data
Governance data

05.2. Indicate what format your ESG information comes in and where you typically source it

Indicate who provides this information  

specify description

          Multiple external sources including NGO, academic, multilateral, development organisation and government research sources etc.
        

Indicate who provides this information  

specify description

          Multiple external sources including NGO, academic, multilateral, development organisation and government research sources etc.
        

Indicate who provides this information  

specify description

          Multiple external sources including NGO, academic, multilateral, development organisation and government research sources etc.
        

Indicate who provides this information  

specific description

          Multiple external sources including NGO, academic, multilateral, development organisation and government research sources etc.
        

Indicate who provides this information  

specify description

          Multiple external sources including NGO, academic, multilateral, development organisation and government research sources etc.
        

05.3. Provide a brief description of the ESG information used, highlighting any differences in sources of information across your ESG incorporation strategies.

We subscribe to a number of ESG research services including Sustainalytics, MSCI Governance research and Reprisk. Raw ESG data is also available through Bloomberg. We have integrated these external ESG research providers ratings with Bloomberg to provide efficient access for analysts.

In addition to these sources we have access to sell side research, NGO, academic, multilateral, development organisation and government research sources.

For example for sovereign issuers we use sources like: the Corruption Perception Index (Transparency International) Human Development Index (United Nations Development Program) Ease of Doing Business (World Bank) Fragile State Index (Fund For Peace) Government Effectiveness Index (World Bank) Energy Sustainability Index (World Energy Council) among others.

The responsible investment team also distribute research reports and other information to the investment teams, however the primary responsibility for sourcing information rests with each team.

We have found company level information easier to source but not always relevant at the fixed income security level.

 

05.4. Additional information. [Optional]


FI 06. Processes to ensure analysis is robust

06.1. Indicate how you ensure that your ESG research process is robust:

specify description

          The credit research process has a quality check by Head of Research / Manager Credit who also reviews all ESG assessments to ensure they're robust.
        

06.2. Describe how your ESG information or analysis is shared among your investment team.

06.3. Additional information. [Optional]

We have a centralised research database and opinion management system (ION) which all teams have access to. ESG ratings and assessments are captured in this system.

The quality of the ratings we receive from external providers is monitored by the responsible investment team using our ESG Portfolio Monitor tool . This includes feedback from investment teams on where they disagree with ratings which in turn is fed back to the providers. This process forms part of the quarterly investment committee reporting process. In addition, as part of this process, we compare ratings from our controversy monitoring provider (RepRisk) and our ESG research providers (Sustainalytics and MSCI Governance). 

We have also initiated a regular process where we compare the ratings from three ESG research providers (Regnan, Sustainalytics and MSCI Governance) providers for our Australian equities coverage. 


(A) Implementation: Screening

FI 07. Types of screening applied

07.1. Indicate the type of screening you conduct.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

07.2. Describe your approach to screening for internally managed active fixed income

We exclude cluster munition and land mine manufacturers. The criteria were established under our cluster munitions policy which was approved by the Global Responsible Investment Steering Group. The companies captured by the policy are reviewed annually with any changes reported in our annual responsible investment and stewardship report. 

We also exclude sanctioned and very high risk countries, companies domiciled in those countries and indviduals. The process includes a two-tier system whereby some countries are completely blocked (such as Iran, North Korea, Syria) and others are heavily restricted. The process is described in the additional inforamtion section below.

07.3. Additional information. [Optional]

In both fixed income and equity systems, we enforce country level restrictions based on the constituents of the Australian Department of Foreign Affairs and Trade (DFAT) Sanctioned Countries List and similar lists issued by Governments in other jurisdictions where our funds are domiciled. The constituents on each system are regularly reviewed and updated.

Any potential investments in companies domiciled in these countries would be rigorously screened to ensure that there is no association with any sanctioned individual, entity or regime prior to investment. No investment is possible in companies domiciled in any country on the DFAT list without clearance from Investment Compliance personnel as the system controls do not allow it.

In addition our controls include screens for any potential investment from a country deemed to be ‘very high risk’ in relation to politically exposed persons, sanctions and ultimate beneficial ownership controls. The scope of this framework will be wider than the sanctioned countries list and the countries deemed to be ‘very high risk’ are updated on a regular basis.


FI 08. Negative screening - overview and rationale

08.1. Indicate why you conduct negative screening.

SSA

SSA

Corporate (financial)

Corporate (fin)

Corporate (non-financial)

Corporate (non-fin)

Securitised

Securitised

08.2. Describe your approach to ESG-based negative screening of issuers from your investable universe.

We exclude cluster munition and loan mine manufacturers. The criteria were established under our cluster munitions policy which was approved by the Global Responsible Investment Steering Group. The companies captured by the policy are reviewed annually with any changes reported in our annual responsible investment and stewardship report. 

We also exclude sanctioned and very high risk countries, companies domiciled in those countries and indviduals. The process includes a two-tier system whereby some countries are completely blocked (such as Iran, North Korea, Syria) and others are heavily restricted. 

08.3. Additional information. [Optional]


FI 09. Examples of ESG factors in screening process

09.1. Provide examples of how ESG factors are included in your screening criteria.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

We exclude companies who manufacture cluster munitions. For cluster munitions and land mines the criteria were established under our cluster munitions policy which was approved by the Global Responsible Investment Steering Group. The companies captured by the policy are reviewed annually with any changes reported in our annual responsible investment and stewardship report. Currently this includes:

  • Hanwha Corporation;
  • Orbital ATK, Inc;
  • Poongsan Corporation
  • Motovilikha Plants JSC; and
  • Textron, Inc.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

For sanctioned we enforce country level restrictions based on the constituents of the Australian Department of Foreign Affairs and Trade (DFAT) Sanctioned Countries List and similar lists issued by Governments in other jurisdictions where our funds are domiciled. The constituents on each system are regularly reviewed and updated.

Any potential investments in companies domiciled in these countries would be rigorously screened to ensure that there is no association with any sanctioned individual, entity or regime prior to investment. No investment is possible in companies domiciled in any country on the DFAT list without clearance from Investment Compliance personnel as the system controls do not allow it.

Currently this includes:

  • Central African Republic
  • Congo, Democratic Republic of the
  • Cuba
  • Eritrea (ER) [new]
  • Guinea-Bissau
  • Iran
  • Iraq
  • Lebanon
  • Libya
  • Korea, Democratic People's Republic (North Korea)
  • Sudan
  • Somalia
  • South Sudan
  • Ukraine
  • Yemen

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

We exclude companies on the Office of Foreign Assets Control ("OFAC") of the US Department of the Treasury sanctions list. Currently this includes:

  • Surgutneftegaz ADR
  • Lukoil ADR
  • Oao Gazprom Adr Reg S
  • VTB GDR REG S
  • SBERBANK RUSSIA PREF(RUB
  • ROSTELECOM RUB0.0025(RUB)
  • Ak Transneft Oao-Pref
  • Surgutneftegas - PFD
  • Gazprom Neft ADR
  • OIL CO LUKOIL PJSC ADR EACH REPR 1 ORD RUB0.02
  • ROSNEFT OJSC-REG S GDR
  • GAZPROM NEFT-SPONSORED ADR
  • NOVATEK PJSC GDR EACH REPR 10 ORD 'REG S
  • Gazprom OAO
  • Lukoil OAO-CLS
  • Rosneft Oil Company
  • Surgutneftegas
  • VTB Bank OJSC
  • Sberbank - Sponsored ADR
  • NOVATEK PJSC RUB0.1(RUB)
  • Sberbank - Sponsored ADR
  • Sberbank
  • Sberbank - Sponsored ADR
  • ROSTELECOM-Sponsored ADR
  • BANK OF MOSCOW RUB100(RUB)
  • Almaz Antey Brd
  • Rosselkhozbank Ojsc
  • Dobrolet Ltd
  • STROYTRANSGAZ OAO RUB25(USD)
  • TRANSNEFT RUB1
  • UNITED AIRCRAFT CO RUB0.86(RUB)
  • United Shipbuilding Corp OAO

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

In addition our controls include screens for any potential investment from a country deemed to be ‘very high risk’ in relation to politically exposed persons, sanctions and ultimate beneficial ownership controls. The scope of this framework will be wider than the sanctioned countries list and the countries deemed to be ‘very high risk’ are updated on a regular basis.

  • Afghanistan
  • Ivory Coast
  • Congo, Democratic Republic of the
  • Cuba
  • Eritrea (ER) [new]
  • Iran
  • Iraq
  • Lebanon
  • Myanmar (MM) [formerly MMK]
  • Korea, Democratic People's Republic (North Korea)
  • Palestinian Territory, Occupied
  • Sudan
  • Somalia
  • Syria
  • Venezuela
  • Yemen

09.2. Additional information.


FI 10. Screening - ensuring criteria are met

10.1. Indicate which systems your organisation has to ensure that fund screening criteria are not breached in fixed income investments.

Type of screening
Checks
Negative/exclusionary screening?

10.2. Additional information. [Optional]


(C) Implementation: Integration

FI 14. Integration overview

14.1. Describe your approach to integrating ESG into traditional financial analysis.

We have five fixed income and credit teams:

Global Unconstrained Fixed Income (USA based)
Asian Fixed Income
Emerging market Debt
Australian Fixed Income & Global Credit.
Short term investments (cash)

In addition we have recently added a high yield team who were not managing client funds at the end of the reporting period. 

Like our equity teams our fixed income teams have developed their own approaches to ESG integration which complements their investment processes. The Asian and USA FI&C teams share significant elements of their investment process with the Global credit team, including analyst resources. The US team joined the firm in 2014.

We believe that ESG issues have a direct impact upon a company's risk and therefore its probability of default. As risk turns into a liability for company, it impacts cash flow and therefore both its debt cost and credit ratings.

ESG issues can impact on a sovereign's ability to generate sustainable revenues or potentially increase its future costs, affecting its ability to repay bond holders.

14.2. Describe how your ESG integration approach is adapted to each of the different types of fixed income you invest in.

SSA

ESG issues can impact on a sovereign's ability to generate sustainable revenues or potentially increase its future costs, affecting its ability to repay bond holders.

For the emerging market debt team ESG factors are incorporated in the following way.

Issues are identified and considered in the course of the team's investment analysis. At the core of their process is the Key Factor Model (KFM). The KFM is comprised of six factors, or angles, from which we approach the analysis of the issuers in the team's investment universe. Three of these factors are intimately related to RI and stewardship: fiscal policy, politics, and structural reform.

The team seeks to monitor the investment restrictions put in place by the national and supranational entities relevant to their universe including: national foreign policy measures, United Nations sanctions, European investment restrictions, among others.

The majority of information the team needs in order to analyse sovereign issuers is publicly available through National Statistics Offices. However, it is important for the analysts to spend time on the ground and observe country conditions first-hand to verify whether the statistics or the news is giving the full picture. This time spent on the ground can include meetings with government officials, but a great deal can also be gauged simply by observing the surrounding environment.

For the Fixed Income and Credit teams ESG factors are incorporated in the following way:

The team is still at an initial stage of incorporating ESG issues into our assessment for sovereign issuers. Many of the indicators and data the team use to arrive at their assessment of ESG risks do not apply for certain sovereign issuers. For instance, country or corporate criteria for assessing ESG risks do not apply for supranationals. These issuers have a social or sustainable policy objective but there is limited reporting on ESG performance to enable bond investors to assess and monitor these risks. The challenge is to find the appropriate data in order to assess the risks for a range of sovereign issuers and to understand how ESG risks impact the risk of default for these issuers.

Corporate (financial)

Credit and Fixed Income Teams

Assessment and monitoring

Analysts identify ESG risks during their bottom-up credit research. We use customised ESG rankings as a starting point for assessments. Analysts consider these alongside their own research with reference to a variety of other external sources. Where external ESG ratings are often not available there is a greater reliance on the analysts assessments. 

By analysing and assessing ESG issues within a company, we can identify sources of non-financial risk. In line with our credit philosophy of avoiding the losers, we are able to identify companies with a higher default risk than the balance sheet implies. This gives us greater insight than that offered by a rating from a traditional credit agency.

Integration

The team assigns a proprietary internal credit rating (ICR) to every bond we review. The ICR is a forward looking measure of default risk and is one of the key outputs of our research process. It reflects all risks relevant for that issuer, including ESG risk. Our ICR is on the same scale as ratings assigned by the ratings agencies but is often materially different for individual issuers.

The ICR is also used by the credit portfolio managers when making their decision to buy or sell bonds and to determine position size for the funds that we manage. The Head of Credit Research is responsible for ensuring the consistency and quality of the ESG inputs.

Counterparty Reviews

We annually review and rate our counterparties on a number of factors including ESG. The counterparty review relies on external ESG service providers, commentary from our analysis, and in 2017 will also include a survey of our counterparties where they are not adequately covered by our external providers.

The counterparty review is provided to the counterparties and has been the source of engagement with some counterparties on their ESG performance. The reviews also determine how much and whether we will trade with different counterparties. All other things being equal, a low ESG rating will make it less likely that we will trade with a particular counterparty. 

Corporate (non-financial)

Credit and Fixed Income Teams

Assessment and monitoring

Analysts identify ESG risks during their bottom-up credit research. We use customised ESG rankings as a starting point for assessments. Analysts consider these alongside their own research with reference to a variety of other external sources. Where external ESG ratings are often not available there is a greater reliance on the analysts assessments. 

By analysing and assessing ESG issues within a company, we can identify sources of non-financial risk. In line with our credit philosophy of avoiding the losers, we are able to identify companies with a higher default risk than the balance sheet implies. This gives us greater insight than that offered by a rating from a traditional credit agency.

Integration

The team assigns a proprietary internal credit rating (ICR) to every bond we review. The ICR is a forward looking measure of default risk and is one of the key outputs of our research process. It reflects all risks relevant for that issuer, including ESG risk. Our ICR is on the same scale as ratings assigned by the ratings agencies but is often materially different for individual issuers.

The ICR is also used by the credit portfolio managers when making their decision to buy or sell bonds and to determine position size for the funds that we manage. The Head of Credit Research is responsible for ensuring the consistency and quality of the ESG inputs.

 

Securitised

Credit and Fixed Income Teams

Assessment and monitoring

Analysts identify ESG risks during their bottom-up credit research. We use customised ESG rankings as a starting point for assessments. The only difference between securitised bonds and corporate bonds is that external ESG ratings are often not available on so there is a greater reliance on the analysts assessments. 

By analysing and assessing ESG issues within a company, we can identify sources of non-financial risk. In line with our credit philosophy of avoiding the losers, we are able to identify companies with a higher default risk than the balance sheet implies. This gives us greater insight than that offered by a rating from a traditional credit agency.

Integration

The team assigns a proprietary internal credit rating (ICR) to every bond we review. The ICR is a forward looking measure of default risk and is one of the key outputs of our research process. It reflects all risks relevant for that issuer, including ESG risk. Our ICR is on the same scale as ratings assigned by the ratings agencies but is often materially different for individual issuers.

The ICR is also used by the credit portfolio managers when making their decision to buy or sell bonds and to determine position size for the funds that we manage. The Head of Credit Research is responsible for ensuring the consistency and quality of the ESG inputs.

14.3. Additional information [OPTIONAL]


FI 15. Integration - ESG information in investment processes

15.1. Indicate how ESG information is typically used as part of your investment process.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
ESG analysis is integrated into fundamental analysis
ESG analysis is integrated into security weighting decisions
ESG analysis is integrated into portfolio construction decisions
ESG analysis is a standard part of internal credit ratings or assessment
ESG analysis for issuers is a standard agenda item at investment committee meetings
ESG analysis is regularly featured in internal research notes or similar
ESG analysis is a standard feature of ongoing portfolio monitoring
ESG analysis features in all internal issuer summaries or similar documents
Other, specify

15.2. Additional information [OPTIONAL]


FI 16. Integration - E,S and G issues reviewed

16.1. Indicate the extent to which ESG issues are reviewed in your integration process.

Environment
Social
Governance
SSA

Environmental

Social

Governance

Corporate (financial)

Environmental

Social

Governance

Corporate (non-financial)

Environmental

Social

Governance

Securitised

Environmental

Social

Governance

16.2. Please provide more detail on how you review E, S and G factors in your integration process.

SSA

ESG issues can impact on a sovereign's ability to generate sustainable revenues or potentially increase its future costs, affecting its ability to repay bond holders.

For the emerging market debt team ESG factors are incorporated in the following way.

Issues are identified and considered in the course of the team's investment analysis. At the core of their process is the Key Factor Model (KFM). The KFM is comprised of six factors, or angles, from which we approach the analysis of the issuers in the team's investment universe. Three of these factors are intimately related to RI and stewardship: fiscal policy, politics, and structural reform.

The team seeks to monitor the investment restrictions put in place by the national and supranational entities relevant to their universe including: national foreign policy measures, United Nations sanctions, European investment restrictions, among others.

The majority of information the team needs in order to analyse sovereign issuers is publicly available through National Statistics Offices. However, it is important for the analysts to spend time on the ground and observe country conditions first-hand to verify whether the statistics or the news is giving the full picture. This time spent on the ground can include meetings with government officials, but a great deal can also be gauged simply by observing the surrounding environment.

For the Fixed Income and Credit teams ESG factors are incorporated in the following way:

The team is still at an initial stage of incorporating ESG issues into our assessment for sovereign issuers. Many of the indicators and data the team use to arrive at their assessment of ESG risks do not apply for certain sovereign issuers. For instance, country or corporate criteria for assessing ESG risks do not apply for supranationals. These issuers have a social or sustainable policy objective but there is limited reporting on ESG performance to enable bond investors to assess and monitor these risks. The challenge is to find the appropriate data in order to assess the risks for a range of sovereign issuers and to understand how ESG risks impact the risk of default for these issuers.

Corporate (financial)

Credit and Fixed Income Teams

Assessment and monitoring

Analysts identify ESG risks during their bottom-up credit research. We use customised ESG rankings as a starting point for assessments. Analysts consider these alongside their own research with reference to a variety of other external sources.

By analysing and assessing ESG issues within a company, we can identify sources of non-financial risk. In line with our credit philosophy of avoiding the losers, we are able to identify companies with a higher default risk than the balance sheet implies. This gives us greater insight than that offered by a rating from a traditional credit agency.

Integration

The team assigns a proprietary internal credit rating (ICR) to every bond we review. The ICR is a forward looking measure of default risk and is one of the key outputs of our research process. It reflects all risks relevant for that issuer, including ESG risk. Our ICR is on the same scale as ratings assigned by the ratings agencies but is often materially different for individual issuers.

The ICR is also used by the credit portfolio managers when making their decision to buy or sell bonds and to determine position size for the funds that we manage. The Head of Credit Research is responsible for ensuring the consistency and quality of the ESG inputs.

Counterparty Reviews

We annually review and rate our counterparties on a number of factors including ESG. The counterparty review relies on external ESG service providers, commentary from our analysis, and in 2017 will also include a survey of our counterparties where they are not adequately covered by our external providers.

The counterparty review is provided to the counterparties and has been the source of engagement with some counterparties on their ESG performance. The reviews also determine how much and whether we will trade with different counterparties. All other things being equal, a low ESG rating will make it less likely that we will trade with a particular counterparty. 

Corporate (non-financial)

Credit and Fixed Income Teams

Assessment and monitoring

Analysts identify ESG risks during their bottom-up credit research. We use customised ESG rankings as a starting point for assessments. Analysts consider these alongside their own research with reference to a variety of other external sources.

By analysing and assessing ESG issues within a company, we can identify sources of non-financial risk. In line with our credit philosophy of avoiding the losers, we are able to identify companies with a higher default risk than the balance sheet implies. This gives us greater insight than that offered by a rating from a traditional credit agency.

Integration

The team assigns a proprietary internal credit rating (ICR) to every bond we review. The ICR is a forward looking measure of default risk and is one of the key outputs of our research process. It reflects all risks relevant for that issuer, including ESG risk. Our ICR is on the same scale as ratings assigned by the ratings agencies but is often materially different for individual issuers.

The ICR is also used by the credit portfolio managers when making their decision to buy or sell bonds and to determine position size for the funds that we manage. The Head of Credit Research is responsible for ensuring the consistency and quality of the ESG inputs.

Securitised

Credit and Fixed Income Teams

Assessment and monitoring

Analysts identify ESG risks during their bottom-up credit research. Analysts consider these alongside their own research with reference to a variety of other external sources. The only difference between securtised bonds and corporate bonds is that external ESG ratings are often not available on so there is a greater reliance on the analysts assessments. 

By analysing and assessing ESG issues within a company, we can identify sources of non-financial risk. In line with our credit philosophy of avoiding the losers, we are able to identify companies with a higher default risk than the balance sheet implies. This gives us greater insight than that offered by a rating from a traditional credit agency.

Integration

The team assigns a proprietary internal credit rating (ICR) to every bond we review. The ICR is a forward looking measure of default risk and is one of the key outputs of our research process. It reflects all risks relevant for that issuer, including ESG risk. Our ICR is on the same scale as ratings assigned by the ratings agencies but is often materially different for individual issuers.

The ICR is also used by the credit portfolio managers when making their decision to buy or sell bonds and to determine position size for the funds that we manage. The Head of Credit Research is responsible for ensuring the consistency and quality of the ESG inputs.

16.3. Additional information.[OPTIONAL]


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