AB’s Primary Approach: Integration
Our firm's primary approach to ESG incorporation is through "Integration". That is, we believe the bottom-up integration of ESG factors into our research and investment processes is an important part of identifying investment risks as well as opportunities. Our long-standing disciplined research processes include ESG factors, and all of our fundamental analysts assess carefully if ESG factors could have a material impact on our forecasts and investment decisions. If our analysts determine that, after integrating ESG factors into their fundamental research, there are aspects of an issuer's past, current or anticipated ESG-related behavior that are material to its future expected returns, we address these concerns in our research forecasts, research reviews, and investment decisions.
Key Element of Integration: Active Ownership (Direct Engagement, ESG Engagement Framework, and Proxy Voting)
Importantly, a key method in which we implement our "Integration" of ESG issues is through pro-active ownership. We take a three-pronged approach to active ownership: 1) We directly engage with issuers as part of our research/investment process, and 2) we utilize an engagement framework to assist us in identifying companies with whom we should engage on ESG issues, and 3) we selectively engage as part of our proxy voting process. These approaches are often used in a coordinated manner for particular investments.
- Direct Engagement: Direct communication with issuers and stakeholders is an important part of AB’s research/investment process, and a fundamental part of AB’s approach to responsible investment. Constructive engagements create a channel to discuss such matters as strategy, business operations, governance and a wide variety of other topics, such as, but not limited to, ESG issues. Over time, we build a forum for open dialogue. In addition, we engage with other stakeholders such as suppliers and customers as part of our process. Engagements take place both before the initial investment is made and as part of our ongoing monitoring of issuers. We vary our level of direct engagement based on several factors such as the size of the investment and potential impacts on the issuer and the AB fund.
- ESG Engagement Framework: AB's Responsible Investment (RI) team maintains an engagement universe which helps identify companies within our global holdings where we believe we are most likely to affect positive change, and/or where we have the greatest exposure at issuers with a potential ESG issue. The universe is created based on a number of quantitative factors, such as but not limited to, dollar amount invested and percentage of the issuer owned. A number of qualitative factors are added which identify ESG issues, for example, our historic voting pattern. Based on this universe the RI team developed an engagement strategy which drives our long-term strategic ESG engagements, and serves as a guide when selecting companies for ad hoc and event driven engagement. We also use the framework when evaluating whether or not to accept incoming requests for engagement from issuers.
- Proxy Voting: We are shareholder advocates. We thus have a fiduciary duty to make investment decisions that are in our clients' best interests and, in our view, will maximize the value of their shares. Proxy voting is an integral part of this process, and AB supports strong corporate governance structures, shareholder rights, and transparency. We have a well developed in-house proxy policy and process that guides our proxy decisions. We also take ESG factors into consideration when voting. Proxy related meetings are also often a joint effort between the investment professionals, who are best positioned to comment on company-specific details, and the proxy manager(s), who offer a more holistic view of governance.
Negative or Exclusionary Screening: We apply negative or exclusionary screening by product, activity, sector, environmental, social and corporate governance practices and performance. Some clients have provided us with a list of companies to be restricted from their portfolio, while others prefer that we screen on one or more factors using a third-party research provider. Screens can take several forms, including industry screens as well as ESG factor screens. We generally develop these screens in conjunction with our clients, and we update these screens regularly, as our clients or our research providers provide us updated data.
Once we identify the names to be screen and our client agrees, we capture those names electronically in our firm's pre-trade and post-trade compliance systems, which will then restrict those securities from that client's Account.
Positive Screening: We can apply positive screening as well if our client so requests. In these cases, we would seek to specifically invest in companies that have demonstrated clear ESG leadership and are widely recognized as exhibiting a "best-in-class" approach to integrating ESG considerations into their businesses. We work with clients to develop screens that meet their requirements and investment objectives.
Restrictions on Controversial Weapons: We recognize that legislation prohibiting investment in companies involved in controversial weapons (anti-personnel landmines, cluster bombs, and/or munitions made with depleted uranium) is growing, and client engagement on this issue is rising. As a result, AB (Luxembourg) S.à r.l., an AB affiliate, now excludes both debt and equity securities issued by companies involved in controversial weapons from the universe of potential investments in publicly-available Funds on this platform, for which we are the management company. We have engaged a third-party service (ISS-Ethix) to provide us the list of companies to be excluded.
We continue to monitor the evolution of regulation around the world regarding investment in companies involved in controversial weapons and will work with our service provider to ensure the screening for AB Funds remains updated.
In addition to ESG integration, we manage thematic portfolios. In November 2016, our AB Global Thematic Growth Fund (US Mutual Fund) evolved from a global thematic growth strategy to a sustainable thematic strategy, now called the AB Sustainable Global Thematic Fund.