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Alliance Bernstein

PRI reporting framework 2018

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Outputs and outcomes

FI 18. Financial/ESG performance

18.1. Indicate whether your organisation measures how your incorporation of ESG analysis in fixed income has affected investment outcomes and/or ESG performance.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
We measure whether incorporating ESG impacts funds' reputation
We measure whether incorporating ESG impacts financial returns
We measure whether incorporating ESG impacts risk
We measure whether incorporating ESG impacts funds' ESG performance
None of the above

18.2. Describe how your organisation measures how your incorporation of ESG analysis in fixed income has affected investment outcomes and/or ESG performance. [OPTIONAL]

We have not conducted any empirical research to determine the impact of ESG considerations.

Within our impact strategy in the US municipal market, we have established a series of key performance indicators for each sector that we invest in and we look for improvement in these metrics over time. Should trends in metrics deviate significantly in any given year, AB analysts will attempt to ascertain the reason for the change. Through active engagement, should we conclude that a viable plan and strategy is in place and being implemented, we will maintain our position.  If we ultimately question the probability of success of a particular strategy employed, we will either trim or sell out of position and reallocate proceeds to other investments that show better impact potential.

18.3. Additional information.[OPTIONAL]


FI 19. Examples - ESG incorporation or engagement

19.1. Provide examples of how your incorporation of ESG analysis and/or your engagement of issuers has affected your fixed income investment outcomes during the reporting year.

ESG issue and explanation

Our AB Municipal Impact strategy focuses its healthcare investments largely on safety-net hospitals throughout the US. We see successful healthcare systems as those who deeply enmesh themselves in the community and forge a holistic approach that goes beyond the confines of the hospital’s “four walls” and beyond the provision of just medicine. It’s about meeting the medical needs of the community from a physical, behavioural, economic, structural and prophylactic perspective.

One of our hospital holdings is the safety-net health provider for a major metropolitan city, where 40+% of patients are Medicaid-eligible. In addition to providing high quality medicine, this hospital understands that poverty and inequality create a cycle of bad outcomes: poverty leads to health and housing problems; poor health and housing leads to school and employment problems; and educational and employment failure leads back to poverty. To disrupt this cycle, this hospital delivers holistic innovative community “wrap-around services” as prevention before patients get to the hospital.

Impact on investment decision or performance

The hospital has also been at the forefront of addressing the recent opioid epidemic.  They have worked collaboratively both nationally with other organizations, and locally with police, fire and other first responders who connect overdose survivors and their personal networks with addiction treatment, harm reduction, and other community support services following a non-fatal overdose. They continue to be a leader in research on this crisis and developing new and innovative methods of addressing it.

This hospital holding fits with our Municipal Impact Strategy which seeks to identify investments that generate positive social and environmental impacts.  In addition, this hospital serves a community of lower socioeconomic status.  The issuer was approved for inclusion in our impact portfolios by our Investment Policy Group.

ESG issue and explanation

A charter school holding in our Municipal Impact Strategy founded in 1997 was one of New Jersey’s first charter schools. For over 20 years, this educational institution established a symbiotic, collaborative relationship with the traditional public school system, while demonstrating high performance year after year as evidenced by high graduation, college acceptance and college completion rates.  This issuer has excelled at providing traditionally underserved students with a high quality academic program and has expanded to 13 schools in Newark, New Jersey serving approximately 5,000 students, with plans to grow their program to 6,500 students by 2021.

 

Impact on investment decision or performance

  • The charter school’s matriculation, for 2 or 4-year college has averaged between 95-100% for every high school class since 2011-2012.
  • Graduation: 100% of seniors in 2017 were accepted into at least one college with 90% of graduates enrolling in a 4-year college or university.
  • Attendance rates have averaged at least 95% going back to 2011.
  • The charter high school students (classes 2004-2011) graduated 4-year college or university at 7x the national rate for bottom income quartile students.
  • In 2014, the charter school agreed to take over a failing school in Newark scheduled to be closed because it was the lowest performer in its district. Students were reading three full grades below their allotted grade. The charter school’s leaders revamped the curriculum for success. Within one-year, proficiency rates in English and math were beating state averages.

This charter school has excelled, and we believe will continue to excel, at providing traditionally underserved students a high quality academic program leading to college acceptance and, most importantly, college completion.  Therefore, it was approved by our investment policy group for inclusion in our municipal impact portfolios.

 

ESG issue and explanation

One of our Municipal Impact Strategy holdings is a Water Authority in a major southwestern US city.  This water authority serves 715,000 people or 72% of the total population within its greater metropolitan area. Close to 75% of the utility's customers come from the city which has a 25% poverty rate, as well as median household and per capita income equal to 74.4% and 80%, respectively of the State. The authority is a well-managed water system that has operated prudently during the worst drought in centuries. The implementation of a conservation fee to pay for a range of interventions and rebates has helped dramatically reduce total and residential consumption on a per capita basis.

The Water Authority provides Conservation, Education, Outreach and Low Income Assistance Programs - among many others:

  • Water Conservation and Efficiency
  • Fixture Replacement Rebate Program
  • Low-Income Assistance Program
  • Education and Outreach

Impact on investment decision or performance

Water is a finite resource that must be conserved and managed to preserve access for future generations. Climate change is already adversely impacting large swaths of the Western US creating more frequent, intense and longer periods of droughts. Population shifts over the last several decades resulted in fierce “competition” for potable water sources. Innovative and unique initiatives to promote conservation and reduce water use will be essential to maintaining a positive quality of life without causing mass migration and disruption. Our goal is to invest in communities who view the provision of clean water as a right and who consistently demonstrate strong stewardship of the most essential resource. Therefore, this issuer was approved as a holding within our municipal impact strategy.

ESG issue and explanation

We evaluated the 100% state-owned electricity and gas company in Bulgaria.  The company accounts for 50% of electricity generation, owns the natural gas pipelines and the country’s only nuclear power plant.  Even though the company has full sovereign support, we were concerned about the following ESG:

  • The company’s reported non-transparent relations with private businessmen around the import of natural gas from Russia and export of electricity to neighbouring countries.
  • Abuse of market power, which resulted in an ongoing investigation by the EU commission
  • The company’s dependence on coal-fired and nuclear power plants, which were built during the communist era and therefore and significant concerns about the safety and emission standards. 

Impact on investment decision or performance

Due to these environmental and governance concerns we avoided this company within client portfolios.

ESG issue and explanation

In early 2017, we had two important concerns about the direction of South Africa:

  • South Africa boasts robust technocratic, meritocratic and highly capable institutions (unlike many of its emerging-market peers). The SARB and the National Treasury have done an outstanding job steering the South African economy through volatile times and maintaining overall macroeconomic stability. That said, we had concern that certain key South African institutions were becoming less effective.
     
  • Concern about deteriorating governance at some of South Africa’s State Owned Enterprises (SOEs). Over the last four years, SOEs’ contingent liabilities reached 25% of GDP. This concerns us because the lack of a clear and transparent reform agenda could increase the financial burden on the public sector.

Impact on investment decision or performance

Amid these concerns, in March 2017, we sent a formal letter to senior government officials where we raised these two specific ESG risks that we feel could impact the investment-grade rating that the country has held for more than two decades.   A downgrade to sub-investment grade status could substantially increase the cost of capital. That could slow investment at a time when the country needs robust investment spending to rein in persistently high unemployment and to close a widening income gap with advanced economies. An investment-grade credit rating, once lost, can be very difficult to regain.

As a firm with a long history of investing in South Africa, AllianceBernstein believes in the country’s long-term potential. As responsible investors, we wanted to remind the South African authorities that the country’s key institutional strengths and high governance standards need to be maintained for the benefit of South Africa’s people and its investors.

19.2. Additional information.

Integration with a Corporate (non-financial):

In March 2017, we met with the management of a privately held textile manufacturer/distributor based in Mexico, which was bringing a new 5-year deal to market.  We decided to pass on the new issue due to governance concerns—as with many privately held companies, transparency was a concern—the company was not willing to report to us on a frequent enough basis.   The company was expelled from the UN global compact in 2010 for failure to communicate progress. 

Poor governance and lack of transparency led us to avoid the credit. After the new issue, the company’s bonds sold off in the wake of poor earnings news.

 

Integration with a Corporate (non-financial):

An environmental service company provides waste management services, servicing residents in Canada. The Company offers solid and liquid waste collection and processing, including programs in industrial, commercial, institutional, municipal, residential, and recycling wastes. The company has recently pursued expanding its food waste recycling initiative.  This is an underserved area that would bring meaningful benefits to the environment and individual municipalities in Canada.  The company benefits from low cyclicality, end market diversification and supportive sponsors.

Given the company’s positive environmental and social impact along with positive fundamentals we have included this credit within our holdings. 


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