Our economists consider ESG factors as part of their overall evaluation of a sovereign issuer. They evaluate how ESG issues are currently affecting the country's ability to meet payment obligations as well as how they may affect them in the future. If ESG factors are deemed material enough that they impact the risk/return profile of the sovereign issuer, that assessment will be reflected in the analyst's opinion and forecast for that issuer and will be discussed with the portfolio managers and the traders during regular research review/investment strategy meetings. ESG issues may also be addressed with government officials and central bankers via engagement.
Within our Municipal Impact strategy, our Investment Policy Group convenes regularly to review potential investments for the Impact portfolios. We have established an investment structure in which research analysts-in addition to their traditional fundamental analysis-score each issuer numerically on Environmental, Social and Governance criteria. Bonds with an "impact score" below a certain level are not eligible for investment in the Municipal Impact Strategy.
Our ESG scoring model weighs environmental and social considerations differently depending on the municipal sector under consideration: i.e., environmental criteria receive more weight for electric utilities and water systems; social criteria receive more weight for education and healthcare issuers. We recognize how essential strong municipal management is (including the stewardship of finances and debt, as well as transparency), and therefore the weight we assign to governance is consistent across all sectors.
Analysts' present their findings and recommendations to the Municipal Impact Investment Policy Group. This generates a dialogue designed to illuminate the strengths, weaknesses, opportunities, and threats underlying each potential impact investment. The output of our Municipal Impact Investment Policy Group sessions is a consensus on a set of approved bonds for inclusion across all impact client portfolios. We adjust weights of the holdings within our impact portfolios to be higher/lower based on the bond’s impact score (as well as traditional credit quality).
An important component of our approach is active engagement with issuers included in our portfolios. We have established baselines associated with key performance indicators and will actively surveil progress made on those metrics. 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.