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Alliance Bernstein

PRI reporting framework 2018

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Outputs and outcomes

LEI 12. How ESG incorporation has influenced portfolio composition

12.1. Indicate how your ESG incorporation strategies have influenced the composition of your portfolio(s) or investment universe.

Describe any reduction in your starting investment universe or other effects.

We narrow down the investment universe in accounts with client-directed or other third-party screening. We have a controversial weapons policy for our Luxembourg domiciled funds which limits the investment universe.  A number of specific strategies have additional sector or industry restrictions.   

Specify the percentage reduction (+/- 5%)

%

Describe any alteration to your investment universe or other effects.

The Fund pursues opportunistic growth by investing in a global universe of companies that are positively exposed to sustainable investment themes. We define sustainable investment themes to be those that are broadly consistent with achieving the United Nations Sustainable Development Goals. Our portfolio holdings must fit within themes that are directly aligned with one or more UNSDGs. We believe that such alignment implicitly excludes several product categories from ownership consideration. We also monitor companies for conduct-based violations, as generally defined by the UN Global Compact.

Select which of these effects followed your ESG integration:

Describe the influence on composition or other effects

We use an MSCI SRI Index for our Global Responsible Factor Fund and we use FTSE4Good Indices for our Ethical Target Date Funds. Both indices have a reduced investment universe due to a best-in-class approach as well as a restriction list. 

12.2. Additional information.[Optional]

For accounts with screening criteria, the investment universe is narrowed down by the securities restricted.

For all our active portfolios, ESG factors are incorporated into our buy/sell/weight decisions across all our client portfolios when we believe they are material to our forecasts and investment decisions. If we determine that these aspects of an issuer's past, current, or anticipated behavior are material to its future expected returns, we address these concerns in our research forecasts, research review meetings and investment decisions.

 


LEI 13. Measurement of financial and ESG outcomes of ESG incorporation

13.1. Indicate whether your organisation measures how your approach to responsible investment in Listed Equity has affected your portfolio’s financial and/or ESG performance.

b) Funds’ financial performance: return

Describe the impact on:
Describe the impact
Which strategies were analysed?
Funds' financial performance: return

c) Funds’ financial performance: risk

Describe the impact on:
Describe the impact
Which strategies were analysed?
Funds' financial performance: risk
Describe the impact on:
Describe the impact
Which strategies were analysed?
Funds' ESG performance

13.2. Describe how you are able to determine these outcomes.

We measure whether our approach to ESG issues impacts our Sustainable Global Thematic fund's financial risk and return performance. Our approach is to invest in social and environmental themes with strong secular growth that should drive attractive financial returns. We measure the growth potential of our themes versus the expected returns in the broad market. We analyze the risks of ESG issues for each company we invest in and quantitatively measure these ESG risks our models. These risks are measured at both a company level and total portfolio level. We also measure the ESG performance of our portfolios several ways. We measure the carbon footprint of the portfolio vs. the benchmark. We measure the impact of the companies we invest in by measuring the revenue exposure they have for providing products and services related to environmental and social solutions compared to the benchmark.


LEI 14. Examples of ESG issues that affected your investment view / performance

14.1. Provide examples of ESG issues that affected your investment view and/or performance during the reporting year.

ESG issue and explanation

We have a multi-year history investing in an Ireland-based manufacturing company. We liked this mid-size company for its innovative growth-oriented earnings profile, and were moderately invested within our Global Thematic portfolios.  However, as a building materials manufacturer that relies heavily on natural resources, this company was predisposed to several environmental risks, with the main risks being carbon emissions in the manufacturing process and the use of toxic materials. For building materials companies, carbon emissions costs are zero today but are likely to  become more meaningful over time given increasing  regulation in this area. 

We evaluate environmental risks closely because they represent real risks to a manufacturing company’s long-term profitability, revenue growth and brand value yet are sometimes  underappreciated by the market, which tends to be more short-term results-oriented. As such, we initiated meetings with the company to further understand the actions it was taking to address  carbon emissions and the use of toxic materials. The company informed us of the steps it was taking to increase energy efficiency and move toward using zero-carbon energy sources for its manufacturing. The company is also proactively addressing its toxic material risk by seeking to find replacement chemicals ahead of potential future regulations.

Impact on investment decision or performance

We were highly satisfied at the specific steps the company was taking to reduce its carbon emissions and toxic material use. In our view, the company is one of the most sustainable and progressive manufacturers in the industry. Our positive engagement with the company led to us update our investment thesis. We expect the company to continue outperforming competitors based on superior product performance, advanced technologies and the environmental sustainability of its products. Our discussion with the company prompted us to raise our five-year return forecast in our  forecast model and also bolstered our confidence in the risk characteristics of the stock. Our engagement  led us to maintain a full position in the name. 

ESG issue and explanation

We had a multi-year investment in  two Brazilian protein producers in our Emerging Market Value portfolios. In March 2017, the two producers were included in a federal investigation involving a bribery scandal. Twenty-one meat companies allegedly made payments to the inspection agents responsible for verifying product quality (including expiration date, packaging, size) to encourage them to bend the rules and standards. The published allegations detailed discussions between employees of these companies and federal inspection agents and  their superiors discussing the circumvention of standard inspections rules and standards.  In addition to the federal investigation itself, the resulting news coverage was heavily negative. Several countries suspended meat imports from Brazil.  

Following this news,  we were immediately concerned with the companies’ governance practices and adherence to food safety standards. We had originally viewed both companies as having strong food safety practices. As a part of our research process, we had visited production plants at both companies in the past, and found strong  production processes and controls. Feedback from various industry stakeholders regarding both companies’ product quality had also generally been positive. The discussions with IR focused on the companies’ production and control processes and on how the companies were  responding to the investigations. 

Impact on investment decision or performance

Following our engagements in March 2017, we were dissatisfied with the explanations from both companies. We believed  both producers could have done more in mitigating bribery risks and actively committing to better ESG practices, including governance practices.  Apparently other investors felt the same way: negative fallout related to the news led to declines in both companies’ stock prices. After our meetings, we rebalanced our positions in Company #1 across several accounts.  As the stock price declined related to the situation, we wanted to ensure minimal losses in our Accounts. We continue to closely monitor this company and will exit positions entirely if we feel that the company is not operating to standard. 

In early 2018, we exited our position in Company #2 completely. We believed the company missed ample opportunities to improve its governance practices, despite our engagement and efforts to push for change. We had recouped much of our losses from the short-term stock price decline and decided that our longer-term  investment thesis  was no longer intact, given the company’s poor handling of importance governance issues.  

ESG issue and explanation

We have a multi-year history of investing in  a South Korean electronics company in several of our Emerging Market Growth and Value portfolios. We liked this company and were generally confident in its ability to generate strong earnings and sustainable growth. This company, like some others in South Korea, is operated by a family-owned conglomerate with strong ties to local government agencies. As a result, the company was predisposed to several governance risks, mainly bribery. 

In February 2017, a high-ranking executive was arrested on bribery charges. The executive had allegedly bribed a senior government official to help him secure further control of the company. In August 2017, the executive was  found guilty of bribery, embezzlement and perjury, resulting in a five-year prison sentence that was eventually reduced to an eight-month stint in prison and two years’ probation.  

After this event, we needed to reaffirm our confidence in this company’s ability to operate ethically. We wanted to determine whether this was an isolated event, or if there were deeper issues to be addressed. Since we held positions in this company two different Strategies, our portfolio management teams engaged jointly. 

Impact on investment decision or performance

In February and March 2017, our teams met with company management to discuss corporate governance and the ongoing investigation. The objective of these meetings was to determine how the company’s business and organization would be affected by the event. 

The company exhibited a satisfactory approach to eliminating ethical violations, and we did not see the event impacting its daily operations nor, related, the returns it could potentially provide to shareholders. Within our Emerging Markets Growth and Value Strategies, we took two separate actions. We trimmed positions in this company in some of our Growth portfolios, more related to the company’s delayed restructuring than to the execution’s conviction. Within our Value portfolios, we kept our positions unchanged. 

ESG issue and explanation

We reviewed a potential opportunity with a US-based pet food company. 

We liked this company for its long-term growth potential and fair valuations, and considered investing in it in several of our Concentrated Growth portfolios. Before deciding whether to invest, however, we wanted to review the company’s approach to ensuring quality in its operations.  

In 2014, the company faced a lawsuit alleging false advertising. The company’s advertising centered around a theme called “True Promise” which stated that the company’s products are “formulated with the finest natural ingredients”. The claim cited that certain pet food produced by  the company contained  poultry by-product meal and artificial preservatives.The claim also cited that certain of the company’s “grain-free” products contained grain.

On May 6, 2015, the company admitted  in court that a “substantial” and “material” portion of its pet food indeed contained poultry by-product meal,  contrary to how the products were advertised. To settle, the company paid $32 million into a settlement fund.  

The principles of food safety applies to pets, too: The Food and Drug Administration (FDA) requires that all pet foods be safe to eat, produced under sanitary conditions, contain no harmful substances, and, importantly in this case, be truthfully labeled. 

Impact on investment decision or performance

To gain more clarity on the issue above, we met with the company to evaluate its business practices. In August 2017, we met with the CFO. We discussed strategy and supply chain management as it relates to safety and quality, and also discussed the false advertising settlement. We specifically wanted to know what the company had done to improve their products since.   

The CFO informed us that a big part of the issue was the company’s use of external suppliers. Following the lawsuit, the company stopped using the supplier that had been responsible for the sub-par ingredients. The supplier was later indicted for fraud. To avoid similar issues in the future, the company tightened its standards around raw material supply, with the company now directly responsible for the procurement of all raw material and pricing. 

While food by nature always has some risk, we believed the company had substantially improved its practices to the degree  that the risk of a future food safety issue was manageable. In September 2017, we established a position in this company based on our satisfaction with management’s response to both this issue as well as several others that fell outside the ESG realm. 

ESG issue and explanation

We had been closely monitoring emerging market opportunities in clean technologies, wind, energy and water treatment. In 2016, we became aware of a growing opportunity in China. Renewable energy is a key part of China’s national strategy to combat climate change and air pollution. As a result, Chinese companies in environmentally-related sectors were performing well and garnering increased government support.  

 From 2010-2016, China experienced an over-supply of electricity production known as “curtailment”. Wind farms, as one of the faster-growing segments, saw a more severe impact in regions with concentrated wind resources and less demand. During those years, nearly 16% of overall wind generation projects were abandoned. 

In early 2016, we began considering positions in a state-owned Chinese wind power operator for our Emerging Market Value portfolios. The company’s stock was relatively cheap due to high levels of curtailment. Subsequently, we made the investment with the confidence that China’s continuous support on clean energy would help improve demand.

Despite our optimistic outlook for the company, we had two areas of concern: (1) Stock underperformance; and (2) policy risks.

Impact on investment decision or performance

While utilization had improved, we still saw increased risk with the use of ‘green certificates’ rather than the original tariff subsidy. The pricing of green certificates is capped, and would therefore not generate earnings higher than the original fixed tax subsidy. This earnings downgrade pressure contributed to the underperformance of renewables. As a result, we exited positions in May 2017.  We were uncomfortable with the uncertainty associated with the tax subsidy policy and we sought to avoid losses as the stock continued to decline. 

14.2. Additional information.[Optional]


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