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Loomis, Sayles & Company, L.P.

PRI reporting framework 2018

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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 01. Incorporation strategies applied

01.1. 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
95 Integration alone
5 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
95 Integration alone
5 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
95 Integration alone
5 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
100 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%

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

At Loomis Sayles, we believe that ESG issues play an important role in the global economy, both from a business and investment perspective. Loomis Sayles embraces its duty to act at all times in our clients' best interest, and we believe that ESG issues impact our goal of achieving superior, risk-adjusted returns. We understand that environmental, social, and corporate governance practices may present risks that need to be evaluated, and we analyze these risks as part of our fundamental research process.

We analyze risks by modeling long-term business opportunities and challenges, by identifying risks inherent in industries and sectors, and by using a variety of methods to evaluate ESG issues, including engagement with Issuers and the use of third-party analytical tools. 

With respect to integration, we expect our investment professionals to consider all available macro, fundamental and quantitative research insights, including those related to ESG.

Unless otherwise directed, with respect to screening, Loomis Sayles does not impose any ESG restrictions or exclusions on the investment process. Screening performed is mandated by our clients' guidelines, or by regulation.

01.3. Additional information [Optional].

With respect to integration, we expect our investment professionals to consider all available macro, fundamental and quantitative research insights, including those related to ESG.  With respect to screening, Loomis Sayles does not impose any ESG restrictions or exclusions on the investment process. Any screening is mandated by our clients’ guidelines, or by regulation.


FI 02. ESG issues and issuer research

02.1. 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

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

Indicate who provides this information  

Indicate who provides this information  

Indicate who provides this information  

Indicate who provides this information  

Indicate who provides this information  

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

ESG issues are considered as part of the firm's investment decision-making process. We use MSCI IVA, MSCI’s ESG research and issuer scores, and we have access to Bloomberg’s issuer ESG data and scores. In addition, Loomis Sayles utilizes information from financial news publications, specialist data services, and economic and political consulting groups, and has considerable access to Wall Street research publications and sell-side analysts. At all times, Loomis Sayles has as one of its goals to continually identify additional superior tools for the research analysts and the investment teams. We continually evaluate the existing resources and the need to supplement them, through (1) the acquisition of data, and (2) the development of technological tools.  The analysis focuses on whether our resources sufficiently capture data to assist in incorporating ESG into the investment process, and whether other resources may be necessary in the future.

02.4. Additional information. [Optional]


FI 03. Processes to ensure analysis is robust

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

specify description

          We consistently measure and monitor the analysts' views, ratings and recommendations relative to outcome. Box 2 relates to corporate credit only.
        

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

          Our periodic industry and issuer reviews include a written presentation of ESG factors and they are discussed if material.
        

03.3. Additional information. [Optional]

The MSCI ESG centralized data base is available to investment professionals. Moreover, we include the ESG MSCI ratings in some of our internally generated research reports.

In addition to the boxes selected above, our ESG attribution analysis is available and used to ascertain the impact of an investment management team’s ESG related positioning on product performance.  

Semiannually, our Chief Investment Risk Officer conducts an investment risk review with each investment product team.  The review includes exposure by ESG rating for the representative account, performance by ESG rating and a review of the lower ESG rated securities held in the portfolio with each portfolio management team in order to assess awareness of ESG issues in the portfolios.  Based on the review, the Chief Investment Risk Officer shares processes and practices across all investment teams.


(A) Implementation: Screening

FI 04. Types of screening applied

04.1. Indicate the type of screening you conduct.

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

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

Screening is conducted in accordance with client-specific guidelines and/or the mandate of a given product. We may partner with an expert company that monitors activity related to a client's particular screening requirements. Frequency of review and changes are within the client's purview.

04.3. Additional information. [Optional]


FI 05. Negative screening - overview and rationale

05.1. Indicate why you conduct negative screening.

SSA

SSA

Corporate (financial)

Corporate (fin)

Corporate (non-financial)

Corporate (non-fin)

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

Screening is conducted in accordance with client-specific guidelines and/or the mandate of a given product. We may partner with an expert company that monitors activity related to a client's particular screening requirements. Frequency of review and changes are within the client's purview.

05.3. Additional information. [Optional]


FI 06. Examples of ESG factors in screening process (Not Completed)


FI 07. Screening - ensuring criteria are met

07.1. 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?

other description

          Audits of our trading system, which include holdings in accordance with fund guidelines, are undertaken regularly by external auditors.
        

07.2. Additional information. [Optional]

We note that the term "fund" is used in this question. Our answer applies to any client account (funds and separate accounts) that require negative screening.


(C) Implementation: Integration

FI 11. Integration overview

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

We believe that integrating certain ESG factors is a part of traditional financial analysis. Governance is a critical component in the assessment of management's or a sovereign's ability to cope with the financial impact of economic volatility as well as changes involving technology, the competitive landscape, and government tax/regulatory policies. For example, we have considered the impact of new environmental requirements for the automotive industry on its capital and R&D spending as well as their impact on the key credit ratios. Governance and social policy are also critical components of our sovereign analysis.

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

SSA

ESG factors are a fundamental part of sovereign credit analysis. Using data from government and independent sources, we look at social factors like access to education and health care, environmental concerns regarding resource constraints, and governance factors like rule of law and quality of institutions. We incorporate into our long term view the published rankings of countries on specific factors like income inequality, the ease of doing business, and the level of corruption in the public sector.

Corporate (financial)

We view the governance history of financial companies as it relates to the turnover rate of senior management, the maintenance of prudent financial policies, the ability to balance the needs of all stakeholders, the severity of pending lititgation, whether the chairman and CEO positions are separate as well as the experience/qualifications of company leaders.  Regarding the adherence of social principles, we evaluate an issuer's relationship with its customers including whether its products are fairly priced, its selling practices and whether it fairly serves all communities.  On environmental matters, we note whether financial institutions participate in the "green bond" market.

Corporate (non-financial)

Every industry is different as it relates to various ESG factors. For example, environmental risks are very important for the automotive, energy and utility industries while social factors come to the forefront for apparel producers and the retail industry.

Securitised

Governance is an important factor in the analysis of securitizations.  We evaluate governance primarily as it relates to the alignment of interest between the sponsor and the investor.  More specifically, we look at whether the sponsor is using securitization simply as a method of exit or risk transfer, or as a funding source in which they will continue to participate.  We seek structures where there is strong alignment of interests.  Social and environmental matters are not always relevant to the securitized space.  However, with respect to social factors, we do watch for and avoid structures and programs that could be viewed as predatory toward consumers. 

11.3. Additional information [OPTIONAL]


FI 12. Integration - ESG information in investment processes

12.1. 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

12.2. Additional information [OPTIONAL]

With regard to whether ESG analysis for issuers is a standard agenda item at investment committee meetings, we wish to clarify that our model is one of distinct investment product teams, and therefore we do not have a standard "investment committee meeting".  However, each research group as well as the investment product teams choose how and when to include ESG analysis as a standard agenda item in each of their meetings.  For example, one fixed income product team reviews the lowest ESG rated issuers by sector in their portfolio on a regular basis.  Several other investment teams anticipate integrating ESG analysis in a more formal manner in their investment process in 2018.  


FI 13. Integration - E,S and G issues reviewed

13.1. 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

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

SSA

ESG factors are a fundamental part of sovereign credit analysis. Using data from government and independent sources, we look at social factors like access to education and health care, environmental concerns regarding resource constraints, and governance factors like rule of law and quality of institutions. We incorporate into our long term view the published rankings of countries on specific factors like income inequality, the ease of doing business, and the level of corruption in the public sector.

Corporate (financial)

For companies in the financial sector much of the ESG review process is driven by a company's governance history. For example, we typically review the performance and effectiveness of the senior leadership team as well as the Board of Directors by delving into their expertise, composition, turnover and outcomes of previous decisions.  Social factors are also evaluated, especially as they relate to the customers and communities these companies serve.

Corporate (non-financial)

The impact of specific ESG factors varies greatly among the vast array of corporate sectors. For example, environmental risks are very important in the evaluation of the automotive, utilities and energy industries. Meanwhile, social factors come to the forefront for apparel producers and the retail industry.

Securitised

The relevance of ESG factors varies widely in the securitized market. Governance analysis within securitizations is done at the deal sponsor level. Governance vis-a-vis alignment of interests between the sponsor and investor is relevant to all structures. Loomis Sayles, through industry/investor associations, led the effort to design and generate industry consensus with regard to enhanced structures to provide alignment of interests between the sponsors of MBS deals and the investors in those deals. These efforts have been coordinated by a task force facilitated by the US Treasury Department. 

Social matters, specifically predatory lending practices, are relevant in consumer related finance. 

Environmental issues are generally not directly applicable to securitizations. Securitization involves lending to a diversified group of participants and does not typically offer the opportunity to be selective with regard to recipients. As a lender, we have no direct connection to, or influence over, the use of funds. 

13.3. Additional information.[OPTIONAL]


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