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Principal Global Investors

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You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income » (C) Implementation: Integration

(C) Implementation: Integration

FI 11. Integration overview

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

Our primary consideration of ESG issues takes place within our investment process by our sector-focused research analysts. Our research team is organized by areas of industry sector specialization and our analysts are responsible for providing essential insights into industry trends and company-specific considerations, which may include certain ESG issues deemed material and relevant to the evaluation of sustainable earnings trends, sentiment, and valuation. Our analysts are also expected to provide timely insights on key risk considerations at a company-specific and industry level which may also include ESG-related considerations and events. ESG is factored into the “Fundamentals” component of our Financials, Technicals, and Valuations framework, which runs throughout our investment process. It is based on independent internal research and provides a consistent, comparative framework to evaluate all investment opportunities. To ensure they appropriately integrate ESG factors into their investment theses, the analysts of our largest boutique, supplement their own fundamental research with insights from third-party ESG research providers.

We conduct frequent discussions with corporate management teams for both current and prospective investments. Where appropriate, analysts will raise any concerns about ESG issues (along with any other fundamental concerns) during meetings with management. The company responses impact our opinion of the company's outlook.

Prior to issuance, the focus of our research is more focused on identifying potential ESG issues and evaluating how they impact the investment case for a particular company. If ESG issues are discovered, we determine the extent to which we will be compensated for the risks created by these issues or if we would avoid the investment. Following issuance and our investment, the focus of our monitoring shifts to ensuring the issuer is fulfilling the terms of the agreement and not engaging in any activities (ESG or otherwise) that could jeopardize the value of our investment.

Our analysts obtain the information necessary for his/her independent analysis from a variety of sources, including, but not limited to company information available on websites and through regulatory filings, meetings and calls with management teams, industry conferences and publications, media reports, formal and informal research from and dialogue with sell-side analysts, direct dialogue with and publications from the credit rating agencies, industry contacts, and various internal resources (economic team, legal counsel, analysts in other asset classes, etc.). In addition, analysts have access to MSCI Research and ISS-Ethix reports, from which ESG related data can be extracted. Over 6,000 companies are covered in the MSCI universe and ISS-Ethix researches and screens more than 20,000 debt and equity issuers worldwide. A sizable portion of our research data and information is available at no cost through disclosures from the company or as part of the service package provided by sell-side firms. Information from MSCI and the credit rating agencies is paid for directly as part of a service contract.

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

SSA

We are a research driven organization and our team of research analysts are experts in their particular area of focus, across asset classes and regions. Independent research and analysis on SSA issuers is conducted by dedicated analysts on the Fixed Income Emerging Market and Municipal teams for the companies and government issuers he or she covers. The product of this analysis is a view of the risks of the investment and recommended actions. We incorporate ESG issues into our analysis through our qualitative research at the discretion of our analysts. The analysts provide the essential insights into country or issuer specific considerations including ESG issues.

For SSA issuers, government and quasi-government agencies will generally engage with investors before bond issuance, but government issuers of sovereign bonds do not usually engage with investors prior to coming to market. However, we are able to engage with sovereign emerging market debt issuers at IMF investor conferences.

Corporate (financial)

For financial corporate bond issuers, analysts are expected to incorporate all factors impacting the creditworthiness of a company when conducting his/her analysis, which include social, governance issues such as cyber-security and risk management practices, and to a lesser extent environmental issues. These issues can be company specific or country specific, and analysts are expected to evaluate each. Analysts evaluate raw data from a variety of sources as well as comments from the credit rating agencies when determining the impact of ESG issues on our investment decision. Systems are in place for analysts to document, distribute, and store information to support his/her investment decision. To the extent ESG issues impact the investment decision, they may be documented in these databases. While ESG issues are an important consideration in our research, we incorporate ESG factors to expand our understanding of the company's credit quality and relative value so we may uphold our fiduciary duty to our clients.

Corporate (non-financial)

For non-financial corporate bond issuers, PGI analysts are expected to incorporate all factors impacting the creditworthiness of a company when conducting his/her analysis, which include social, governance, and environmental issues. These issues are sector or country specific, such as environmental factors pertaining to the utility sector. Analysts evaluate raw data from a variety of sources as well as comments from the credit rating agencies when determining the impact of ESG issues on our investment decision. Systems are in place for analysts to document, distribute, and store information to support his/her investment decision. To the extent ESG issues impact the investment decision, they may be documented in these databases. While ESG issues are an important consideration in our research, we incorporate ESG factors to expand our understanding of the company's credit quality and relative value so we may uphold our fiduciary duty to our clients.

Securitised

For Securitized assets that are made up of pools of residential mortgages or auto loans (ABS), there is not the opportunity to engage on ESG issues. Pools are generally fixed upon issue announcement and for the life of the security. For this reason, an evaluation of the originator becomes more important prior to purchase, as this allows you to incorporate governance factors into the analysis. There is not the opportunity to engage on concerns post-investment to change the trajectory of creditworthiness.

For CMBS (Commercial Mortgage Backed Securities), every property supporting the investment would have an environmental survey done as part of the underwriting. Looking through to the underlying properties allows the analysts to incorporate ESG factors into his or her analysis and allows us to monitor the performance of the deal for as long as we own the security.

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]

We are a research driven organization and our team of research analysts are experts in their particular area of focus, across industries and regions. Independent research and analysis is conducted by each analyst on the Fixed Income Credit Research team for the companies and industries he or she covers. The product of this analysis is a view of the risks of the investment and recommended actions. We incorporate ESG issues into our analysis through our quantitative research and inclusion into scored valuation models. The analysts provide the essential insights into industry trends and company-specific considerations including ESG issues. These insights are crucial to the evaluation of sustainable competitive advantages and risks at a company-specific and industry level. ESG factors can inform buy or sell decisions and underweight or overweight decisions at the issuer level. However, Portfolio Managers do not use ESG factors to weight particular benchmark sectors unless mandated by client-specific thematic directives.

We conduct frequent discussions with corporate management teams for both current and prospective investments. Where appropriate, analysts will raise any concerns about ESG issues (along with any other fundamental concerns) during meetings with management. The company responses impact our opinion of the company's outlook.

Prior to bonds issuance, our research is more focused on identifying potential ESG issues and evaluating how they impact the investment case for a particular company. If ESG issues are discovered, we determine the extent to which we will be compensated for the risks created by these issues or if we would avoid the investment. Following issuance and our investment, the focus of our monitoring shifts to ensuring the issuer is fulfilling the terms of the agreement and not engaging in any activities (ESG or otherwise) that could jeopardize the value of our investment.

Our analysts obtain the information necessary for his/her independent analysis from a variety of sources, including, but not limited to company information available on websites and through regulatory filings, meetings and calls with management teams, industry conferences and publications, media reports, formal and informal research from and dialogue with sell-side analysts, direct dialogue with and publications from the credit rating agencies, industry contacts, and various internal resources (economic team, legal counsel, analysts in other asset classes, etc.). In addition, analysts have access to MSCI Research and ISS-Ethix reports, from which ESG related data can be extracted. Over 6,000 companies are covered in the MSCI universe and ISS-Ethix researches and screens more than 20,000 debt and equity issuers worldwide. A sizable portion of our research data and information is available at no cost through disclosures from the company or as part of the service package provided by sell-side firms. Information from MSCI and the credit rating agencies is paid for directly as part of a service contract.


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

Macroeconomic research (which would include an assessment of corruption) is part of the investment process for sovereign debt. For municipal issuers, assessment of ESG factors varies with the type of bond issuance. For example, General Obligation bonds would focus more on the governance factor, while debt issued out of specific agencies (such as water or sewer departments) would have an environmental element in addition to governance; and agencies that focus on affordable housing or education would incorporate social factors as well as governance. Information on these factors would be obtained through research obtained from economists, investment banks, think-tanks, rating agencies, and directly from interaction with the issuer.

Corporate (financial)

Analysts are expected to incorporate all factors impacting the creditworthiness of a company when conducting his/her analysis, which could include environmental, social, and/or governance issues. These issues can be company specific, sector specific, or country specific, and analysts are expected to evaluate each. Analysts evaluate raw data from a variety of sources as well as comments from the credit rating agencies when determining the impact of ESG issues on our investment decision and are required to assign a specific ESG signal for each issuer in their coverage, ranging from green (positive) to red (warning). The next level of integration involves our analysts assigning an explicit ESG score that is an input in to the Fundamental, Technical, and Valuation (FTV) framework, culminating in a level of conviction and ultimately a portfolio recommendation at the security and industry level. They are also expected to provide timely insights on key risk considerations at a company-specific and industry level, which may also include qualitative ESG-related considerations and events. Systems are in place for analysts to document, distribute, and store information to support his/her investment decision. To the extent ESG issues impact the investment decision, they may be documented in these databases.

Corporate (non-financial)

Analysts are expected to incorporate all factors impacting the creditworthiness of a company when conducting his/her analysis, which could include environmental, social, and/or governance issues. These issues can be company specific, sector specific, or country specific, and analysts are expected to evaluate each. Analysts evaluate raw data from a variety of sources as well as comments from the credit rating agencies when determining the impact of ESG issues on our investment decision and are required to assign a specific ESG signal for each issuer in their coverage, ranging from green (positive) to red (warning). The next level of integration involves our analysts assigning an explicit ESG score that is an input in to the Fundamental, Technical, and Valuation (FTV) framework, culminating in a level of conviction and ultimately a portfolio recommendation at the security and industry level. They are also expected to provide timely insights on key risk considerations at a company-specific and industry level, which may also include qualitative ESG-related considerations and events. Systems are in place for analysts to document, distribute, and store information to support his/her investment decision. To the extent ESG issues impact the investment decision, they may be documented in these databases.

Securitised

For Securitized assets that are made up of pools of residential mortgages or auto loans (ABS), there is not the opportunity to engage on ESG issues. Pools are generally fixed upon issue announcement and for the life of the security. For this reason, an evaluation of the originator becomes more important prior to purchase, as this allows you to incorporate governance factors into the analysis. There is not the opportunity to engage on concerns post-investment to change the trajectory of creditworthiness.

For CMBS (Commercial Mortgage Backed Securities), every property supporting the investment would have an environmental survey done as part of the underwriting. Looking through to the underlying properties allows the analysts to incorporate ESG factors into his or her analysis and allows us to monitor the performance of the deal for as long as we own the security.

13.3. Additional information.[OPTIONAL]


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