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Universities Superannuation Scheme - USS

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)
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]

Carbon Footprint

We carbon footprint our fixed income portfolio’s by comparing the carbon intensity of the portfolio to the carbon intensity of the corresponding benchmark.  We find this a useful starting point from which to identify potential hotspots in our portfolios.

Back test

Back testing / modelling was employed in the development of the new investment process for the Emerging Markets Debt (local currencies) portfolio which uses the ESG country ranking as one of three core components for portfolio construction.

Performance

USS takes an integration approach to Responsible investment. We consider that it would be very difficult to attribute portfolio performance specifically to ESG factors.   It may  be easier to identify the impact on portfolio performance when screening out sectors (but this is not our approach).

We assess ESG performance at stock level rather than portfolio level.    We do not necessarily agree with all of the analysis and rankings produced by our external research providers.  We find it much more useful to analyse the detail behind the rankings and scores and leverage internal expertise.  This is more consistent with our bottom up approach to stock analysis.

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

 

Risks associated with the transition to a lower carbon economy as they apply specifically to the autos industry.

 

Impact on investment decision or performance

The auto's industry faces a number of headwinds associated with the transition to a lower carbon economy and the innovation of disruptive technology,  particularly around autonomous driving and car sharing.

The product portfolio of a well known autos manufacturer was analysed and despite impressive fundamentals, a decision not to invest was taken for a number of reasons.  The company's reliance on diesel powertrains and lack of progress in terms of developing electric powertrain alternatives were important considerations in assessing potential downside risks over the medium to long term.

 

ESG issue and explanation

Concerns around the independence and entrenchment of the board were raised along with the combined role of CEO and Chairman.

Impact on investment decision or performance

The credit analyst reviewed the corporate governance arrangements at a large international holding company with the assistance of the RI Team.  It was concluded that the issues identified did not present material financial downside risks and therefore were not material in the context of fixed income investments.    The risk of material financial misstatement,  bribery & corruption and fraud were not raised.   Therefore there was no impact on the analyst's view of the company.  

ESG issue and explanation

Risks associated with the transition to a lower carbon economy and potential bottle necks in the supply of key commodities required for the development of electric vehicles and associated battery technology.

Impact on investment decision or performance

The Credit Team increased their weight in a large integrated mining company.  An analysis was conducted into the potential demand for seaborne thermal coal and the potential upside to demand for cobalt and copper resulting from the  transition to EV and demand for improved battery storage.  These considerations along with the company's improved balance sheet formed were key elements in the team's decision to increase their exposure.   The RI team conducted a review of ethical issues associated with the supply of cobalt.   This review included an analysis of the potential for ethical supply and political risk in DRC. 

ESG issue and explanation

Transition to a lower carbon economy and the risk of assets stranding both in terms of a lower for longer oil price and the potential impact of a carbon tax/ trading scheme

Impact on investment decision or performance

Climate change risk is an integral part of the credit team's analysis of the Oil & Gas sector.   This includes analysis of the cost of extraction v predicted price for oil.  Companies with assets at the higher end of the cost curve present more risk and are avoided.   This provides some protection against the potential impact of a carbon price/ tax.   This analysis was an integral part of the Credit team's decision to invest in a large integrated oil & gas company which had a relatively favourable portfolio cost profile.  The Credit team liaises closes with Oil & Gas analysts in the Equity team when analysing this sector.

ESG issue and explanation

Transition to a lower carbon economy and the risk of asset stranding.

Impact on investment decision or performance

Analysed oil and gas exploration company.  Found that the breakeven point of production was coming down.  This  made the company more attractive as an investment because of improved margins and less exposed to increasing regulatory risks such as carbon tax/ carbon pricing.  It also provided some protection against deflated oil prices.  Final investment decision pending.

19.2. Additional information.

We do not make a distinction between Corporate financial and Corporate non-financial.


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