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Universities Superannuation Scheme - USS

PRI reporting framework 2018

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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.

SSA Country Analytics

The SSA mandates utilise an in-house tool, first developed in 2008 and updated annually, which ranks countries based on environmental, social and governance (ESG) risks. The tool is used in the selection processes for sovereign debt in emerging markets.

The rankings are based upon an equally weighted amalgamation of the component headline scores, rebased to one hundred to give a composite ranking score.

The four indices detailed below are used:

  • Transparency International Corruption Perceptions Index
  • UNDP Human Development Index
  • Yale & Columbia Environmental Performance Index and the Wall Street Journal Heritage Foundation Index of Economic Freedom. 

In all instances a higher score means better performance. The indices were selected due to their credibility and accessibility, and the range of social and environmental criteria that they combine. This includes (but is not restricted to):

  • Adult literacy and education enrolment
  • Air pollution
  • Biodiversity and habitat protection
  • Carbon intensity
  • Corruption
  • Female representation
  • Investment & regulatory restrictions
  • Life expectancy
  • Population below poverty line
  • Price controls
  • Private property rights
  • Water accessibility and quality

These indices are selected because of their credibility and accessibility, and the range of social and environmental criteria that they combine. When looked at in combination these indicators provide a stronger signal than if each one was looked at in isolation.

Process

For the Emerging Market Debt portfolio (local currencies), the composite index is one of the core tools used in portfolio construction. The results of the composite country score is combined with a fundamental credit assessment and integrated with two other factors to formulate the investment strategy.  Positive ESG country scores are viewed as an indicator of lower future default risk and negative ESG scores are viewed as being an indicator of higher future default risk.  Our investment approach attempts to avoid countries where risk of default is increasing,  ESG country rankings contribute to this analysis but are not the only input.

For the dollar denominated sovereign debt mandate, the ESG country scores are used as a tie breaker between issuers, where other considerations (such as liquidity and duration) are equal.  However due to the tightening of credit spreads USS is not currently active in this market. 

Corporate Credit

For corporate fixed income, the scheme has sought to adapt its RI experience and processes developed for internal equity. The internal credit portfolio managers have access to quantitative ESG data from Bloomberg initially brought into the fund for equities analysis. Further, the Credit Team now share access to the 'internal research hub' (IRH) which details the qualitative RI perspectives, meeting notes, voting and engagement records from the equities and RI departments. They also post their own research notes to this page contributing to the knowledge sharing that takes place between the credit and equity teams.

The examples in FI 19 illustrate how the process works for credit.

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

SSA

See answers to FI 11.1

Corporate (financial)

See answers to FI 11.1

Corporate (non-financial)

See answers to FI 11.1.

NB:  We do not make a distinction between Corporate (Non-financial) and (financial)

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]

See answers to section FI03.3 and FI02.3

We will continue to develop the ESG integration processes within the credit mandate for the fixed income asset class in 2018.   We have encountered problems with the mapping of security identifiers (such as ISINs and sedols used by the ESG data providers and fixed income and RI team analysis), back to the issuer in order to link the equity to credit securities.   We will carry on trying to resolve these problems 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
Corporate (financial)
Corporate (non-financial)

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

SSA

Please see our response to F103.3 and FI02.3

Corporate (financial)

Please see our response to F103.3 and FI02.3

Corporate (non-financial)

Please see our response to F103.3 and FI02.3

13.3. Additional information.[OPTIONAL]


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