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UBS Asset Management

PRI reporting framework 2018

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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
0 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
100 No incorporation strategies applied
100%
Corporate (financial)
0 Screening alone
0 Thematic alone
0 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
100 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (non-financial)
0 Screening alone
0 Thematic alone
0 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
100 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.

Norms-based Screening: UBS Asset Management has implemented a process to prevent investments in companies involved in the development, production or purchase of cluster munitions and antipersonnel mines for our actively managed corporate(non-financial) fixed income assets. The firm's Sanctions Compliance Committee issues a list of affected companies based on information provided by an external advisor. Changes are implemented by the responsible Portfolio Managers. Portfolios undergo regular pre and post-trade compliance checks.

Negative Screening: Typically directed by client requests, we are  able to incorporate negative screening lists for securities, issuers or certain sectors provided by clients into our investment process.

Positive/ Best-in class screening: We are able to tailor our investment management approach to accommodate ESG constraints within mandates directed by our clients.

Thematic: We are a diversified asset manager providing broad range of strategies to a global client base. Currently, we manage thematic strategies mandated and directed by our clients.

01.3. Additional information [Optional].

Integration:

We believe that fundamental, material ESG factors are best assessed as part of the company research process. These factors are fundamental in nature and need to be analysed as an integral part of the due diligence process, included in our estimation of cash flows and valuation metrics.

UBS AM's 25+ credit analysts provide research coverage for more than 2,000 non-government issuers globally across all fixed income sectors. The credit research process includes qualitative assessments of management strength, business strategy, market position, competitive environment, regulatory environment, and financial flexibility and quantitative assessments of historical operating results, calculation of various credit ratios and, most importantly, an expected future outlook. The analysts specialize in their sectors and build up valuable, in-depth knowledge over time to provide comprehensive credit review and analysis with emphasis on cash flow generation and sustainability.

We are currently working toward fully integrating ESG considerations throughout our credit research process including investment grade and high yield credit assessments. This will require all credit recommendations by our Credit Research teams to address the most material sustainability strengths and weaknesses and also to assess the material impact of sustainability considerations on their credit recommendations and how sustainability risk factors influence their credit recommendation either positively or negatively.

The impacts of sustainability factors in the company case should be included in the underlying financial assumptions, and analysts must explain the link between the sustainability performance and the future outlook on credit quality. Credit analysts  will evaluate  the current status and also provide a forward looking trajectory of the EGS risks of each credit. In order to do so, each credit's ESG profile will be rated on a proprietary rating scale to determine the materiality of ESG issues as well as the positive or negative material impact on their overall credit recommendations. Our credit research teams work in close collaboration with the Sustainable Investment Research team which provides guidance and quality control on the sustainable credit assessment process.  This integration is pursued across all research recommendations and consequently will have an impact on all of our actively managed strategies.


FI 02. ESG issues and issuer research (Private)


FI 03. Processes to ensure analysis is robust

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

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

03.3. Additional information. [Optional]

UBS Asset Management pursues the integration of material sustainability factors into all analyst recommendations, which impacts all actively managed strategies. Through the integration of sustainability factors into the research process, the precise weight of sustainability across mainstream strategies will vary depending on the materiality and relevance of the sustainability issues for particular company cases. Fixed income and equity analysts assess material sustainability factors by considering the UBS proprietary score, as well as MSCI ESG Research reports. In addition, the Sustainable & Impact Investing team has regular interaction with both fixed income and equity research teams to support materiality analysis of sustainability factors across various industries, as well as support on individual company cases.


(A) Implementation: Screening

FI 04. Types of screening applied

04.1. Indicate the type of screening you conduct.

Select all that apply
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

Negative Screening: We are able to incorporate negative screening lists for securities, issuers or certain sectors provided by clients into our investment process.

Positive/ Best-in class screening: We are able to tailor our investment management approach to accommodate SRI constraints within mandates directed by our clients.

04.3. Additional information. [Optional]


FI 05. Negative screening - overview and rationale

05.1. Indicate why you conduct negative screening.

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.

Norms-based Screening: UBS Asset Management has implemented a process to prevent investments in companies involved in the development, production or purchase of cluster munitions and antipersonnel mines for our actively managed corporate (non-financial) fixed income assets. The firm's Sanctions Compliance Committee issues a list of affected companies based on information provided by an external advisor. Changes are implemented by the responsible Portfolio Managers. Portfolios undergo regular pre and post-trade compliance checks.

Negative Screening: Directed by client requests, we are able to incorporate negative screening lists for securities, issuers or certain sectors provided by clients into our investment process.

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?
Positive/best-in-class screening
Norms-based screening

07.2. Additional information. [Optional]


(B) Implementation: Thematic

FI 08. Thematic investing - overview (Private)


FI 09. Thematic investing - themed bond processes

09.1. Indicate whether you encourage transparency and disclosure relating to the issuance of themed bonds as per the Green Bonds Principles, Social Bond Principles, or Sustainability Bond Guidelines..

          We expect the standards above collectively to be met in our green bond holdings.
        

09.2. Describe the actions you take when issuers do not disburse bond proceeds as described in the offering documents.

Should we discover that these standards are lacking in our green bond holdings, we would review the credit recommendation and likely downgrade which would lead to sale of the bonds from our portfolio holdings.  Consequently maintaining these standards is an important basis for our selection and holding of green bonds in our portfolios.

09.3. Additional information. [Optional]


FI 10. Thematic investing - assessing impact

10.1. Indicate how you assess the environmental or social impact of your thematic investments

10.2. Additional information. [Optional]


(C) Implementation: Integration

FI 11. Integration overview

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

UBS aims to be a leader in sustainability in the financial industry. This requires us to focus on the long term and to work to provide consistent returns to our stakeholders. It also requires us to promote the common good by being proactive, purposeful and accountable. At UBS Asset Management we are committed to acting as responsible investors on our clients' behalf. Across our traditional investment areas, recognizing the growing importance of ESG, we have established a general approach and commitment to addressing environmental, social and corporate governance factors.

Within fixed income, analyst recommendations are centrally stored and shared with portfolio managers globally, and analyst credit recommendations are discussed in regularly scheduled credit committee meetings, in which individual cases are discussed in a centralized manner with portfolio managers globally. ESG recommendations are included as part of the credit analysts' credit research and are also subject to the considerations of and discussions with Sustainable Research team representatives.

By providing integrated recommendations that consider ESG risks and opportunities, UBS avoids portfolio managers being forced to choose between the sustainability and the financial attractiveness of companies when making their stock selections, given that ESG considerations are taken into account in the research recommendations.

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

Corporate (financial)

The process of ESG integration, as described in our response to question FI 11.1 above, applies to all types of fixed income we invest in.

Corporate (non-financial)

The process of ESG integration, as described in our response to question FI 11.1 above, applies to all types of fixed income we invest in.

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
Corporate (financial)
Corporate (non-financial)
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]

Broadly speaking, UBS Asset Management pursues the integration of material sustainability factors into all analyst recommendations, which impacts all actively managed strategies. Through the integration of sustainability factors into the research process, the precise weight of sustainability across mainstream strategies will vary depending on the materiality and relevance of the sustainability issues for particular company cases. Fixed income and equity analysts assess material sustainability factors by considering the UBS proprietary score, as well as MSCI ESG Research reports. In addition, the Sustainable Investment Research and Engagement team has regular interaction with both fixed income and equity research teams to support materiality analysis of sustainability factors across various industries, as well as support on individual company cases.

Within fixed income, analyst recommendations are centrally stored and shared with portfolio managers globally, and analyst credit recommendations are discussed in regularly scheduled credit committee meetings, in which individual cases are discussed in a centralized manner with portfolio managers globally. ESG recommendations are included as part of the credit analysts' credit research and are also subject to the considerations of and discussions with Sustainable & Impact Investing team representatives.


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
Corporate (financial)

Environmental

Social

Governance

Corporate (non-financial)

Environmental

Social

Governance

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

Corporate (financial)

We believe that fundamental, material ESG factors are best assessed as part of the company research process. These factors are fundamental in nature and need to be analysed as an integral part of the due diligence process, included in our estimation of cash flows and valuation metrics.

Corporate (non-financial)

We believe that fundamental, material ESG factors are best assessed as part of the company research process. These factors are fundamental in nature and need to be analysed as an integral part of the due diligence process, included in our estimation of cash flows and valuation metrics.

13.3. Additional information.[OPTIONAL]


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