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Wellington Management Company LLP

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
78 Integration alone
22 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
84 Integration alone
16 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
84 Integration alone
16 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
83 Integration alone
17 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.

Each of our portfolio managers and investment teams develops their own investment approach whereby ESG considerations are integrated into their research and decision-making processes to the extent that they believe these issues may affect the long-term success of a company and investment returns. This can manifest itself within the investment thesis or portfolio weighting for a particular security, as well as within our proxy voting and company engagement efforts.

01.3. Additional information [Optional].

At Wellington Management, fixed income portfolios are managed by independent portfolio management teams, including dedicated teams specializing in various sectors of the market. Our firm does not have a central investment committee. Each of the investment styles offered by Wellington Management is managed by an individual Portfolio Manager or team of managers, by a group of research analysts, or by a combination of these structures. Each portfolio management team has broad investment discretion within the pre-defined parameters of its investment approach and each has access to the full research resources of the firm.


While the investment process and philosophy may differ by fixed income approach, portfolio management teams generally use a fundamental investment process with quantitative rigor. Certain parts of the process may have a quantitative element to help identify market signals, which might inform fundamentally-driven processes for making buy and sell decisions.


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.

Our ESG Research Team uses data from a number of different sources in order to evaluate companies’ level of disclosure and reporting on ESG indicators. As inputs to our approach, we use ESG research from Morgan Stanley, Credit Suisse, CLSA, Goldman Sachs Sustain, UBS, Bank of America Merrill Lynch, Société Générale, MSCI, Bloomberg, Oekom, ISS, Glass Lewis, Equilar, and FactSet amongst others. Data from select sources feeds a proprietary algorithm that we have developed in order to provide internal ESG ratings on about 7,000 companies. We are continually evaluating new data providers to improve the coverage and quality of inputs into our ESG analysis. These ratings and external research providers serve as a starting point for further research and engagement by the ESG Research team.

For our government bond portfolios, we have resources available to help investors assess the ESG risks or opportunities that would impact the long term economic growth and sustainable development of the respective countries. For example, ESG issues relative to sovereign bonds can include political stability, social inequality, investment in education, and climate change management.

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:

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

03.3. Additional information. [Optional]


(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)
Securitised
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

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

In addition to our ESG integration, we serve as investment manager for various screened investment portfolios, where we invest in, or exclude certain types of companies or countries based on pre-agreed guidelines and criteria from the client. Approximately 18% of FI assets under management are subject to an SRI screen.

Wellington Management sub-advises Domini Impact Investment's three US mutual funds- two equity, one fixed income. The Domini Impact Bond Fund is a domestic, intermediate term FI fund, with a focus on community economic development. The objective is to create a FI vehicle aligned with the goals of seeking universal human dignity and environmental sustainability, while achieving competitive financial returns. Potential investments are screened by Domini for approval based on Domini's own ESG criteria. Potential investments may be screened due to negative factors, and the approach seeks to proactively invest in issuers having a positive impact on society.

We also developed a global FI approach, AB-SEAS (Advanced Beta- Sustainable Environmental and Social Credit), designed to generate returns in line with the global investment grade corporate bond market by investing in industry leaders in their commitment to environmental and social sustainability, while avoiding companies with poor environmental and social sustainability practices.

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)

Securitised

Securitised

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

In addition to our ESG integration process, we serve as the investment manager of various screened investment portfolios, where we invest in, or exclude certain types of companies or countries based on pre-agreed guidelines and criteria from the client.

Environmental and social screening is conducted through a proprietary quantitative research process.

05.3. Additional information. [Optional]


FI 06. Examples of ESG factors in screening process

06.1. Provide examples of how ESG factors are included in your screening criteria.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

We do not impose any firm-wide portfolio restrictions on the basis of controversial business activities but we do implement such restrictions at the request of our clients. For example, in several of the emerging markets debt portfolios we manage, we have set up restrictions not to contribute to the financing of cluster munitions or cluster bombs. This is an outright exclusion and does not depend upon any revenue threshold.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

We do not impose any firm-wide portfolio restrictions on the basis of controversial business activities but we do implement such restrictions at the request of our clients. For example, in several of the mortgage-backed securities (MBS) portfolios we manage, we have set up restrictions not to invest in securities that receive more than 10% or more than 30% of their revenues from gambling-related businesses. Clients can adjust their preferred revenue threshold upon request.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

We do not impose any firm-wide portfolio restrictions on the basis of controversial business activities but we do implement such restrictions at the request of our clients. For example, in several of the corporate bond portfolios we manage, we have set up restrictions not to invest in securities that are tied to tobacco production and manufacturing. This can take the form of an outright exclusion or a revenue-based exclusion; if the latter, clients can adjust their preferred revenue threshold upon request.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

We do not impose any firm-wide portfolio restrictions on the basis of controversial business activities but we do implement such restrictions at the request of our clients. For example, in several of the bank loan portfolios we manage, we have set up restrictions not to invest in securities issued by companies with any business operations in Iran. This is an outright exclusion and does not depend upon any revenue threshold.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

We do not impose any firm-wide portfolio restrictions on the basis of controversial business activities but we do implement such restrictions at the request of our clients. For example, in several of the high yield corporate bond portfolios we manage, we have set up restrictions not to invest in securities issued by companies with significant environmental violations. This is an outright exclusion and does not depend upon any revenue threshold.

06.2. Additional information.

Restricted lists are typically sourced from our primary screening vendor, MSCI ESG, or directly from the client at the inception of the mandate. Once agreed upon, this list or definitive rule is then coded into our trading systems. Wellington's guidelines monitoring team is responsible for oversight of this process.


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]


(C) Implementation: Integration

FI 11. Integration overview

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

Wellington Management considers environmental, social, and corporate governance (ESG) criteria as one set of factors among many that should be weighed appropriately to inform investment decision making. To help our portfolio managers and investment teams better assess risks and opportunities in client portfolios, Wellington has integrated the analysis of ESG factors into our investment and risk-management processes firmwide. To aid in the integration of ESG analysis, our specialized in-house ESG team manages several investor tools, including an innovative portfolio review process, ESG ratings, and reference guides that examine ESG factors by sector and country. Our ESG team also works closely with our portfolio managers and analysts to engage with company managements each year.

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

SSA

For government bond portfolios, we have resources available to help investors assess the ESG risks or opportunities that would impact the long-term economic growth and sustainable development of the respective countries. For example, ESG issues relative to sovereign bonds can include political stability, corruption, social inequality, investment in education, and climate change management. 

In addition, portfolio managers may develop their own custom approach to ESG integration. For example, we employ a proprietary country scoring model in our Emerging Markets Debt approach that enables us to quantify the sovereign credit outlook for the 60 emerging market countries that we cover and rank them according to their credit strength from high to low. The primary aim of the model is to provide greater rigor to our country research and to highlight potential vulnerabilities in individual countries. The resulting score for each country is adjusted to reflect important qualitative factors such as political stability, which then facilitates cross-country comparisons. The country scoring model is one element of the research process, and as such the Portfolio Manager does not have to override the output of the model.

The scoring process begins with a top-down quantitative assessment of macroeconomic and debt sustainability conditions using a proprietary model that assigns a numerical score to each emerging markets country. The specific inputs and their weights in the model are proprietary, but they include what we have determined to be the key drivers of credit spreads, such as a country's economic performance and debt burden, the government's fiscal position, and the country's quality of governance. Overall, the model employs 10 factors that we found to be the most valuable in determining the credit strength of individual countries.

In emerging markets, however, quantitative measures alone cannot tell the whole story. Rather, the quantitative component of the analysis ensures that every country is reviewed with the same disciplined framework. Our team of experienced sovereign analysts then adapts the raw quantitative score to reflect those less quantifiable factors that may have a meaningful impact on credit spreads, such as political risk, central bank independence, and structural reform progress. Usually, the quantitative and fundamental credit scores are similar, however, in some cases; the politics are such that the final score is meaningfully different than the raw credit score, reflecting a greater credit risk than the numbers alone might imply.

The core of the country scoring model has remained consistent since the inception of our emerging markets debt approach in 1999. We do recalibrate the model every few years, however, in order to refine the specific factors and improve the effectiveness of the model.

Corporate (financial)

Our approach to corporates taps into the issuer research conducted by our central ESG Research team.
We provide central ESG integration resources to portfolio teams firm-wide, and we approach ESG integration as a tailored process that can be applied to all asset classes. We do this by analyzing ESG risks and opportunities in our clients' portfolios, engaging with companies in which we invest to discuss material ESG issues, and voting proxies on our clients' behalf to support decisions that we believe will maximize the long-term value of securities. Wellington Management's culture is built to support collaboration and our open-architecture "community of investors" naturally lends itself to the integration of ESG considerations.

Our ESG Research team, part of the central Investment Research function, helps our portfolio managers and analysts gather deeper intelligence on ESG topics and integrate these considerations into the investment process. We believe that a holistic understanding of how companies deploy capital - financial, physical, and human - is helpful in framing an investment thesis, and examining ESG issues gives us a more complete picture. Our ESG analysts are responsible for conducting in-depth analysis of the ESG factors most relevant to the sectors within their coverage area. They are also responsible for coordinating the ESG engagement strategies for the companies in their sectors with equity and fixed income analysts and portfolio managers. Our ESG team works closely with investment teams to incorporate our research into the investment process - regularly conducting in-depth portfolio reviews with investment teams to discuss holdings with the greatest ESG risks and strengths.

Each of our portfolio managers develops their own investment approach whereby ESG considerations are integrated into their research and decision-making processes to the extent that they believe these issues may affect the long-term success of a company and investment returns. This can manifest itself within the investment thesis or portfolio weighting for a particular security, as well as within our proxy voting and company engagement efforts.

Corporate (non-financial)

Our approach to corporates taps into the issuer research conducted by our central ESG Research team.
We provide central ESG integration resources to portfolio teams firm-wide, and we approach ESG integration as a tailored process that can be applied to all asset classes. We do this by analyzing ESG risks and opportunities in our clients' portfolios, engaging with companies in which we invest to discuss material ESG issues, and voting proxies on our clients' behalf to support decisions that we believe will maximize the long-term value of securities. Wellington Management's culture is built to support collaboration and our open-architecture "community of investors" naturally lends itself to the integration of ESG considerations.

Our ESG Research team, part of the central Investment Research function, helps our portfolio managers and analysts gather deeper intelligence on ESG topics and integrate these considerations into the investment process. We believe that a holistic understanding of how companies deploy capital - financial, physical, and human - is helpful in framing an investment thesis, and examining ESG issues gives us a more complete picture. Our ESG analysts are responsible for conducting in-depth analysis of the ESG factors most relevant to the sectors within their coverage area. They are also responsible for coordinating the ESG engagement strategies for the companies in their sectors with equity and fixed income analysts and portfolio managers. Our ESG team works closely with investment teams to incorporate our research into the investment process - regularly conducting in-depth portfolio reviews with investment teams to discuss holdings with the greatest ESG risks and strengths.

Each of our portfolio managers develops their own investment approach whereby ESG considerations are integrated into their research and decision-making processes to the extent that they believe these issues may affect the long-term success of a company and investment returns. This can manifest itself within the investment thesis or portfolio weighting for a particular security, as well as within our proxy voting and company engagement efforts.

Securitised

Our approach to securitised debt taps into the issuer research conducted by our central ESG Research team.
We provide central ESG integration resources to portfolio teams firm-wide, and we approach ESG integration as a tailored process that can be applied to all asset classes. We do this by analyzing ESG risks and opportunities in our clients' portfolios, engaging with companies in which we invest to discuss material ESG issues, and voting proxies on our clients' behalf to support decisions that we believe will maximize the long-term value of securities. Wellington Management's culture is built to support collaboration and our open-architecture "community of investors" naturally lends itself to the integration of ESG considerations. During 2017, the ESG team hired an experienced analyst from Wellington's municipal credit analysis team, which has greatly increased the team's focus on fixed income and securitized assets specifically. 

Each of our portfolio managers develops their own investment approach whereby ESG considerations are integrated into their research and decision-making processes to the extent that they believe these issues may affect the long-term success of a company and investment returns. This can manifest itself within the investment thesis or portfolio weighting for a particular security, as well as within our proxy voting and company engagement efforts.

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]

As mentioned previously, Wellington Management sub-advises the Domini Impact Bond Fund, a domestic, intermediate term fixed income fund, with a focus on community economic development. The objective is to create a fixed income vehicle aligned with the goals of seeking universal human dignity and environmental sustainability, while also achieving competitive financial returns. To that end, potential investments are screened by Domini for approval based on Domini's own ESG criteria. While potential investments may be screened out due to negative factors, Wellington and Domini together seek to proactively invest in issuers that are having a positive impact on society. Domini contributes their ESG research, shareholder engagement, and responsible investing values to the approaches, while Wellington also focuses on the financial research, trading, portfolio construction, and risk management processes.

In addition, Wellington has several additional integrated fixed income strategies under development:

  • AB-SEAS (Advanced Beta- Sustainable Environmental and Social Credit) emphasizes investment in companies that are industry leaders in their commitment to environmental and social sustainability, as measured by the company's environmental and social sustainability ratings based on Wellington's proprietary quantitative assessment.
  • ESG Enhanced Global Corporate Bond seeks to generate returns in excess of the global corporate credit market by investing in a portfolio oriented toward companies that act responsibly with respect to environmental and social sustainability.  It is a diversified, active credit strategy that systematically incorporates ESG scores into the security selection process.


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

For government bond portfolios, we have resources available to help investors assess the ESG risks or opportunities that would impact the long-term economic growth and sustainable development of the respective countries. For example, ESG issues relative to sovereign bonds can include political stability, corruption, social inequality, investment in education, and climate change management. 

In addition, portfolio managers may develop their own custom approach to ESG integration. For example, we employ a proprietary country scoring model in our Emerging Markets Debt approach that enables us to quantify the sovereign credit outlook for the 60 emerging market countries that we cover and rank them according to their credit strength from high to low. The primary aim of the model is to provide greater rigor to our country research and to highlight potential vulnerabilities in individual countries. The resulting score for each country is adjusted to reflect important qualitative factors such as political stability, which then facilitates cross-country comparisons. The country scoring model is one element of the research process, and as such the Portfolio Manager does not have to override the output of the model.

The scoring process begins with a top-down quantitative assessment of macroeconomic and debt sustainability conditions using a proprietary model that assigns a numerical score to each emerging markets country. The specific inputs and their weights in the model are proprietary, but they include what we have determined to be the key drivers of credit spreads, such as a country's economic performance and debt burden, the government's fiscal position, and the country's quality of governance. Overall, the model employs 10 factors that we found to be the most valuable in determining the credit strength of individual countries.

In emerging markets, however, quantitative measures alone cannot tell the whole story. Rather, the quantitative component of the analysis ensures that every country is reviewed with the same disciplined framework. Our team of experienced sovereign analysts then adapts the raw quantitative score to reflect those less quantifiable factors that may have a meaningful impact on credit spreads, such as political risk, central bank independence, and structural reform progress. Usually, the quantitative and fundamental credit scores are similar, however, in some cases; the politics are such that the final score is meaningfully different than the raw credit score, reflecting a greater credit risk than the numbers alone might imply.

The core of the country scoring model has remained consistent since the inception of our emerging markets debt approach in 1999. We do recalibrate the model every few years, however, in order to refine the specific factors and improve the effectiveness of the model.

Corporate (financial)

We provide central ESG integration resources to portfolio teams firm-wide, and we approach ESG integration as a tailored process that can be applied to all asset classes. We do this by analyzing ESG risks and opportunities in our clients' portfolios and engaging with companies in which we invest to discuss material ESG issues. Wellington Management's culture is built to support collaboration and our open-architecture "community of investors" naturally lends itself to the integration of ESG considerations. 

Our ESG Research team, part of the central Investment Research function, helps our portfolio managers and analysts gather deeper intelligence on ESG topics and integrate these considerations into the investment process. We believe that a holistic understanding of how companies deploy capital - financial, physical, and human - is helpful in framing an investment thesis, and examining ESG issues gives us a more complete picture. Our ESG analysts are responsible for conducting in-depth analysis of the ESG factors most relevant to the sectors within their coverage area. They are also responsible for coordinating the ESG engagement strategies for the companies in their sectors with equity and fixed income analysts and portfolio managers. Our ESG team works closely with investment teams to incorporate our research into the investment process - regularly conducting in-depth portfolio reviews with investment teams to discuss holdings with the greatest ESG risks and strengths.

Each of our portfolio managers develops their own investment approach whereby ESG considerations are integrated into their research and decision-making processes to the extent that they believe these issues may affect the long-term success of a company and investment returns. This can manifest itself within the investment thesis or portfolio weighting for a particular security, as well as within company engagement efforts.

Corporate (non-financial)

We provide central ESG integration resources to portfolio teams firm-wide, and we approach ESG integration as a tailored process that can be applied to all asset classes. We do this by analyzing ESG risks and opportunities in our clients' portfolios and engaging with companies in which we invest to discuss material ESG issues. Wellington Management's culture is built to support collaboration and our open-architecture "community of investors" naturally lends itself to the integration of ESG considerations. 

Our ESG Research team, part of the central Investment Research function, helps our portfolio managers and analysts gather deeper intelligence on ESG topics and integrate these considerations into the investment process. We believe that a holistic understanding of how companies deploy capital - financial, physical, and human - is helpful in framing an investment thesis, and examining ESG issues gives us a more complete picture. Our ESG analysts are responsible for conducting in-depth analysis of the ESG factors most relevant to the sectors within their coverage area. They are also responsible for coordinating the ESG engagement strategies for the companies in their sectors with equity and fixed income analysts and portfolio managers. Our ESG team works closely with investment teams to incorporate our research into the investment process - regularly conducting in-depth portfolio reviews with investment teams to discuss holdings with the greatest ESG risks and strengths.

Each of our portfolio managers develops their own investment approach whereby ESG considerations are integrated into their research and decision-making processes to the extent that they believe these issues may affect the long-term success of a company and investment returns. This can manifest itself within the investment thesis or portfolio weighting for a particular security, as well as within company engagement efforts.
 

Securitised

We provide central ESG integration resources to portfolio teams firm-wide, and we approach ESG integration as a tailored process that can be applied to all asset classes. We do this by analyzing ESG risks and opportunities in our clients' portfolios and engaging with companies in which we invest to discuss material ESG issues. Wellington Management's culture is built to support collaboration and our open-architecture "community of investors" naturally lends itself to the integration of ESG considerations. During 2017, the ESG team hired an experienced analyst from Wellington's municipal credit analysis team, which has greatly increased the team's focus on fixed income and securitized assets specifically.  

Each of our portfolio managers develops their own investment approach whereby ESG considerations are integrated into their research and decision-making processes to the extent that they believe these issues may affect the long-term success of a company and investment returns. This can manifest itself within the investment thesis or portfolio weighting for a particular security, as well as within engagement efforts.

13.3. Additional information.[OPTIONAL]


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