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AMP Capital Investors

PRI reporting framework 2019

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

(C) Implementation: Integration

FI 10. Integration overview

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

Rationale for ESG incorporation

AMP Capital aims to deliver globally-competitive outcomes for the assets and products we manage. ESG analysis contributes to those outcomes. We believe there are links between an organisation's environmental and social impacts, the quality of its corporate governance, and its long-term business success. Considering those ESG factors provides us with greater insight into areas of risk and opportunity that impact the value, performance and reputation of investments we make on behalf of clients. AMP Capital's ESG and Responsible Investment philosophy applies across the business and can be viewed at www.ampcapital.com.au/esg.

Recognising the characteristics and addressing challenges within Fixed Income

We note there are some general characteristics and challenges associated with considering ESG issues within Fixed Income investments:

Engaging issuers on ESG issues

Bondholders typically do not have the voting rights or access to management that institutional shareholders do. Bonds can also be issued by unlisted entities or corporate subsidiaries, or be project- rather than entity-specific, so that management and accounting quality issues are often less transparent.

Divergent interests

As a mainstream investment manager, AMP Capital recognises scenarios where the interests of bondholders and equity holders may also diverge. Where companies or issuers are under financial stress, for example, bondholders may take a more risk averse position than an equity investor.

Pricing ESG risks

Determining how ESG risks can be systematically priced into particular fixed income instruments - for example fixed income derivatives (synthetics) - is also challenging. Other key considerations include the time frame (duration) for fixed income investments and the horizon over which some ESG issues might potentially play out.

Integration of ESG into the investment process

AMP Capital's approach to ESG integration in Fixed Income is explicitly referenced in our Credit Research Philosophy and systematically considered within our bottom-up Credit process. AMP Capital integrates ESG considerations for bond issuers in a similar way to equity issuers, noting the differences and challenges described above. In particular, the focus in fixed income is on the issuer's credit rating, rather than on its longer-term market value. AMP Capital makes its own assessments of an issuer's credit rating.

Our approach within Fixed Income also has a strong directional focus on corporate governance issues which are closely linked to overall management and credit quality. The overall investment focus in Fixed Income is more on operating profits and cash flows as a measure of an issuer's ability to service debt obligations. These are not generally as sensitive to environment and social issues as assessments of equity value. Establishing the materiality of environmental and social issues to credit quality can be more complex and difficult, as is demonstrating how analysis of ESG issues reduces the probability of, or the losses from, a default. Materiality can also vary significantly between industry sectors, between companies and between host countries or economies.

Our recent objectives have included further developing our systematic approaches to incorporate ESG considerations into fixed income investment decisions, particularly on corporate bonds, and also fostering further collaboration between our Equities, Fixed Income and ESG Research teams. To that end, the ESG Research team analyses individual companies and industry sectors from proprietary data and that sourced from external third parties (in particular for international issuers). Their ESG analysis is included in the credit quality assessments of our Credit team.

The ESG team also researches companies, sectors or themes on request from the Global Fixed Income team; for example, an analysis of climate change policy and its potential impacts on debt instruments within the Australian power sector. Members of our ESG, and Global Equities and Global Fixed Income investment teams also regularly attend the same meetings with companies and issuers, providing unique insights on investment and ESG performance that incorporate each of these perspectives.

Future objectives, opportunities and actions

AMP Capital aims to continue to improve our Global Fixed Income teams' understanding of ESG issues to meaningfully enhance their investment analyses. This includes further work on materiality, and how ESG analysis can increase the understanding of bond pricing and of the risks of default-driven losses.

AMP Capital also continues to play an active role in helping address these issues in the broader investment community, through participation in the Principles for Responsible Investment (PRI) Fixed Income Steering Committee and supporting the ESG in Credit Ratings Initiative - sharing our own experiences and insights and collaborating with other institutional investors to explore the issues, challenges and investment impact of ESG issues within fixed income. Examples of this collaborative work is available via the PRI website or below:

Corporate Bonds: Spotlight on ESG Risks: https://www.unpri.org/download?ac=35

Sovereign Bonds: Spotlight on ESG Risks: https://www.unpri.org/download?ac=34

Fixed Income Investor Guide: https://www.unpri.org/download?ac=32

 

 

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

SSA

AMP Capital's Global Fixed Income team invests with a strong focus on Australian bonds and credit with only some limited exposure to global fixed income securities. Generally, deciding whether to buy, hold or sell investments in sovereign bonds is based primarily on economic factors. However, AMP Capital is developing ways of incorporating ESG considerations in three ways.

ESG integration. ESG issues are taken into account where they may have a material impact on the economic factors that determine the value of an investment.

Fixed income funds. AMP Capital's Responsible Investment Leaders (RIL) Diversified Fixed Income Fund* also provides investors access to global government bonds within a fund-specific ESG investment framework (overlay). The overlay assesses the environmental, social and governance exposure of sovereign entities and avoids investing in bottom quartile performers.

ESG-related bonds. AMP Capital has also commenced making investments in emerging areas including green bonds, as supranational issuers such as the World Bank demonstrated a desire to issue ESG related bonds in Australia.

Assessing country ESG performance is based on assessments of a range of relevant indicators including:

•           water, land, atmosphere and biodiversity indicators,

•           work, education and human welfare and equality issues, and

•           political rights, civil liberties, governance quality and gender inequality index.

* AMP Capital Funds Management Limited (AMP Capital) ABN 15159557721, AFSL 426455, is the responsible entity of the Responsible Investment Leaders Funds and issuer of the Product Disclosure Statements (PDS) for the Funds. To invest, investors will need to obtain the current PDS from AMP Capital before making a decision to acquire, continue to hold or dispose of units in the Fund.

Corporate (financial)

Corporate Bonds (financial) For investors in bonds and corporate credit (fixed income investments), ESG analysis offers bondholders sharper insights into bond pricing and increased protection against downside risks. ESG issues that affect profit and cash flows may, in severe cases, reduce a company's ability to service debt and risk its credit rating. Corporate governance analysis can highlight the type of management and credit quality risks that have too often led to corporate collapse.

Our ESG team works with our Global Fixed Income team on company and sector-based analyses to identify these risks.

AMP Capital's in house ESG Research team provides most of the research and analysis and supports our Credit team. Additional coverage for international securities is provided by an external ESG research provider. This includes ESG information and ratings coverage for over 6000 issuers, and accounting and governance ratings for over 20,000 issuers.

 

Corporate (non-financial)

Corporate Bonds (non-financial) For investors in bonds and corporate credit (fixed income investments), ESG analysis offers bondholders sharper insights into bond pricing and increased protection against downside risks. ESG issues that affect profit and cash flows may, in severe cases, reduce a company's ability to service debt and risk its credit rating. Corporate governance analysis can highlight the type of management and credit quality risks that have too often led to corporate collapse. Our ESG team works with our fixed income teams on company and sector-based analyses to identify these risks.

AMP Capital's in house ESG Research team provides most of the research and analysis and supports our Credit team. Additional coverage for international securities is provided by an external ESG research provider. This includes ESG information and ratings coverage for over 6000 issuers, and accounting and governance ratings for over 20,000 issuers.

10.3. Additional information [OPTIONAL]


FI 11. Integration - ESG information in investment processes

11.1. Indicate how ESG information is typically used as part of your investment process.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
ESG analysis is integrated into fundamental analysis
ESG analysis is used to adjust the internal credit assessments of issuers.
ESG analysis is used to adjust forecasted financials and future cash flow estimates.
ESG analysis impacts the ranking of an issuer relative to a chosen peer group.
An issuer's ESG bond spreads and its relative value versus its sector peers are analysed to find out if all risks are priced in.
The impact of ESG analysis on bonds of an issuer with different durations/maturities are analysed.
Sensitivity analysis and scenario analysis are applied to valuation models to compare the difference between base-case and ESG-integrated security valuation.
ESG analysis is integrated into portfolio weighting decisions.
Companies, sectors, countries and currency and monitored for changes in ESG exposure and for breaches of risk limits.
The ESG profile of portfolios is examined for securities with high ESG risks and assessed relative to the ESG profile of a benchmark.
Other, specify

11.2. Additional information [OPTIONAL]

Use of ESG information and perspectives is drawn on by our Fixed Income investment teams in both direct and indirect ways, providing them with deeper insights into the investment impact of ESG issues.

•    ESG integration is facilitated by co-locating the in-house ESG Research team within our Global Equity and Fixed Income teams, allowing constant interaction and communication between them.

•    Internal and external ESG analysis is reviewed regularly for material changes to a company / issuer(s) approach to managing material ESG risks. Quantitative and qualitative updates are stored in databases that are easily and frequently accessed by our Credit team. These include a Fixed Income Credit Research - Corporate Credit Review for each company.

•    Positive and negative watch lists are generated, together with issuer flags to indicate changes in risk assessments.

•    The ESG Research team gives fixed income investment teams weekly summaries of ESG-related events and news, ESG SWOT analyses on particular issuing companies, domestic and international ESG wraps with sector or issuer-specific relevance.

•    Analysis from our ESG Research team is incorporated into joint sessions involving some or all of our Global Fixed Income, Investment Strategy& Economics, Credit teams, to share news and ideas, discuss implications, and explore different perspectives.

•    Joint-team investor forums, presentations and company meetings are used both to access further insights and communicate integrated ESG analysis.


FI 12. Integration - E,S and G issues reviewed

12.1. 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

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

SSA

Existing government notes. AMP Capital's Global Fixed Income team invests predominantly in Australian bonds and credit with some limited exposure to global fixed income securities. Decisions about whether to buy, hold or sell investments are based primarily on economic factors with governance, labour standards, environmental, social and ethical considerations taken into account where they may be seen to have a material impact on the value of an investment.

New bond products. Due to the strength of AMP Capital's focus on ESG, we have been meeting supranational issuers with a desire to issue ESG-themed bonds in Australia (A$). The extends upon the World Bank bringing their first A$ Green Bond issue to the market. The AAA-rated bond has the full guarantee of the World Bank shareholders, is fairly valued when compared to bonds of other semi-government and supranational issuers and is attractive compared to government bonds. AMP Capital achieved a favourable allocation, with the proceeds placed into a special account for eligible projects including:

  • Rehabilitation of power plants and transmission facilities to reduce greenhouse gas emissions
  • Solar and wind installations
  • New technologies for reducing greenhouse gas emissions
  • Greater efficiency in transportation, including fuel switching and mass transport systems
  • Emission reduction in waste management, including methane capture and energy-efficient technologies
  • Carbon reduction through sustainable forest management, reforestation and avoided deforestation
  • Adaptation projects including those providing protection against flooding, food security and stress-resilient agricultural systems.

Diversified fixed income investments. AMP Capital's Responsible Investment Leaders (RIL) Diversified Fixed Income Fund* offers investors access to global government bonds via a multi-manager platform, with an ESG overlay. The overlay assesses the ESG exposure of sovereign entities and avoids investing in bottom quartile performers. Country assessment is based on relevant indicators that include:

  • water, land, atmosphere and biodiversity indicators,
  • work, education and human welfare and equality issues, and
  • political rights, civil liberties, governance quality and gender inequality

* AMP Capital Funds Management Limited (AMP Capital) ABN 15159557721, AFSL 426455, is the responsible entity of the Responsible Investment Leaders Funds and issuer of the Product Disclosure Statements (PDS) for the Funds. To invest, investors will need to obtain the current PDS from AMP Capital before making a decision to acquire, continue to hold or dispose of units in the Fund.

Corporate (financial)

Integration of ESG into the investment process for Corporate Bonds. AMP Capital integrates ESG considerations for bond issuers in a similar way to equity issuers, noting the differences and challenges in Fixed Income. In particular, the focus in fixed income is on the issuer's credit rating, rather than on its longer-term market value.

AMP Capital makes its own assessments of an issuer's credit rating. ESG materiality can vary significantly between industry sectors, between companies and between host countries or economies. Accordingly, the ESG research team's first contribution to the credit risk assessment is an ESG score (A-F) that incorporates the following elements:

  • Industry Risk covers the external socio-economic factors which shape the market or sector in which the company operates. These are generally longer-term issues that have a negative or positive impact on the company, and companies within a sector may have different exposures to and different strategies to manage those risks. Such issues are considered and integrated into our investment decision-making frameworks through AMP Capital's ESG and Credit teams. The company's ESG score reflects their relative exposure and strategies.
  • Company Risk considers the internal ESG issues that may affect its ability to service its debt obligations, again relative to its industry peers. Corporate governance issues are particularly important in understanding overall credit quality, given the history of high-profile corporate collapses in all jurisdictions, and their revealed links to the lack of effective corporate governance. Issues such as corruption, transparency of reporting and decision-making, independence of the board and management quality are critical.
  • Country Risk considers the geographic locations and markets in which the company operates. The Credit team includes these ESG scores in taking an overall view on a company's creditworthiness. Proprietary tools and systems are used to access and check this information. The Credit team may then delve deeper into the issuer scores and access the ESG Research team and its data for qualitative insights. The Credit team may also request the ESG Research Team to further investigate additional issues that they encounter or suspect.

In 2018 our ESG research team also supported our Credit team, raising awareness of various ESG issues associated with financial institutions as part of our regular ESG analysis and International ESG Wraps. This included highlighting governance concerns at several issuers including fines related to failures in preventing money laundering risks; risk governance and culture; and board composition and independence issues.

Corporate (non-financial)

Integration of ESG into the investment process for Corporate Bonds. AMP Capital integrates ESG considerations for bond issuers in a similar way to equity issuers, noting the differences and challenges described in Fixed Income. In particular, the focus in fixed income is on the issuer's credit rating, rather than on its longer-term market value.

AMP Capital makes its own assessments of an issuer's credit rating. ESG materiality can vary significantly between industry sectors, between companies and between host countries or economies. Accordingly, the ESG research team's first contribution to the credit risk assessment is an ESG score (A-F) that incorporates the following elements:

  • Industry Risk covers the external socio-economic factors which shape the market or sector in which the company operates. These are generally longer-term issues that have a negative or positive impact on the company, and companies within a sector may have different exposures to and different strategies to manage those risks. Such issues are considered and integrated into our investment decision-making frameworks through AMP Capital's ESG and Credit teams. The company's ESG score reflects their relative exposure and strategies.
  • Company Risk considers the internal ESG issues that may affect its ability to service its debt obligations, again relative to its industry peers. Corporate governance issues are particularly important in understanding overall credit quality, given the history of high-profile corporate collapses in all jurisdictions, and their revealed links to the lack of effective corporate governance. Issues such as corruption, transparency of reporting and decision-making, independence of the board and management quality are critical.
  • Country Risk considers the geographic locations and markets in which the company operates. The Credit team includes these ESG scores in taking an overall view on a company's creditworthiness. Proprietary tools and systems are used to access and check this information. The Credit team may then delve deeper into the issuer scores and access the ESG Research Team and its data for qualitative insights. The Credit team may also request the ESG Research Team to further investigate additional issues that they encounter or suspect.

12.3. Additional information.[OPTIONAL]


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