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California Public Employees' Retirement System CalPERS

PRI reporting framework 2019

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You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income » Implementation processes

Implementation processes

FI 01. Incorporation strategies applied

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
100 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
0 Integration alone
100 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
0 Integration alone
100 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
0 Integration alone
100 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.

We primarily use the integration strategy as it is consistent with our portfolio objective, which is to outperform our benchmark index while maintaining a high level of diversification within a risk-controlled environment. Integration of risk factors, including ESG risks where material, have always been a part of our credit analysis.

The primary reason we use the screening strategy is because of decisions made by our governing body which has excluded investments in the following: tobacco, firearms, thermal coal, Sudan and Iran

01.3. Additional information [Optional].


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  

specify description

          Rating agencies -Credit Sights, and MSCI
        

Indicate who provides this information  

specify description

          Rating agencies -Credit Sights, and MSCI
        

Indicate who provides this information  

specify description

          Rating agencies -Credit Sights, and MSCI
        

Indicate who provides this information  

specific description

          Rating agencies -Credit Sights, and MSCI
        

02.3. Provide a brief description of the ESG information used, highlighting any differences in sources of information across your ESG incorporation strategies.

ESG factors are considered as part of a wider array of risk factors when performing investment analysis. Empirical data on bond returns and credit ratings shows that the greatest success of integrating ESG is in the Governance area. Our analysis process incorporates consideration of issues related to ownership, succession planning, and the governing board. For example, when waves of leveraged buyouts were taking place, the credit team focused on governance structures of portfolio companies to identify risks.

Our portfolios have sector exposure to Energy, Metals and Mining, and Utilities-sectors that are flagged by Moody's and our own internal analysts as having moderate to elevated exposure to environmental risks. Thus, integrating Environmental analysis into our credit process is critical in assessing emerging trends and regulatory changes that affect credit quality and relative value. Our investments include companies operating in emerging market countries where employee rights and safety are less established and enforced, which is an important element of our analysis of Social risk factors.

To integrate Environmental or Social risk factors into our processes, our analysts use a range of materials and company interactions to inform investment opinions. These include: issuer required SEC filings, offering documents, bond indentures, and third-party reports.

02.4. Additional information. [Optional]

As debt investors, our issuer and security selection is made only after fully understanding the capital structure of the companies we invest in, and the rank of our securities within that structure. Any ESG risks at the parent or holding company level, as well as at any subsidiaries or special purpose vehicles (SPVs), are carefully considered in our analysis. For example, risks present at operating subsidiaries may have a meaningful impact on holding company debt credit quality, and vice versa, regardless of bond indentures' subordination or seniority terms.


FI 03. Processes to ensure analysis is robust

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

specify description

          Benchmark own ESG processes against external managers.
        

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

03.3. Additional information. [Optional]

Our credit analysts use multiple sources of ESG data, including MSCI and Bloomberg. MSCI is used to evaluate ESG risk of companies and the securities they issue. ESG data is also utilized through centralized subscription services.  Our banks and utility analysts use SNL Financial, which provides comprehensive data on Utility and Bank filings at Federal and State regulatory levels.  MSCI scores are stored and accessible to portfolio managers and analysts on front office risk management platform (Aladdin).

Another integral resource is Covenant Review. Covenant Review is a database with Indentures and offerings of Investment Grade and High Yield Issuers, encompassing current and historical debt issues. Covenant Review legal analysis and data provides critical insight into understanding our rights as Bond Holders as stated in Bond Indentures.

Lastly, Rating Agencies (Moody's, S&P and Fitch) online subscription access provides the analysts with industry and issuer related analysis on a wide range of matters related to ESG.


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