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Impax Asset Management

PRI reporting framework 2019

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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

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
80 All three strategies combined
20 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%
Securitised
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.

​ESG analysis is an integrated component of our credit analysis, providing an additional component of risk mitigation. Our High Yield, Core Bond and Sustainability Research teams are responsible for integrating ESG-analysis into the investment process.

The team employs a fundamental approach to ESG research in collaboration with fundamental credit analysis. Key ESG issues are assessed for each issuer sector and industry, with materiality-based ESG-factor weightings. IAM LLC focuses on companies’ ability to manage operational and reputational risks and to capitalize on opportunities arising from the shift towards a more sustainable global economy.

ESG is integrated into fixed income strategies to enhance our credit analysis and facilitate;

Avoidance of ESG laggards. ESG-analysis helps avoid companies with unacceptable ESG risks and/or operating in industries that are at greater risk in the transition to a more sustainable economy; which is unacceptable credit risk.

Enhanced Risk Management. ESG-analysis provides additional insights into a company’s ability to manage operational and reputational risks and minimize exposure to disrupted industries. Analysis is key to managing credit risk and is the primary input into portfolio construction.

Identifying well positioned companies. ESG-analysis helps identify companies positioned to benefit from the transition to a more sustainable economy.

01.3. Additional information [Optional].

Incorporation strategies are not applied to U.S. Treasury securities.


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 sustainability research analysts conduct original ESG research for use in our investment process. The Sustainability Research team’s research process is augmented with ESG data from multiple sources including:

•Independent Third-Party Research: In-depth research, ratings and analysis of companies’ environmental, social and governance-related business practices. Examples of data providers include MSCI, Sustainalytics and Glass Lewis.

•Sell-Side Research: Research and analysis of company exposure to ESG-related opportunities, and management of ESG-related risks.

•Company Sustainability Reports: ESG data direct from a company

•News: ESG-related news coverage. (FactSet, Bloomberg, etc.)

•Sustainability Research & Advocacy Organizations: Research on new or emerging ESG topics from subject experts, which we use to assess company exposure to emerging ESG risks, and positioning on ESG-related opportunities. Examples include CDP and Investor Environmental Health Network.

•Government databases/websites: Industry-specific regulatory compliance databases/press releases. Examples include the FDA, EPA, SEC, and OSHA. 

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

ESG is integrated into fixed income strategies to enhance our credit analysis:

•Avoidance of ESG laggards. ESG-analysis helps avoid companies with unacceptable ESG risks and/or operating in industries at risk in the transition to a more sustainable economy; unacceptable credit risk. 

•Enhanced Risk Management. ESG-analysis provides additional insights into companies’ ability to manage operational and reputational risks and minimize exposure to disrupted industries. Analysis is key to managing credit risk, primary input into portfolio construction.

•Identifying well-positioned companies. ESG-analysis helps identify companies positioned to benefit from the transition to a more sustainable economy.

Further, our fixed income strategies seek to avoid investment in companies with:

  • involvement in the manufacture or sale of weapons (including firearms);
  • manufacturing of tobacco products;
  • primary business in coal mining and production;
  • sole or majority of operations in oil sands;
  • reliance on coal, in the case of utilities, above national average, unless company has demonstrated significant commitment to renewables and is reducing dependence on coal.

We consider the revenue and activity to determine company involvement in weapons manufacturing. We exclude companies involved in the manufacture of cluster munitions, landmines and nuclear weapons - regardless of revenues - due to their indiscriminate nature.

04.3. Additional information. [Optional]


FI 05. Examples of ESG factors in screening process

05.1. 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

Residential PACE ABS securities were screened out based on available information about the industry’s lending practices and the lack of nation-wide consumer protection laws. The PACE industry has been heavily criticized for unscrupulous lending practices in recent years.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Duke Energy Green Bonds were screened out because we have identified Duke Energy as a company involved in significant and sustained environmental and social controversies, mainly related to its operation of coal ash storage facilities.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Deutsche Bank (all securities) has been screened out for investment based on the company’s operating history and compliance record. Between 2015-2017, the bank has paid out about $10 billion in fines, settlements and pay-outs—the highest of its peer group.

05.2. Additional information.


FI 06. Screening - ensuring criteria are met

06.1. 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

06.2. Additional information. [Optional]


(B) Implementation: Thematic

FI 07. Thematic investing - overview

07.1. Indicate what proportion of your thematic investments are:

40.3 %
0.8 %

Specify

          Community Investment Notes/CDs, Sustainable Public Financing, Impact Asset backed Securities (ABS).
        
58.9 %

07.2. Describe your organisation’s approach to thematic fixed income investing

Impact Bonds provide high credit quality, diversification, competitive returns and positive societal and environmental benefits. These bonds span the spectrum of traditional issuers across municipals, agencies and corporates and allocations are managed with primary consideration given to their traditional classification.

We have identified eight impact focus areas that we believe are most relevant to this asset class: Environment & Energy, Sustainable Infrastructure, Sustainable Development, Education, Affordable Housing, Agriculture, Community Development and Sustainable Products & Services.

Examples of impact investments categorized as “Other:”

-Community Investment Notes/CDs: Shorter-term instruments primarily focused on community development and issued by Community Development Financial Institutions (CDFIs) or credit unions.

-Sustainable Public Financing: Primarily municipal bonds focused on sustainable infrastructure solutions specific to municipalities, or federal government agency securities focused more broadly on issues such as housing and agriculture. Also, includes supranational issuers.

-Impact Asset Backed Securities (ABS): Includes securitizations of solar loans, payments on solar leases and power purchase agreements, electric vehicle leases, and education loans.

07.3. Additional information [OPTIONAL]


FI 08. Thematic investing - themed bond processes

08.1. 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..

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

We periodically review issuer updates regarding the themed bonds that we hold in our fixed income strategies. We have not discovered that these issuers have failed to disburse bond proceeds as described in their offering documents.

08.3. Additional information. [Optional]


FI 09. Thematic investing - assessing impact

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

09.2. Additional information. [Optional]


(C) Implementation: Integration

FI 10. Integration overview

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

Each fixed income asset class has unique and varying degrees of ESG risk and opportunity. Issuers with credit risk most exposed to ESG-related risks, but impact-related opportunities are available across all fixed income asset classes.

For corporate (financial/non-financial) and select securitized bonds, ESG is integrated to enhance our credit analysis and facilitate:

  • Avoidance of ESG laggards. ESG analysis helps avoid companies with unacceptable ESG risks and/or operating in industries that are at greater risk in the transition to a more sustainable economy, which we view as unacceptable credit risk.
  • Enhanced Risk Management. ESG analysis provides additional insights into a company’s ability to manage operational and reputational risks and minimize exposure to disrupted industries. Analysis is key to managing credit risk and is the primary input into portfolio construction.
  • Identifying well positioned companies. ESG analysis helps identify companies positioned to benefit from the transition to a more sustainable economy.

For SSA, with few exceptions, IAM LLC considers U.S. government-related entities to be central in providing liquidity, stability and affordability in several key markets of the U.S. economy.

For these reasons, U.S. treasury securities, certain U.S. agency bonds and mortgage-backed securities are generally available for investment.

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

SSA

Incorporation strategies are not applied to U.S. Treasury Securities, but are applied to other SSA issuers.

Corporate (financial)

ESG analysis is integrated into fundamental analysis. 

Corporate (non-financial)

ESG analysis is integrated into fundamental analysis

Securitised

ESG analysis is integrated into fundamental analysis. 

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)
Securitised
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]


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

Securitised

Environmental

Social

Governance

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

SSA

Incorporation strategies are not applied to U.S. Treasury Securities, but are applied to other SSA issuers.

Corporate (financial)

For any corporate issuer (financial or nonfinancial) IAM LLC examines the ESG profile of the issuer with the heaviest weight on key performance indicators for the sector of the issuer. The key issues vary widely among ESG-related criteria, depending on the sector. For example, for the four sectors that are the heaviest emitters of greenhouse gases and other pollutants--utilities, materials, energy and industrials--we place great weight on companies' performance and policies on emissions control, pollution management and prevention, and development of clean tech alternatives.

Corporate (non-financial)

For any corporate issuer (financial or nonfinancial) IAM LLC examines the ESG profile of the issuer with the heaviest weight on key performance indicators for the sector of the issuer. The key issues vary widely among ESG-related criteria, depending on the sector. For example, for the four sectors that are the heaviest emitters of greenhouse gases and other pollutants--utilities, materials, energy and industrials--we place great weight on companies' performance and policies on emissions control, pollution management and prevention, and development of clean tech alternatives.

Securitised

Asset backed securities, for example, reflect contractual obligations to finance certain activities, such as financing higher education, or the purchase of an automobile. Our ESG analysis is focused on the underlying collateral and, when appropriate, the lending practices associated with the underlying collateral.

12.3. Additional information.[OPTIONAL]


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