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ClearBridge Investments

PRI reporting framework 2019

You are in Direct - Listed Equity Incorporation » ESG incorporation in actively managed listed equities » Implementation processes

Implementation processes

LEI 01. Percentage of each incorporation strategy

01.1. Indicate (1) which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities and (2) the breakdown of your actively managed listed equities by strategy or combination of strategies (+/- 5%)

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied
100 %
Total actively managed listed equities 100%

01.2. Describe your organisation’s approach to incorporation and the reasons for choosing the particular ESG incorporation strategy/strategies.

ESG Integration is our primary ESG incorporation strategy at ClearBridge.

We integrate ESG analysis across our fundamental analyst platform. Sector analysts, who specialize in specific sectors, and portfolio analysts, who support specific investment teams as generalists, are responsible for both financial and ESG research and analysis. Our ESG analysis plays a meaningful role in valuation discussions, training, internal meeting notes, compensation structure and appraisal process, among other activities. We believe in the significance of the inclusion of ESG factors and incorporate them throughout our analyst platform. Our goal is formal ESG analysis, engagement and reporting across the entire firm's assets. We are currently at 93% of AuMs are ESG integrated.

Our CEO is the driving force behind our ESG analysis, and sets the tone on ESG at the firm, along with our co-CIOs, one of whom also co-manage ESG strategies.

We publish an annual Impact Report that details our wide variety of ESG research and the impact we have as active investment managers. This helps communicate our impact to clients, who often ask about the change effected by their invested assets. It is also available to the public. We also produce annual engagement reports for each ESG-focused strategy. This is an extensive exercise and is carried out by our fundamental analysts. 

We have also instituted a formal, proprietary ESG Ratings process (AAA, AA, A) for stocks held in ESG strategies, as well as companies that are under review, or not yet suitable for ESG portfolios ("B" Rating). Analysts include their proprietary ESG rating in company notes that are distributed across the platform.

In addition to our numerous ESG separate account strategies and active ESG ETFs, we also offer our Sustainability Leaders Strategy, which is a concentrated high active share strategy seeking to invest in companies with compelling investment attributes and industry leadership sustainability initiatives. This strategy could be considered both a thematic and low-carbon approach.

01.3. If assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]

We believe all three types of ESG incorporation strategies have merit as appropriate. We utilize the combination of the three ESG incorporation strategies. That said, our ESG integration approach is implemented [the most by far] across the vast majority of our assets under management. 


LEI 02. Type of ESG information used in investment decision

02.1. Indicate what ESG information you use in your ESG incorporation strategies and who provides this information.

Type of ESG information

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 

          Independent ngo's or non-profits with credible research capabilities and networks as another verification source
        

Indicate who provides this information 

02.2. Indicate if you incentivise brokers to provide ESG research.

02.3. Describe how you incentivise brokers.

We pay commission dollars to sell-side brokers for quality ESG/SRI/thematic research - and in the notes we acknowledge and name the specific analysts who do a good job in coverage of the ESG issues within an investment context. We vote for the Thomson Extel survey to rank sell-side analysts in their category. We buy third-party independent research for additonal views.

02.4. Additional information.[Optional]


LEI 03. Information from engagement and/or voting used in investment decision-making

03.1. Indicate if your organisation has a process through which information derived from ESG engagement and/or (proxy) voting activities is made available for use in investment decision-making.

03.2. Additional information. [Optional]

For Engagement: We have a systematic process to ensure the information is available internally. All engagements are tracked and company research notes from those engagements are shared across the firm and is considered proprietary research. Externally, we publish annual summary engagement reports by strategy.

Proxy voting is managed by the Proxy Voting Committee (PMs, analysts, compliance, ops, etc). All proposals are reviewed in accordance with our ClearBridge Proxy Voting Guidelines, which is our guiding document, but the Committee will also consider the opinions of third party governance research as well as the opinions of the shareholder proposal proponents and management. Voting results are publicly available for mutual funds, and available upon request for clients invested in separate accounts.


(A) Implementation: Screening

LEI 04. Types of screening applied

04.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

Any negative/exclusionary screening is applied carefully and prudently. Our focus is not as much on what to exclude from the portfolio, but more so on analyzing and investing in high-conviction long-term sustainable listed equity investments.  

On occasion, as warranted, we would exclude based on an internal sector analyst's ESG rating (if an internal "B" rating) which indicates that there is a red flag on the company or the business is not sustainable.

Screened by

Description

We invest in companies that meet our investment criteria while seeking best-in-class ESG characteristics, sustainability strategy, transparency, engagement, etc. Our internal analyst ESG ratings (A, AA, AAA) help us to differentiate the best-in-class status within a given industry.

 

Screened by

Description

While we review the norms that companies may sign up to, we wouldn't select a stock solely based on that norm. If anything, the company's adherence with the norms are a signal that there are international standards are being recognized.

04.2. Describe how you notify clients and/or beneficiaries when changes are made to your screening criteria.

While our primary approach is not a "screening" process, the original screening criteria was established at the inception of our ESG investment program, which dates back to 1987. The approach has always been focused on two areas: Investment process and sustainability.

Over the decades, our clients have given attention to a variety of themes/topics in society, e.g., anti- apartheid, diversity, education, environmental stewardship, good governance, and more recently, a focus on impact of their investments as well as the SDGs (sustainable development goals).

We review our ESG integration approach continuously and make adjustments, as appropriate - given the macro, societal and regulatory norms as appropriate. 

We rely on our internal research analysts to analyze and assess the material and relevant ESG factors by industry. Each analyst assigns an ESG rating to all of the stocks under their coverage. The ESG ratings range from "AAA, AA, A, B"

Our analysts also give their views on emerging areas of risk and opportunities within their given sectors throughout the year.

Our general focus is not to take an exclusionary approach, but rather, to identify long-term sustainable investments that have met both our robust financial criteria and material ESG sector-specific criteria.


LEI 05. Processes to ensure screening is based on robust analysis

05.1. Indicate which processes your organisation uses to ensure screening is based on robust analysis.

          In addition to the above, we reach out to all related (and unconventional) and relevant sources to verify information on our companies
        

05.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your ESG screening strategy.

05.3. Indicate how frequently third party ESG ratings are updated for screening purposes.

05.4. Indicate how frequently you review internal research that builds your ESG screens.

05.5. Additional information. [Optional]

For question LEI 05.3 above, just to clarify, we don't control the frequency of the third party research firms' updating schedule. Rather, the annual basis is what they have told us as an investment manager.


LEI 06. Processes to ensure fund criteria are not breached

06.1. Indicate which processes your organisation uses to ensure fund criteria are not breached.

          In addition to our Compliance and oversight teams, each PM on the investment teams also bears responsibility that the fund criteria is adhered to
        

06.2. If breaches of fund screening criteria are identified - describe the process followed to correct those breaches.

If such a situation were to take place, all parties involved would take immediate action to verify the breach and discuss with our compliance team, notify the teams involved, address as needed, discuss with advisor and client, and review systems in place to identify how breach had occurred.

 

06.3. Additional information.[Optional]


(B) Implementation: Thematic

LEI 07. Types of sustainability thematic funds/mandates

07.1. Indicate the type of sustainability thematic funds or mandates your organisation manages.

07.2. Describe your organisation’s processes relating to sustainability themed funds. [Optional]

We do not label our products as "themed funds," but we do manage active equity strategies that are inclusive of all material and relevant E, S, and G issues and apply the appropriate ESG considerations. 

Further, we do pursue exposure to themes of longevity, renewable energy, clean tech, water, or gender diversity - to name a few.

Also we are not limited to one theme, nor do generate our stock selection primarily by theme. Rather, we seek to identify the issues (across the spectrum) associated with investment opportunities.

We employ a variety of ESG approaches (can include ESG integration, thematic, best-in-class, exclusionary, etc.)

Our Sustainability Leaders strategy which includes multiple themes in one strategy.

We have include the sustainable development goals as part of the alignment of our investment with the SDGs.


(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the ESG factors you systematically research as part of your investment analysis and the proportion of actively managed listed equity portfolios that is impacted by this analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]

Since the majority of our ESG research is conducted by our Sector and Portfolio analysts on the fundamental team, the coverage of potentially significant E, S, or G issues are monitored on a regular, timely basis by each analyst. Additionally, these review systems are in place since ESG integration is part of the analyst performance review and incentive compensation structure. 

ESG integration is a firm-wide approach and is applied to almost 100% of our assets under management.

 


LEI 09. Processes to ensure integration is based on robust analysis

09.1. Indicate which processes your organisation uses to ensure ESG integration is based on a robust analysis.

          All fundamental and ESG analysis is conducted internally by each of the firm's sector and portfolio analysts (not a separate ESG team)
        

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

09.5. Describe how ESG information is held and used by your portfolio managers.

          All internal research notes include the analysts' internal ESG rating (B, A, AA, AAA) in addition to the valuation, risk/reward, target price, etc.
        

09.6. Additional information.[Optional]

All ESG research notes are internally housed on the Bloomberg terminals that are used by PMs and analysts. In addition, PMs will review the ESG ratings assignment by the fundamental analysts continually and for existing holdings, as well as for new investment recommendations. 


LEI 10. Aspects of analysis ESG information is integrated into

New selection options have been added to this indicator. Please review your prefilled responses carefully.

10.1. Indicate which aspects of investment analysis you integrate material ESG information into.

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

10.2. Indicate which methods are part of your process to integrate ESG information into fair value/fundamental analysis and/or portfolio construction.

10.3. Describe how you integrate ESG information into portfolio weighting.

Briefly, ESG factors would be reviewed at the sector/sub-sector level, as well as fundamental research and ESG integration at the company level, then that resulting proprietary ESG rating assigned by the sector analyst would factor into the portfolio construction process by the portfolio managers (but not solely dictate the weighting). The investment thesis, cash flow generation, valuation, risk/reward, ESG rating, etc. would all be part of the portfolio construction construction considerations. 

10.4. Describe the methods you have used to adjust the income forecast / valuation tool

Firstly, based on internal fundamental, as well as industry discussions, we have observed assessing valuation with the inclusion of ESG factors can vary by industry, investment opportunity and  materiality. Similar to how there is more than one approach to valuation, there is not a singular way to view ESG factors in valuation. 

We acknowledge that the forums for discussion around how and if ESG factors impact valuation, or whether to attribute how much alpha was generated from ESG factors is still in early days - and may or may not be directly applicable to fundamental research process in every case. 

Such methods have included (on a case-by-case basis) top line sales forecasts, as well as operating costs and cash flows. In addition, adjustments to discount rates and terminal value, as appropriate, and if the ESG factor is material.

10.6. Additional information. [OPTIONAL]

Since our ESG research is conducted by our fundamental analysts, the ESG issues are systematically factored into the research process and valuation tools as applicable. That said, with regard to above items, the adjustments would primarily be warranted if the ESG information is more material in nature (not minutia).

 


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