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ClearBridge Investments

PRI reporting framework 2019

You are in Direct - Listed Equity Incorporation » Outputs and outcomes

Outputs and outcomes

LEI 12. How ESG incorporation has influenced portfolio composition

12.1. Indicate how your ESG incorporation strategies have influenced the composition of your portfolio(s) or investment universe.

Describe any reduction in your starting investment universe or other effects.

The initial reduction in the investment universe would come from our quantitative financial screening, based on financial metrics in our proprietary models. As long-term active investors, we invest in high conviction holdings in concentrated portfolios (typically 40 - 60 holdings). Our benchmark universes will depend on the strategy, i.e., R3000, R1000, S&P500, MSCI EAFE, etc.

Our sector analysts conduct fundamental research and apply ESG integration for attractive investment candidates generally on a bottom-up basis. All companies are given an internal ESG rating of "AAA, AA, A, B." In addition, for custom client accounts, we can take a directive on exclusionary criteria from the Investment Policy Statement.

Generally speaking, based on our financial criteria to reduce the investment universe as the first step, our experience has resulted in a reduction of less than 10% in aggregate of investments that have been reviewed by our fundamental approach and inclusive of both financial and ESG criteria (i.e., less than 10% of companies reviewed have received a "B" rating).

Specify the percentage reduction (+/- 5%)

10 %

Describe any alteration to your investment universe or other effects.

Our long-term financially focused approach helps us to indentify companies with high quality attributes and attractive risk/reward on financial, environment, social and governance matters.

That said, as an example of one alteration, for our Sustainability Leaders Strategy, we deliberately seek out financially compelling investments in the renewable and clean tech space, for instance, to offset the lack of exposure to conventional oil & gas and mining. 

Select which of these effects followed your ESG integration:

12.2. Additional information.[Optional]

It should be noted that the above "effects" were not only based on ESG factors, but to reiterate, our approach to ESG integration is within our fundamental analysis for both financial and ESG considerations. 


LEI 13. Examples of ESG issues that affected your investment view / performance

13.1. Provide examples of ESG issues that affected your investment view and/or performance during the reporting year.

ESG factor and explanation

Gender diversity- we have viewed this issue as constructive for our investments. Given the large body of academic and practitioner research on the financially positive impacts to companies with higher gender diversity, we are seeing more investors and governments being supportive of women's empowerment.

We have invested in companies with attractive risk/reward that have had added gender diversity for qualified women to their management team, board, and other senior roles. We have also given considerations to companies that have robust training and promotion programs for female employees, as well as strong family leave policies (for both women and men).

 

ESG incorporation strategy applied Thematic|Integration

Impact on investment decision or performance

Our experience has been that companies with high gender diversity can have lower volatility, higher ROE, and more innovation (this has been corroborated by a quantitative study from the sell-side). Gender diversity is not the sole factor for our investment view, but it is an important issue that is notable whether related to talent pipelines and retention, or a reflection on management's ability to understand the preferences of their employees, consumers and shareholders.

 

ESG factor and explanation

Water Usage - this issue impacts most sectors and is covered by our sector analysts for Materials, Industrials, Energy, Staples, Discretionary, Utilities, for example.

 

ESG incorporation strategy applied Thematic|Integration

Impact on investment decision or performance

We seek to invest in best-in-class companies that have strong water recycling practices and water conservation policies. We have invested in a large number of companies that have best practices in water stewardship, as well as water safety and hygiene. Water would not be the sole factor for investment consideration, but depending on the company or sector, can have a material impact on ROIC, reputation and costs.

ESG factor and explanation

Supply Chains - This issue impacts many of our sectors including: IT hardware, apparel manufacture, retailing, restaurants, food companies

 

ESG incorporation strategy applied Integration

Impact on investment decision or performance

We seek to invest in companies that have strong supply chain standards and policies. Supply chains impact our investments in most of industries. We prefer companies with good oversight and control over their supply chains, as poor controls could negatively impact labor relations, health & safety of the worker and productivity. Depending on where the supply chains are located and how complex, the value could be impacted by tariffs, tax policies, fair wages, reliability, ability to scale, etc.

ESG factor and explanation

Improving Health - drug innovation, addressing unmet medical needes, patient safety, and health care coverage

Also, Opioid Addiction - this issue is covered by our Healthcare analysts and Insurance analysts. This is a silent epidemic that has been quickly growing in many parts of the world and can impact communities, employees and shareowners. 

 

ESG incorporation strategy applied Integration

Impact on investment decision or performance

For example, we own biotechnology companies that are developing treatments for severe and ultra-rare disorders. The potential for growth in these companies is that their investments in R&D may yield treatments that will materially improve/save the lives of patients with unmet needs.

Related to Opioids, our Healthcare analysts engage with their PBM companies, as well as managed care companies to ensure preventative measures and policies are in place to reduce the likelihood of opioid addiction. Our insurance analyst engaged our insurance companies with worker compensation coverage, also from a preventative approach.

ESG factor and explanation

Data Security and Customer Privacy - this issue impacts most sectors including Technology, Financials, Retailers, Healthcare companies, etc.

 

ESG incorporation strategy applied Integration

Impact on investment decision or performance

Our sector analysts are seeking companies that have invested in data security protection and customer privacy measures. This is not the sole issue for investment, but has implications that can become material to company performance if not handled properly by company management. Major financial losses can be realized when a company has lost control over its customer privacy or has a loss in data integrity and security. Many of our portfolio companies have invested materially in data security technology and cyber risk oversight.

13.2. Additional information.[Optional]


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