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Boston Common Asset Management

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.

Our investment team, comprised of financial and ESG professionals, is responsible for integrating financial and sustainability factors into our investment process.   We believe ESG research helps us identify companies that should be successful over the long-term.  We seek companies that can capitalize on new market opportunities, implement efficiency improvements, and avoid unanticipated costs stemming from inadequate attention to ESG risks. As a result, Boston Common believes ESG research helps improve portfolio quality and financial return potential.  

We integrate ESG factors at every stage of our research and investment process: in the definition of the investable universe, through ruling out companies with the worst records; in the stock selection phase through detailed company research identifying leaders and laggards; and in the portfolio construction stage where our goal is to raise the portfolios' ESG profiles. There are no exceptions to the application of our responsible investment policy. 

1.  Quantitative Screening + Initial ESG review

We begin the equity selection process by creating a diversified monitor list of what we believe are high-quality stocks. For our international and global strategies, we construct monitor lists of securities drawn from the appropriate benchmarks - US S&P500, MSCI EAFE, MSCI ACWI, MSCI ACWI exUS or MSCI Emerging Markets indices. We screen these lists using financial metrics such as capitalization, liquidity, profitability, and leverage as well as environmental, social, and governance criteria. These screens exclude companies that have consistently lost money, taken on unsustainable levels of debt, or experienced such volatile operating performance that we would not be confident in projections about their future profitability. 

2.  Fundamental Research

Using an ESG lens we examine the material risks and opportunities that impact companies in the same sector. Similarly, our financial analysts cover the global sectors in which they have developed specific expertise, generating stock ideas in those sectors, monitoring our holdings, and tracking market dynamics. Beyond the initial quantitative universe screening and careful consideration of top-down forces, the focus of our research process is bottom-up, fundamental research on specific companies. The ESG team produces a detailed research report on each company under consideration for inclusion in the portfolio. Once the stock has been vetted from an ESG perspective, our global sector analysts all contribute to the creation of a focus list which identifies companies which are high quality and trade below their intrinsic value.

3.  Sector Level Understanding of Risks and Opportunities

The ESG team presents their analysis of the material issues in each sector, highlighting emerging issues, best in class practices, risks, and opportunities. They also highlight leading companies in each sector. If the fundamentals and valuation analysis corroborates and supports the idea, such ESG leaders may be bought into the portfolio. A complete sector level ESG analysis is done about once in 18  to 24 months. A more frequent financial analysis at the sector level is also undertaken, twice a year, by the sector analysts, with the goal of analyzing sub-sectors and create an update on changes arising from macro-economic trends, fundamentals, and valuation changes.

4.  Portfolio Construction

Using the stocks which have been vetted and approved by both teams we construct a portfolio of 60-80 names, in which each security usually has a weight ranging from one to three percent of the total at purchase. We prefer to buy the strongest companies from an ESG perspective. We will not, however, invest in a company which, in our opinion, has a weak investment outlook even though it may have a strong ESG profile. In some industries we are currently unable to find enough companies with both strong investment and ESG profiles; we also buy companies that are better than average from an ESG perspective if we believe they are financially attractive. In these instances, we seek to raise the social profile of our holdings by urging the management of portfolio companies to improve their policies and operations through active shareholder engagement, proxy voting, or other engagement strategies such as public benchmarking or improving industry standards.

5.  Ongoing Portfolio Maintenance

In addition to monitoring traditional financial metrics relative to the benchmark on an ongoing basis, Boston Common tracks ESG profiles and shareholder engagement accomplishments over time. In some instances, we have discovered that a holding's ESG profile has changed so that it would no longer pass our initial screening criteria; in this case, we have sold our holding down to zero. The opposite has occurred as well - a company has improved their profile so that they are eligible for purchasing.

6.  Long-term Shareowner Engagement

Our engagement is intended to support long-term thinking and decisions by corporate managements. We believe that long-term oriented decision making will improve the fundamentals of the company, eventually becoming reflected in the value of its shares. These improvements may take the form of lower risk premia, higher earnings, cost savings, product and process innovation, policy changes, etc. As shareowners we seek transparency and accountability from companies, but also empower steps towards better environmental, social, and governance frameworks.

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

We continue to incorporate ESG issues as a core part of investment analysis.  We believe this process:

  • Completes our work on the financial side
  • Is an important component of assessing management and company’s success over  the long term 

 Our Investment Thesis:                                                                                      

  •  All investment analysis requires a view of the long term (3-5 year minimum) 
  •  We want to invest with long-term oriented, visionary managements                 
  • Our rigorous research helps us identify these leading companies  

 Strong ESG companies benefit from:   

  • Superior ESG product/market innovation
  • Enhanced productivity throughout value chain
  •  Better governance leading to lower risk 

 


LEI 02. Type of ESG information used in investment decision (Private)


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


(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

Boston Common employs a comprehensive set of ESG guidelines that are an integral part of our standard investment process. We look to avoid companies that are egregious violators of regulations, exhibit a pattern of negligence, or have a deteriorating record on measurable conduct. We favor companies that have made changes in policies and programs to address past problems. These criteria are industry-relative, such that a company is judged in relation to its peers.

We exclude companies with consistently poor ESG records, egregious practices, or unsustainable business models. Our assessment of worst actors utilizes sector-relative calibration, that may eliminate approximately the bottom quintile of companies within a sector. We add in companies with exemplary practices or innovative, desirable products and sustainable business models. Although we analyze information at a sub-sector level, we do not feel compelled to include best-of-class representatives from each group. For instance, we do not find any coal or gold mining or tobacco companies that are attractive from an ESG perspective. We are active portfolio managers and look for opportunity and diversification at higher levels of aggregation, typically at the sector or super-sector level.

Screened by

Description

We typically seek companies with superior records in environmental responsibility, labor relations, and human rights, that display a commitment to good standards and compliance, and that demonstrate  improving records in these areas. We also examine whether a company’s standards for its vendors broaden the impact of its policies. We favor companies that have made changes in policies and programs to address past problems and strive toward corporate accountability, viewing engaged shareholders as valuable allies in strategic decision-making.  We value Board diversity and independence in order to promote the preservation of the company’s long-term interests and those of its shareowners; and expect alignment of interests through remuneration, in order to ensure that senior executives and management interests are aligned with the interests of shareholders to enhance long-term value.

Screened by

          Montreal Convention on Anti-Personnel Landmines, Convention on Cluster Munitions, United Nations Declaration on the Rights of Indigenous Peoples.
        

Description

We avoid egregious violators of international norms and avoid companies that have a history of knowingly using forced labor, child labor, or sweatshops and a history of discriminating illegally against their employees. These criteria apply to a company’s suppliers as well as to its contractors. Further, we avoid companies that have a history of significantly and directly supporting human rights abuses. We also seek companies that respect the International Labour Organization's (ILO) standards related to freedom of association and the right to bargain collectively.

We have an absolute exclusion of investing in companies that manufacture biological, chemical, or nuclear weapons, anti-personnel landmines, or cluster munitions.

We use the UN Guiding Principles on Business and Human Rights as an engagement tool with our portfolio companies as well as industry groups to underscore the importance of transparency and improved disclosure to investors and internal systems to manage human rights risks.

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

We believe ESG research helps improve portfolio quality and financial return potential. There was no 'separate process' to establish our ESG criteria -we articulated a comprehensive approach to the consideration of ESG factors from our inception over 15 years ago. Our preference has always been to seek out companies who were on average better than their peers on the relevant ESG metrics for their sector. We have undertaken a semi-formal review process every three to four years to determine if there are issues we need to formally include in our guidelines. We do this more frequently for certain emerging issues. For example in 2018 while we have never invested in private prisons, given client and stakeholder concerns, we articulated this exclusion formally by issuing a statement, disclosing it on our website and sharing it with clients.  This review process has led to us identifying additional areas of concern. For example in the area of energy and climate change, as a result of changing market conditions which have made the extraction of oil sands more economical, we have confirmed the formal exclusion of investments in companies that generate their primary revenues from the mining, processing, or production of any product from bituminous sands, also known as oil sands or tar sands. This builds on our earlier decision to exclude companies whose primary revenues are from mining coal, transporting thermal coal or burning coal for electric power generation. We also avoid direct investments in companies that own or operate nuclear power plants, manufacture nuclear power reactors, mine uranium, or derive significant revenues from the nuclear industry. This is because we believe the tail risks are too great as safety and the long-term disposal of radioactive waste remain unresolved. We share our evolving thinking on these issues with our clients via our thought pieces, quarterly newsletters and client reporting.


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.

          We compare our own internal ESG view of companies with the ratings or findings of multiple ESG research providers.
        

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]

We conduct ESG research and analysis of each sector, highlighting emerging issues, best in class practices, risks and opportunities. Our ESG research also highlights leading companies in each sector. If the fundamentals and valuation analysis corroborate and supports the idea, such ESG leaders may be brought in to our portfolios. A complete sector level ESG analysis is done about once every 18 to 24 months. 

Each quarter, the ESG team reviews all account holdings to ensure compliance with Boston Common comprehensive and additional custom guidelines from clients if applicable. This occurs in two stages: Quarterly Compliance Review of Boston Common Model Strategies, followed by Quarterly Compliance Review of Custom accounts. We also review on a quarterly basis the account holdings by our subadvisors versus or comprehensive guidelines or a client’s custom guidelines, depending on the account.


LEI 06. Processes to ensure fund criteria are not breached (Private)


(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]

Issue areas such as the environment, human rights, labor relations and employment practices require a nuanced, judgment-based approach, framed in terms of attributes to seek and those to avoid. We typically seek companies with  superior records in environmental responsibility, labor relations, employment practices and human rights, and that display commitments to good standards and compliance, and  improving records in these areas. We also examine whether the standards of a company’s vendors broaden the impact of its policies. Conversely, we look to avoid companies that are egregious violators of regulations, exhibit a pattern of negligence, or have a deteriorating record on measurable conduct. We favor companies that have made changes in policies and programs to address past problems. These criteria may be industry-relative, such that a company is judged in relation to its peers, except human rights issues are judged on a case by case basis.

 

 

 


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.

          We compare our own internal ESG view of companies with the ratings or findings of multiple ESG research providers.
        

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.

          Internally prepared ESG sector analyses summarize ESG risks and opportunities for sectors and subsectors. The reports identify ESG leaders and include a proprietary ESG ranking.
        

09.6. Additional information.[Optional]

As previously stated, the integration of ESG analysis into our investment process has occurred since the inception of the firm. There is no  'separate process' to include ESG criteria in our portfolio construction or shareholder engagements - instead we have a culture of ESG integration.

We integrate ESG considerations into every step of our investment process. We apply our comprehensive ESG standards in analyzing securities for all strategies and leverage our collective decades of ESG investing experience to refine our ESG standards and make active ESG judgments. We address key issues related to corporate products, processes, and policies. We both seek leaders on ESG issues and avoid stocks of companies with unsustainable business models. We look at areas such as the environment, employment practices and labor relations, human rights and marketing safe and sustainable products and services. We conduct in-depth, bottom-up ESG research on new securities, supplementing our own research with information from external ESG data providers. We search for evidence of forward-thinking management of ESG issues and practices, as well as areas of ESG weakness and risks.  In parallel, we do top-down sector analyses to identify leading companies, key trends and risks and opportunities.


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.

          Assessment of scenarios and probabilities, break-up value, anticipated re-rating of equity valuation.
        

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

Using the stocks which have been vetted and approved by both  financial and ESG research teams, our portfolio managers construct a diversified portfolio, in which each security usually has a weight ranging from one to three per cent of the total at purchase. We prefer to buy the strongest companies from an ESG perspective. We will not, however, invest in a company which, in our opinion, has a weak investment outlook even though it may have a strong ESG profile. In some industries we are currently unable to find enough companies with both strong investment and ESG profiles; we also buy companies that are 'better than average' but not leaders from an ESG perspective if we believe they are financially attractive.  Through our engagement we seek to raise the ESG profile of our holdings by urging the management of portfolio companies to improve their products, processes and practices throughout their value chain.

In the particular context of ESG risk, we build portfolios of companies that we believe have lower risk and higher opportunity. We are particularly mindful of low probability high-impact events for which there are few clear precedents.

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

We use scenario analyses to project an optimistic case that reflects our assessment of future demand, improving technology, and/or a company’s market share.  Thus our assessment of revenue growth and profit margin expansion (in a Base case or Best case) may be higher than consensus 'sell-side' projections.

We identify and value under-priced or over-priced assets from an ESG vantage point.  For example, we consider Mohawk’s materials sourcing “best-in-class” from an ESG perspective. Over 50% of the company’s finished goods are derived from recycled materials, such as plastic bottles, tires, PVC pipes, and glass. Making some products from 100% post-consumer recycled PET plastic soda bottles. In fact, the company utilizes 20% of all recycled bottles in the US.

We believe the market generally does not correctly reflect environmental or social risks and opportunities. We focus on exploiting this market inefficiency by defining an investment universe based on quality ESG factors. In our view, even the best run companies are still vulnerable to low-probability high-impact developments. For example, companies producing the highest cost raw materials, operating in locations with egregious human rights abuses or unethical contracting practices could see their businesses threatened by a sudden paradigm shift.

10.6. Additional information. [OPTIONAL]


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