Drilling down further on the process outlined in FI 10.1, the above top-down and bottom-up components provide additional information on how ESG factors are incorporated into our analysis of corporate (non-financial) issuers:
Top-down: the Credit Macro View is determined through other macro credit fundamentals; such as credit specific economic data, company earnings, balance sheet health, default rates and equity volatility. The results of the macro input stage determine a credit market view (positive, neutral, or negative) which influences the sector weightings (defensive versus cyclical sectors) and credit rating tilt. Once preferred sector exposures have been determined, it is combined with the bottom-up issuer research and culminates in issuer and then security selection
Bottom-up: The credit research process incorporates fundamental issuer analysis (including ESG factors where they are material to the financial outcomes of the investment) and quantitative issuer modelling to identify investment opportunities whilst avoiding deteriorating credits. Collaboration with the Pendal's Australian Equities team and a third party global research house is an important component in the process. The bottom-up credit analysis focuses on business profile (ESG factors, industry factors, competition, business diversity), financial profile (earnings and cashflow volatility, balance sheet) and valuations. The credit research process culminates with analysts formalising a view on each applicable issuer based on both their fundamental strength and relative value versus both industry and peers. The aim is to identify which securities are the most attractive from a risk/return perspective.
Our Head of Responsible Investments works closely with all of our investment teams to ensure each team’s incorporation of ESG factors is relevant and consistent with the Pendal Australia’s overall RI Philosophy. Information is shared across the asset classes teams where ESG information synergies also exist, for example between our credit and equity analysts. This includes ESG information gathered from our Equity team engagements. Our RI Working Group is another forum that fosters ongoing and open dialogue across the investment teams and key support teams to ensure relevant ESG information is being incorporated into our investment products, policies and processes.