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Pendal

PRI reporting framework 2019

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You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income » (C) Implementation: Integration

(C) Implementation: Integration

FI 10. Integration overview

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

The FI investment process draws on a combination of top-down and bottom-up analysis. This applies to all of our Fixed Income assets managed in Australia.

Top-down components include:

  • Macro inputs: incorporates global top-down Core-Scorecard and Credit Macro View. This has a quantitative foundation and comprises of a large number of models which look at bond yields, yield curves, cross market spreads, credit spreads, bonds vs equities and FX. Once preferred sector exposures have been determined, it is combined with the bottom-up issuer research and culminates in issuer and then security selection.
  • Sustainable & Ethical universe: where relevant to the portfolio we apply exclusion screens (e.g. tobacco, thermal coal etc) as well as a sustainability/'Best of Sector' rating process utilising internal as well as external data (e.g. Regnan, MSCI).

Bottom-up components include:

  • Credit research: incorporates fundamental issuer analysis and quantitative modelling to identify investment opportunities whilst avoiding deteriorating credits. The analysis focuses on business profile (including any material ESG issues) as well as the financial profile and valuations.
  • Collaboration with Pendal's Equity teams and a third party global research house is an important component in the credit research process.

Portfolio construction combines the bottom-up and top-down steps outlined above. Important considerations in portfolio construction include: correlation to existing portfolio; issuer diversification; concentration; position sizing; the liquidity of the portfolio; ability to hedge; sector diversification; tracking error; and valuation. Stop loss/take profit limits are identified for each active position. When implementing trades the investment horizon, market positioning, momentum, and technical analysis are incorporated. The focus is on identifying catalysts which can make the trades effective and realise value for the fund.

We have found that the value added from incorporating ESG considerations into fixed income strategies relates more to risk mitigation than other asset classes and that the relevance for a strategy with a short-term investment objective will be considerably less than a longer term horizon.

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. 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.

 

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

SSA

We assess ESG factors across our SSA holdings. In addition, we have developed a proprietary framework for our Australian strategies given the significant proportion of Government securities in our Australian composite fixed interest funds.

The Federal and State Governments in Australia generally have strong governance and social scores on an international comparison. However the environmental scores are lower on an international basis and vary more across States. Following on from this analysis our investment team identified opportunities to add value from a risk/return perspective at a State Issuer level based on these identified environmental issues. 

In addition, Pendal is engaging with State borrowing authorities to support issuance of specific purpose bonds and reflect the importance of ESG scores to our investment process.

Corporate (financial)

Drilling down further on the process outlined in FI 10.1 above, the top-down and bottom-up components provide additional information on how ESG factors are incorporated into our analysis of corporate (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.

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Corporate (non-financial)

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.

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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)
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

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

SSA

Our process for reviewing ESG factors in our SSA integration process is based on an analysis of those factors we believe to be material to the risk/return outcomes of that issuer. As part of this process, we utilise internal and external information sources. In addition, Pendal engages with SSA borrowing authorities to enhance our understanding of a particular issuer's exposure to current or emergent ESG issues and how well the issuer is managing those exposures. Where appropriate we will encourage the adoption of formal policies and enhanced disclosure to assist in the management and assessment of ESG issues (see case studies for examples).

Corporate (financial)

Our credit analysis process incorporates fundamental issuer analysis and proprietary quantitative modelling to assess investment opportunities. In particular, the credit selection framework focuses on four categories:
1. Business profile (such as competitive position and quality of management);
2. Financial profile (such as cash flow metrics and debt maturity schedules);
3. Risk factors (including regulation and funding sources); and
4. Valuation factors (such as relative value, technical and covenant strength).

ESG factors are typically captured in the business profile and risk factor categories where they are deemed material to the financial outcomes of the fund using bottom-up analysis. Examples of some of the categories that may be considered (depending on specific sector, business factors, investment horizon, geographic exposures, regulatory factors, and product performance objectives) include:

  • Environmental Management:
    • management of environmental impacts through the implementation of best practice environmental techniques, technologies and product design;
    • environmental performance against a range of environmental indicators including for example, greenhouse gas emissions, energy and water use and environmental incidents;
    • the capacity to consult key stakeholders in relation to activities that may have significant environmental impacts; and
    • adoption of best practice with regards to management and disclosure of material risks and opportunities associated with climate change.
  • Social practices:
    • equal opportunity, anti-discrimination and industrial relations policies and practices;
    • staff incentives, development and training;
    • employee benefits and entitlements;
    • human capital management performance against a range of indicators, such as voluntary turnover and gender diversity in senior management;
    • products or services that provide positive social impacts such as improved health & community well-being, disease prevention, and education; 
    • management of contractors and suppliers; and
    • workplace health and safety performance against indicators such as fatalities and lost time injury frequency rates.
  • Corporate governance and business conduct:
    • codes of conduct and the extent of their integration into the company’s operations;
    • provision of regular and appropriate training;
    • whistleblower policies and procedures;
    • ethical conduct and performance of employees and officers - the extent to which companies are adopting principles in areas such as complying with the law, fair and open dealings and accepting responsibility for their actions;
    • product safety and consumer protection; and
    • engagement practices with employees, shareholders and key community stakeholders.

For our review of ESG factors for credit, collaboration with Pendal's Equities teams is an important component in the credit research process. ESG data and research from Regnan is also used to enhance our own research and analysis of ESG factors.

Corporate (non-financial)

Our credit analysis process incorporates fundamental issuer analysis and proprietary quantitative modelling to assess investment opportunities. In particular, the credit selection framework focuses on four categories:
1. Business profile (such as competitive position and quality of management);
2. Financial profile (such as cash flow metrics and debt maturity schedules);
3. Risk factors (including regulation and funding sources); and
4. Valuation factors (such as relative value, technical and covenant strength).

ESG factors are typically captured in the business profile and risk factor categories where they are deemed material to the financial outcomes of the fund using bottom-up analysis. Examples of some of the categories that may be considered (depending on specific sector, business factors, investment horizon, geographic exposures, regulatory factors, and product performance objectives) include:

Environmental Management:

  • management of environmental impacts through the implementation of best practice environmental techniques, technologies and product design;
  • environmental performance against a range of environmental indicators including for example, greenhouse gas emissions, energy and water use and environmental incidents;
  • the capacity to consult key stakeholders in relation to activities that may have significant environmental impacts; and
  • adoption of best practice with regards to management and disclosure of material risks and opportunities associated with climate change.

Social practices:

  • equal opportunity, anti-discrimination and industrial relations policies and practices;
  • staff incentives, development and training;
  • employee benefits and entitlements;
  • human capital management performance against a range of indicators, such as voluntary turnover and gender diversity in senior management;
  • products or services that provide positive social impacts such as improved health & community well-being, disease prevention, and education; 
  • management of contractors and suppliers; and
  • workplace health and safety performance against indicators such as fatalities and lost time injury frequency rates.

Corporate governance and business conduct:

  • codes of conduct and the extent of their integration into the company’s operations;
  • provision of regular and appropriate training;
  • whistleblower policies and procedures;
  • ethical conduct and performance of employees and officers - the extent to which companies are adopting principles in areas such as complying with the law, fair and open dealings and accepting responsibility for their actions;
  • product safety and consumer protection; and
  • engagement practices with employees, shareholders and key community stakeholders.

For our review of ESG factors for credit, collaboration with Pendal's Equities teams is an important component in the credit research process. ESG data and research from Regnan is also used to enhance our own research and analysis of ESG factors.

12.3. Additional information.[OPTIONAL]


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