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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 » Implementation processes

Implementation processes

FI 01. Incorporation strategies applied

Indicate (1) Which ESG incorporation strategy and/or combination of strategies you apply to your actively managed fixed income investments; and (2) The proportion (+/- 5%) of your total actively managed fixed income investments each strategy applies to.
SSA
0 Screening alone
0 Thematic alone
96 Integration alone
2 Screening + integration strategies
1 Thematic + integration strategies
0 Screening + thematic strategies
1 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (financial)
0 Screening alone
0 Thematic alone
94 Integration alone
3 Screening + integration strategies
1 Thematic + integration strategies
0 Screening + thematic strategies
2 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (non-financial)
0 Screening alone
0 Thematic alone
95 Integration alone
3 Screening + integration strategies
1 Thematic + integration strategies
0 Screening + thematic strategies
1 All three strategies combined
0 No incorporation strategies applied
100%

01.2. Describe your reasons for choosing a particular ESG incorporation strategy and how combinations of strategies are used.

Pendal’s philosophy for all our fixed  income (FI) funds is that where ESG factors are considered material to risk and return outcomes they are incorporated into the investment process. Time horizons and materiality of ESG factors varies across asset classes as well as by strategy within FI. For example, the value added from incorporating ESG factors into fixed interest analysis relates more to risk mitigation than other asset classes. In addition, we have also found the value added from an ESG incorporation strategy is more material to credit than to developed market SSA.

We have 5 types of ESG strategies:

  1. ESG incorporation
  2. Exclusion screens
  3. Sustainable (Best of Sector)
  4. ESG Thematic - Green, Social, Sustainability Bonds
  5. Active ownership/Engagement: directly & indirectly (via our Equity teams, Regnan)

The choice and combination of ESG strategies above is tailored to be aligned with our views of how we can best manage the values and value (risk/return) objectives for the portfolio / clients.

Our process utilises internal and external ESG resources e.g. our FI teams discuss and access ESG research and analysis from our equity teams, this is particularly relevant for our credit team. External sources include ESG data from Regnan, MSCI and Rating Agencies. 

01.3. Additional information [Optional].


FI 02. ESG issues and issuer research

02.1. Indicate which ESG factors you systematically research as part of your analysis on issuers.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Environmental data
Social data
Governance data

02.2. Indicate what format your ESG information comes in and where you typically source it

Indicate who provides this information  

Indicate who provides this information  

Indicate who provides this information  

Indicate who provides this information  

02.3. Provide a brief description of the ESG information used, highlighting any differences in sources of information across your ESG incorporation strategies.

We utilise a number of both internal and external sources of ESG information as outlined below.

Internal

  • ESG Specialists: Head of RI and specialists within our Investments and Product teams.
  • RI Working group: monitors and reviews industry trends, standards, issues and practices that are relevant to the maintenance and development of Pendal’s RI framework.
  • Pendal's Equity teams: provide a significant internal resource that engages with investee company management directly and share insights across ESG issues. Credit portfolio managers regularly attend equity team meetings to discuss these issues.

External:

  • Regnan: (as of Feb 2019 is a fully owned dedicated ESG research and engagement team within Pendal, previously 50%) conducts in-depth analysis of a company’s non-financial characteristics and risks utilising the ESG framework. Regnan reviews and reports each month on ESG factors. 
  • MSCI: Sustainability Indices positively screen issuers based on MSCI’s ESG Ratings. ESG ratings are available for corporate, sovereign, and government-related issuers.
  • Ratings Agencies: have begun to incorporate ESG factors into their credit ratings process. This will become an important additional ESG resource.
  • Industry (e.g. PRI), academia and broker research: where relevant to investment strategy and as a best practice reference. 

02.4. Additional information. [Optional]

We engage with external research providers to stimulate research on how ESG factors can be better incorporated into fixed income investment frameworks to achieve better risk/return outcomes for our clients. We also engage with issuers to encourage better reporting practices as well as to support the pipeline for ESG/sustainable/impact-related structures in fixed income. For example; our ESG Fixed Income Portfolio Managers have participated in a number of ESG forums and contributed to a PRI published report on ESG factors in Credit risk ratings and analysis. See link below:

https://www.pendalgroup.com/education-and-resources/investing-responsibly-a-case-study-on-assessing-credit-risk/

We also encourage a two-way dialogue with sell-side research providers and frequently suggest ESG themes and tools of interest at an issuer level as well as at a sector and asset class levels.

 


FI 03. Processes to ensure analysis is robust

03.1. Indicate how you ensure that your ESG research process is robust:

03.2. Describe how your ESG information or analysis is shared among your investment team.

03.3. Additional information. [Optional]

The FI investment framework incorporates ESG factors into the investment process through a combination of top down and bottom up analysis:

Top-down:

  • Macro inputs: incorporates global top-down Core-Scorecard and Credit Macro View. Quantitative foundation comprises large number of models which look at bond yields, yield curves, cross market spreads, credit spreads, bonds vs equities and FX.
  • 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:

  • Credit research: incorporates fundamental issuer analysis and quantitative modelling to identify investment opportunities whilst avoiding deteriorating credits. Analysis focuses on business profile (including any material ESG issues) as well as financial profile and valuations.
  • SSA research: incorporates fundamental issuer analysis of material ESG issues.
  • Collaboration with Pendal's Australian Equities team 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: correlations; issuer & sector diversification; concentration; position sizing; liquidity; ability to hedge; tracking error; investment horizon; and valuation.


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