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Macquarie Asset Management

PRI reporting framework 2019

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ESG incorporation in actively managed fixed income

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
0 Integration alone
100 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (financial)
0 Screening alone
0 Thematic alone
0 Integration alone
100 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (non-financial)
0 Screening alone
0 Thematic alone
0 Integration alone
100 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Securitised
0 Screening alone
0 Thematic alone
100 Integration alone
0 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 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.

We have a structure under which autonomous - or independent -- investment teams are supported by a global shared-services platform. Our teams have the autonomy to leverage their specialized skill sets and define their individual investment approaches and decision-making processes, whilst benefitting from a comprehensive operational support platform. The incorporation of ESG factors in the investment process varies by investment team as each team owns its own investment process.

Whereas we utilize integration methods and screening throughout the investment process, integration methods are our primary strategy of conducting analysis.

01.3. Additional information [Optional].

The data provided in this survey represents a compilation of responses that were separately submitted by our independent investment teams.  We have utilized the additional information sections in questions where our teams’ responses are materially different from one another and/or if we felt the need to identify specific practices employed by an individual team.

Macquarie Asset Management (MAM) has a breadth of fixed income capabilities.  A central belief amongst all of our capabilities is a commitment to proprietary, in-depth fundamental research. Inherent in this commitment is a strong focus on the management of the downside, considering capital preservation to be paramount.  Aspects of our credit analysis may include an examination of industry dynamics, visits with company management, competitive positioning comparisons, and an analysis of both overall credit and ESG specific ratings trends.  Inherent to the investment process is an in-depth analysis of economic, competitive and other factors that may influence future revenues and earnings of the issuer, including factors that are considered as material from an ESG perspective.   


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)
Securitised
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  

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.

The responses provided above represent an aggregate of different practices employed by our independent investment teams and do not necessarily indicate that each team employs all of these practices.

The majority of the ESG information that we use is obtained as part of our internal  research process where we gather information on all factors that are relevant to our credit analysis. 

We provide all of our investment teams with access to specialized ESG research. The investment teams determine how best to leverage this information in their investment process.

See below for additional information regarding some of our respective teams.

02.4. Additional information. [Optional]

The Macquarie Investment Management (MIM) Fixed Income research team has added ratings data from our external provider to their weekly data pack and analysts are required to delve into instances where a particular company’s ESG rating has experienced a recent upgrade or downgrade.

Macquarie Infrastructure Debt Investment Solutions (MIDIS), in addition to utilizing external research providers, also utilizes specialised in-house ESG research capabilities.  ESG factors initially assessed by their Investment Committee are (in part) inspired by a series of questions based on the International Finance Corporation (IFC) Performance Standards on Environmental and Social Sustainability as well as IFC Corporate Governance Progression Matrix.


FI 03. Processes to ensure analysis is robust

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

specify description

          Review and evaluation of external research providers
        

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

03.3. Additional information. [Optional]

The process of ensuring that ESG research is robust and the sharing of ESG information and analysis varies among our investment teams.  The responses provided above represent an aggregate of different practices employed by our independent investment teams and do not necessarily indicate that each team employs all of these practices.

MIM’s FI research team has added ratings data from our external provider to their weekly data pack and analysts are required to delve into instances where a particular company’s ESG rating has experienced a recent upgrade or downgrade.  ESG information is also available through the Bloomberg research terminals and can also be accessed via MSCI’s ESG Manager web site.  

MIDIS engages directly with borrowers and consultants on a wide range of issues. This includes ESG, which is a standing item in the Screening Papers and Approval Papers submitted to their Investment Committee. The ESG approach is documented and the ongoing learning culture of MIDIS ensures that information is cascaded to all staff through formal and informal learning sessions.

The review and evaluation of our external research providers is done on a firm level as those resources are shared by all of the investment teams within MIM. 


(A) Implementation: Screening

FI 04. Types of screening applied

04.1. Indicate the type of screening you conduct.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

04.2. Describe your approach to screening for internally managed active fixed income

Screening criteria vary by investment team.  See below for examples

04.3. Additional information. [Optional]

Exclusionary screens are also used for client-specific mandates which restrict the inclusion of companies involved in identified prohibited activities.

The MIM Fixed Income research team has as an exclusionary screen for tobacco across strategies managed for Australian investors.  The team believes that screening out tobacco companies from these portfolios is an appropriate response to enhanced client interest in ethical investments. 

The MIM FI research team also emphasizes the use of corporate governance criteria as a means of identifying issuers to be excluded from their investable universe.

MIDIS investments are governed by its ESG policy which excludes certain specific sectors from investment.


FI 05. Examples of ESG factors in screening process (Private)


FI 06. Screening - ensuring criteria are met

06.1. Indicate which systems your organisation has to ensure that fund screening criteria are not breached in fixed income investments.

Type of screening
Checks
Negative/exclusionary screening?

06.2. Additional information. [Optional]

The responses provided above represent an aggregate of different practices employed by our independent investment teams and do not necessarily indicate that each team employs all of these practices.

MSCI KLD Social restricted lists are loaded into MIM’s trading system on a monthly basis.  Traders entering trades in prohibited securities will receive a notification that the bond is restricted for those specific accounts with restrictions.


(C) Implementation: Integration

FI 10. Integration overview

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

We have a structure under which autonomous - or independent -- investment teams are supported by a global shared-services platform. Our teams have the autonomy to leverage their specialized skill sets and define their individual investment approaches and decision-making processes, whilst benefitting from a comprehensive operational support platform. The incorporation of ESG factors in the investment process varies by investment team as each team owns its own investment process.

A central belief amongst all of our capabilities is a commitment to proprietary, in-depth fundamental research. Inherent in this commitment is a strong focus on the management of the downside, considering capital preservation to be paramount.  As such, ESG issues may be considered throughout the credit selection process as we recognize the potential of ESG issues to negatively impact creditworthiness.  Aspects of our credit analysis may include an examination of industry dynamics, visits with company management, competitive positioning comparisons, and an analysis of both overall credit and ESG specific ratings trends.

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

SSA

Each of our investment teams employs a consistent ESG integration approach across all types of fixed income instruments in which that particular team invests.

Corporate (financial)

Each of our investment teams employs a consistent ESG integration approach across all types of fixed income instruments in which that particular team invests.

Corporate (non-financial)

Each of our investment teams employs a consistent ESG integration approach across all types of fixed income instruments in which that particular team invests.

Securitised

Each of our investment teams employs a consistent ESG integration approach across all types of fixed income instruments in which that particular team invests.  For securitised instruments, credit analysis includes a focus on the risks associated with adverse behaviour of issuers regarding environmental, social and governance factors.

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)
Securitised
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]

The responses provided above represent an aggregate of different practices employed by our independent investment teams and do not necessarily indicate that each team employs all of these practices.

Specific examples of our use of ESG information in the investment process is provided in section FI 13.


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

Securitised

Environmental

Social

Governance

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

SSA

All of our independent investment teams recognize ESG factors as a part of their investment analysis but their approach towards reviewing ESG information in the integration process varies by investment team.  See below for specific examples.

Corporate (financial)

All of our independent investment teams recognize ESG factors as a part of their investment analysis but their approach towards reviewing ESG information in the integration process varies by investment team.  See below for specific examples.

Corporate (non-financial)

All of our independent investment teams recognize ESG factors as a part of their investment analysis but their approach towards reviewing ESG information in the integration process varies by investment team.  See below for specific examples.

Securitised

All of our independent investment teams recognize ESG factors as a part of their investment analysis but their approach towards reviewing ESG information in the integration process varies by investment team.  See below for specific examples.

12.3. Additional information.[OPTIONAL]

Our fixed income teams incorporate the analysis of ESG factors into their fundamental issuer credit analysis, which is consistent with the teams’ investment philosophy of avoiding downside risks.  Inherent to the teams’ investment process is an in-depth analysis of economic, competitive and other factors that may influence future revenues and earnings, including factors that have been identified as material from an ESG perspective.                

Following are a few examples of the many ESG factors that have been reviewed in the integration process.  Specific examples of our use of ESG information in the investment process is provided in section FI 18.

  • Review of all companies covered that have performed poorly on ESG from a bondholder perspective
  • Jurisdiction risk assessment to help identify corruption risk, especially for emerging markets
  • Evaluation of the independence of an issuer’s board by checking for the percentage of unaffiliated board members
  • Analysis of the environmental remediation and liability concerns including coal ash cleanup, nuclear asset retirement obligations, and wildfires for utility companies
  • Investigation of litigation against chemical companies stemming from environmental/health concerns
  • Requirement of super majority vote needed for budget passage or to raise revenues for US states
  • Analysis of nuclear construction risks for US-based public utilities
  • Determination of the percentage of loans in a security that are dedicated to senior and/or low-income housing
  • Comparison of governance practices of a particular issuer of a securitization instrument relative to peers.

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