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Alliance Bernstein

PRI reporting framework 2019

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Outputs and outcomes

FI 17. Financial/ESG performance

17.1. Indicate whether your organisation measures how your incorporation of ESG analysis in fixed income has affected investment outcomes and/or performance.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
We measure whether incorporating ESG impacts portfolio risk.
We measure whether incorporating ESG impacts portfolio returns.
We measure the ESG performance/profile of portfolios (relative to the benchmark).
None of the above

17.2. Describe how your organisation measures how your incorporation of ESG analysis in fixed income has affected investment outcomes and/or ESG performance. [OPTIONAL]

We have not conducted any empirical research to determine the impact of ESG considerations.

Within our impact strategy in the US municipal market, we have established a series of key performance indicators for each sector that we invest in and we look for improvement in these metrics over time. Should trends in metrics deviate significantly in any given year, AB analysts will attempt to ascertain the reason for the change. Through active engagement, should we conclude that a viable plan and strategy is in place and being implemented, we will maintain our position. If we ultimately question the probability of success of a particular strategy employed, we will either trim or sell out of position and reallocate proceeds to other investments that show better impact potential.

For certain corporate bond portfolios that are managed using extensive ESG criteria, we have developed performance attribution that evaluates the impact of these ESG criteria on security selection.

17.3. Additional information.[OPTIONAL]


FI 18. Examples - ESG incorporation or engagement

18.1. Provide examples of how your incorporation of ESG analysis and/or your engagement of issuers has affected your fixed income investment outcomes during the reporting year.

ESG issue and explanation

We met with a multi-national oil and gas company that had not met with credit investors in more than 4 years after announcing a major settlement relating to a significant oil spill.  With remaining liabilities tailing off, the company was able to put forward a long-term outlook and discuss its strategy.  Clearly, the company had an uphill climb post the spill regaining trust but we discussed where they have made material advancements from an E, S and G perspective.

From an “E” perspective, within a strategy focused around growing cost-advantaged production, they equally highlighted a focus on advancing a low carbon agenda.  Specifically, their goals are centred around lowering emissions with clear goals and metrics, specifically to reduce carbon emissions with a target to reduce 3.5 million tonnes out to 2025 via improved energy efficiency, fewer methane emissions and reduced flaring.  Additionally, they are producing more natural gas, which is a lower carbon alternative to coal for power generation and working with auto manufacturers to create biofuels. Looking forward, part of pivoting the portfolio is also about refocusing future capex. There, the company uses a carbon cost when evaluating new projects and ones where there could be material emissions costs.

Impact on investment decision or performance

From an “S” perspective, a focus on digitizing and democratizing real time data at the wellhead and across related logistics helps both with efforts to gain efficiencies but also from a predictive standpoint to prevent prospective future catastrophic equipment failure and to meet a target of zero accidents. They have stepped up the review of contractors from a quality, technical, health, safety and security perspective before awarding contracts and regularly monitor safety. The company has also sought to advance automation and/or unmanned vessels and drones to inspect and gather data in difficult to reach areas. 

From a “G” perspective it is notable that to reinforce the energy efficiency and low carbon agendas, 20% of long-term executive compensations is based on executing towards its strategic priorities. This includes measures on performance in gas, renewables, venturing and renewables trading. Underpinning this further, the board considers progress on issues such as reducing emissions, improving their products and creating low carbon businesses – as well as total shareholder return, safety and other environmental factors – before determining the final vesting outcome of longer-term awards. As a result of our engagement, governance concerns lessoned and we were more comfortable taking exposure in the issuer.     

ESG issue and explanation

The underlying goal of AB’s Municipal Impact strategy is to make environmentally, socially, and financially productive investments in historically marginalized and underserved communities to reduce gaps that exist in such areas as academic achievement, economic development or the provision of healthcare. Inherent in those goals is to make investments toward improving the quality of life for all, including those with disabilities.  In 2018, we evaluated the oldest seeing eye dog school in the US. The organization’s mission is to enhance the independence, dignity and self-confidence of people who are blind through the use of guide dogs.

Impact on investment decision or performance

From a social perspective, the organization breeds, trains, and partners the visually impaired with seeing eye guide dogs. The use of and assistance from these dogs has contributed greatly to enhancing mobility, companionship, social interaction, safety, and self-sufficiency thus helping to reduce feelings of anxiety and depression among the blind and visually impaired. Every dog is specifically matched to meet the individual needs of each student with over 17,000 partnerships banded together since 1929.  Metrics evaluated included surveys that 94% of respondents were completely satisfied with the organizations experience and 99% would recommend it.  From an environmental perspective, the breeding facility is fully accredited and a certified member of the International Guide Dog Federation which sets worldwide standard for such schools/facilities associated with development, monitoring and evaluation of guide dog organizations.  Standards evaluated include humane care, training and treatment of Guide Dogs; breeding, puppy raising and veterinary care; kennel specifications; buildings and transport; Technical Staff Education and Development.  From a governance perspective, the issuer is transparent producing a comprehensive annual report in print and Braille.  Accreditation was also received by the American Animal Hospital Association.  Result: Integration of ESG factors led us to include the issuer in our Impact strategy.

ESG issue and explanation

In March of 2018, a major automaker announced that it was shifting $7 billion of investments to sport utility vehicles (SUVs) from cars, and by 2020 would field a North American line-up of eight SUVs.  In turn, the automaker would be discontinuing longstanding brands of sedans given declining consumer demand and product profitability.  In the near future, the automakers production of cars will account for only 14 percent of its volume, with SUVs and trucks growing to around 86 percent of North American sales. 

Impact on investment decision or performance

In August of 2018, AB’s credit analyst met with the current Treasurer, of whom the analyst has known for many years.  As part of our engagement, our analyst explored the shifts in automakers vehicle mix – particularly the shift from passenger cars to SUVs, and the potential negative environmental and carbon emission impacts.  The automaker reassured the fact that their SUV fuel efficiency rates were approaching that of their passenger cars – so negative environmental and carbon emission impacts from the vehicle mix shift would be limited.  During the face-to-face with AB, the automakers representatives stated to our analyst that the engines used in the new SUV’s would be relatively the same as those in the current cars/sedans they are phasing out but placed in a larger vehicle.  As a result of our direct engagement with the automaker and reassurances provided regarding environmental concerns and fuel efficiency,  AB continued to hold our position in the automaker.

ESG issue and explanation

In mid-October 2018, a major ride-sharing service came to market with its first ($2 billion) high yield bond deal.  The on-demand ride-sharing platform manages a large, disaggregated workforce of drivers that provides transportation services through a smart phone application.  The service provider promotes its drivers as independent entrepreneurs whose work is characterized by freedom, flexibility, and independence.   Our concerns included the low wages paid to drivers.  The ride-sharing service’s drivers are considered “contractual workers” not employees and thus do not fall under minimum wage requirements.  These drivers are generally paid a low percentage of each fare.  In some cases, drivers are given additional “rebates” to supplement their compensation, but these rebates will need to be withdrawn from drivers if the platform is to be profitable.

Impact on investment decision or performance

AB credit analysts and portfolio management conducted a meeting with company management in advance of the new issue, and after engaging decided not to participate in the new issue in part due to concerns over the Social aspects of the company’s business model.  Company management in attendance with AB directly stated that as market share is increased driver pay would be reduced further due to lack of competition.    We view such low driver compensation as unsustainable for their business model in the long term.  Our AB analyst also made note that the ride-sharing service has never advertised for customers but has only advertised for drivers as their business model depends on underpaid workers. We passed on this new issue.

ESG issue and explanation

In August 2018, the Notebook Scandal broke in Argentina after the local news outlet La Nacion published detailed diaries kept by a government chauffeur for the Minister of Federal Planning.  The Minister served during the Argentinian presidencies of Nestor Kirchner (2003-2007) and Cristina Fernandez de Kirchner (2007-2015).  The series of notebooks contained meticulous records of names, amounts and dates of bribery money between construction companies in Argentina, the presidential residence, the planning ministry, and the former president Kirchner’s private home.  The notebooks documented at least $35.6 million in cash transported over the course of seven years.  A subsequent indictment filed against former president Cristina Fernández alleges bribes from construction companies in exchange for public works contracts during her two terms as president.

Impact on investment decision or performance

In October 2018, an AB emerging market credit analyst travelled to Argentina to engage numerous companies that were possibly involved in the Notebooks Scandal.  One of the companies our AB analyst engaged with was a top tier Argentinian construction company which flourished during the Kirchner’s presidential administrations winning many important civil works projects.  When our credit analyst met with this company’s management team on issues of transparency and compliance policy regarding government bidding, the management team immediately changed the subject and would not directly discuss their policy for government contracts.  The management team instead stated they were more successful at winning projects under the prior administration (the current Argentinian president Mauricio Macri ran on cleaning up corruption).   AB did not invest in this Argentinian construction company holding due to the lack of disclosure during our engagement and direct avoidance of our analyst’s questions regarding government bidding.  AB also made the decision to outright sell a position in that company’s bonds that a new AB client had just transferred to us in kind. 

18.2. Additional information.

Our AB Municipal Impact strategy focuses its healthcare sector investments largely on institutions that help address disparate health outcomes in disadvantaged and historically marginalized communities.  Essentially, we are looking to extend the life expectancy and quality of life for those medically underserved.  As of 2016, West Virginia ranked first in the nation in the prevalence of heart attack and coronary heart disease, obesity, arthritis, as well as the rates of chronic obstructive pulmonary disease.  West Virginia also ranked second in the nation in the prevalence of diabetes and rates of tobacco use.  The State’s opioid-related overdose mortality rate was the highest in the nation at 43.4 per 100,000 residents, 3.2x higher than the nation and 20% higher than New Hampshire, the next closest state.

In 2018, AB evaluated the largest healthcare system in the state, consisting of 10 Hospitals and 100+ clinics.  The healthcare system provided a full range of services from primary and specialized care to an academic medical center actively engaged in a wide range of outreach programs designed to serve the most vulnerable and at-risk populations. Well over 20% of the patient revenue is derived from Medicaid and services reach all but 14 of the State’s 55 counties. 

Outreach programs by the Health System Included:   

Comprehensive Opioid Addiction Treatment (COAT): an outpatient group-based treatment program for opioid use serving approximately 600 active participants at any given time.  It is a step-based program dependent on the individual's place in recovery.

The Extension for Community Healthcare Outcomes (ECHO): the program connects rural healthcare providers with substance abuse specialists at the Health System through a knowledge-sharing network

Additionally, the rural and mountainous terrain of West Virginia presents a logistical challenge for many to reach healthcare institutions.  A mobile unit expands the Health Systems cancer treatment programs to the rural communities of West Virginia. For example, the vehicle brings mammography directly to where patients live in rural communities who may otherwise not have access. 

Telemedicine also provides critical on-demand expertise helping rural hospitals and physicians quickly evaluate and treat potential stroke patients.  Specialists outside of these rural areas can see and interact with patients and healthcare professionals throughout the state, thereby providing patients with more timely and efficient care.

Lastly, the Health System’s Center for Diabetes and Metabolic Health Program addresses obesity and diabetes with less medication. It combines medical care with food, exercise, sleep, and stress reduction. Clinicians and staff address food insecurity, decrease sugar in healthcare settings, and support statewide collaborations to combat obesity and diabetes at the policy and grassroots level.  Our integration of ESG factors and evaluation of key healthcare performance indicators led us to include this Health System in our Impact Strategy.

 

Another key sector in our Impact Strategy is education.  A University in California we evaluated was the only Catholic university primarily for women in the western United States (and only women’s university in Los Angeles).  The University is known nationally for its research on gender equality, its innovative health and science programs, and its commitment to community service.  The school also serves a diverse student population with 60% of students Latinx (vs a median of 30% for all California).   Supporting a lower income population–67% of first time, full-time students receive Pell grants (vs. a median of 36% for all California).   Among selective private colleges nationally, the University has among the highest percent (15%) of students that come from the bottom 20% family income.  The school has a track record of success moving students up the economic scale with 43% of students at the University moving up two or more income quintiles post-graduation–which makes it among the highest both in California and nationally among selective private colleges.  Approximately 68% of traditional baccalaureate graduates from this University go on to earn advanced degrees.  After our ESG analysis we decided to include this University in our Impact holdings.

Another educational issuer in the state of Texas where we integrated ESG issues focused on the school's "Whole Child" approach to education including guidance counseling, restorative justice and family-based social services. Daily literacy, history (including Latino and African-American history) and rigorous college preparation classes for students are held daily with an expanded school day and year.  The school has invoked a Zero suspension policy for at—risk students opting to keep them in rigorous classes for achievement.  Every student receives a Chromebook laptop and proficiency in two coding languages are required for graduation.  Integrating these ESG factors led us to include this issuer in our portfolio.

Also inherent in our Impact strategy is to make investments toward improving the quality of life for all by enhancing and promoting civic engagement, an informed citizenry, culture, and the physical and natural sciences. A scientific and educational institute in San Francisco, CA, is a natural history museum, aquarium, planetarium and rainforest—all under one eco-friendly roof. Socially, their mission is to explore, explain, and expand environmental literacy, enhance education in the sciences, biodiversity and sustainability, as well as lower the barriers of entry regardless of socio-economics, language, or culture. The institution promotes free and reduced admission programs to ensure access for all including low-income families, subsidized student visits and Neighborhood and community Free Weekends.  The institution also provides passes to moderate- to low-income neighborhood libraries that can be checked out from 72 different area libraries to ensure access to all despite socio economic status.  Environmentally, the institution's facility is an award winning eco-friendly design and operations including the World’s first Double Platinum LEED-certified institution of its kind—and the largest Double Platinum building in the world including a Living Roof with 87% of the roof's surface vegetated - providing insulation reducing energy needs and transforming carbon dioxide into oxygen. The roof also includes extended solar panels for further energy efficiency.  Integrating ESG factors we included this issuer on our holdings.


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