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Alliance Bernstein

PRI reporting framework 2019

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Outputs and outcomes

LEI 12. How ESG incorporation has influenced portfolio composition

12.1. Indicate how your ESG incorporation strategies have influenced the composition of your portfolio(s) or investment universe.

Describe any reduction in your starting investment universe or other effects.

Several responsible investment specific strategies have sector or industry restrictions based on the objectives of the strategy.  In addition, we narrow down the investment universe in accounts with client-directed or other third-party screening. We have a controversial weapons policy for our Luxembourg domiciled funds which limits the investment universe. 

The percent reduction below is based on our RE-USE strategy.  

Specify the percentage reduction (+/- 5%)

19 %

Describe any alteration to your investment universe or other effects.

Our Sustainable Thematic strategies pursue opportunistic growth by investing in a global universe of companies that are positively exposed to sustainable investment themes. We define sustainable investment themes to be those that are broadly consistent with achieving the United Nations Sustainable Development Goals (SDGs). Our portfolio holdings must fit within themes that are directly aligned with one or more SDGs. We believe that such alignment implicitly excludes several product categories from ownership consideration. We also monitor companies for conduct-based violations, as generally defined by the UN Global Compact.

Select which of these effects followed your ESG integration:

Describe the influence on composition or other effects

We use an MSCI SRI Index for our Global Responsible Factor Fund and we use FTSE4Good Indices for our Ethical Target Date Funds. Both indices have a reduced investment universe due to a best-in-class approach as well as a restriction list.

12.2. Additional information.[Optional]


LEI 13. Examples of ESG issues that affected your investment view / performance

13.1. Provide examples of ESG issues that affected your investment view and/or performance during the reporting year.

ESG factor and explanation

In 2014, we made an investment in a leading Chinese TV manufacturer. Our investment was based on our favorable view of demand growth, as we believed that Chinese TV demand growth would be sustained by the large replacement demand associated with monitor upgrades from cathode ray tube to liquid-crystal display over the next five years. The company also had an attractive valuation, with support provided by its liquidation value; its real estate assets alone were worth US$500 million more than the company’s market capitalization, and the stock was trading at six times earnings. Finally, we believed that the corporate governance risk was being overstated by the market, as the company’s corporate governance had been improving over time. However, given that corporate governance was one of the reasons for the lower share price valuation, we conducted extensive due diligence and became comfortable with the steps that the company’s new CEO had taken to strengthen internal controls and processes since joining in 2012.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

In 2018, several events indicated that corporate governance risk at the company was increasing. In November 2017, the company’s founder suggested that they should purchase an electrical vehicle bus company that he owned. Due to the size of this related-party transaction, this would have required a majority of the minority investors to vote for the deal. As there were limited synergies with the company’s core business, investor feedback and reaction was very negative, and they withdrew the transaction. In February 2018, the company’s CEO sold most of his shares and announced that he would resign in March, without any explanation. Finally, for its annual results posted in June 2018, the company did not hold an annual shareholder results presentation as it had consistently done in the past. The company did not even host an earnings call with analysts and shareholders. We interpreted these events to mean that management had shifted to having very little concern for minority shareholders’ interests. Thus, the risk in our investment had risen substantially.

Due to these signals and events showing deteriorating corporate governance, we started reducing our position in the first half of 2018 and sold out during the third quarter.

ESG factor and explanation

This oil refining company is well-positioned for increasingly tighter environmental standards. The International Maritime Organization (IMO) is introducing a more stringent set of environmental standards for cargo ships, called IMO 2020. Currently, marine bunker fuel represents about 5% of global oil consumption and is among the dirtiest and most polluting uses for oil. By 2020, the IMO is calling for a reduction of sulfur content in marine fuels from the current 3.5% to 0.5%. The cargo fleet is equipped with scrubbers to manage the sulfur requirements, so this will result in greater demand for low-sulfur fuels and lighter, low-sulfur crude feedstocks and less demand for fuel oil and heavier, more sulfuric crude feedstock. Correspondingly, we will see crude and fuel prices move to motivate refiners to upgrade their refineries to produce more low-sulfur fuels. Low-sulfur marine fuels, diesels and crudes will trade at a premium, and high-sulfur fuel oils and crudes will trade at a substantial discount to today's and historical prices.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

The company has made upgrades to its refineries to position itself as perhaps the best refiner in the world to accommodate the upcoming IMO measures. In 2015, it invested US$3 billion to modernize its facilities, increase its proportion of low-sulfur products from 65% to 80% and reduce its high-sulfur fuel oil output from 20% to 5% of production. In addition, the upgrade allows the company to utilize the widest range of crude feedstock in the world. It is able to take in heavy, highly sulfuric crude oil and refine it into cleaner low-sulfur products such as gasoline, diesel or jet fuel. Most refiners taking in heavy oil are only able to refine it into heavy products, which are typically highly sulfuric and hence polluting. As such, the company is helping to provide cleaner fuel and reduce sulfur emissions. The company also stands to benefit from strategic foresight, attention to the environment and the multibillion-dollar investment it made in its facilities. 

ESG factor and explanation

We engaged with this bank, following a money laundering scandal at a competitor's Estonian operation, to gain information on the bank’s Gibraltar operations. We wanted updates following their mention in the “Panama Papers” and the FSA's criticism of their IT systems.

When questioning the company about their Gibraltar operations we wanted to establish if this part of the business is susceptible to fraudulent activity. The company only has around 2 BDKK in loans and 5 BDKK in deposits. This is now a fraction of their income and we do not see why they need this department due to the increased risk/reward from this non-core operation. We don’t think the risk of this operation is worth the reward and have therefore asked for further documentation on historical loans/deposits from Gibraltar.

We also asked about the company’s mention in the Panama Papers scandal. This was due to 6 clients which were bought in through another transaction. We are not overly concerned that this represents a major governance risk. 

ESG incorporation strategy applied Integration

Impact on investment decision or performance

Finally, as the company was criticized for failure to comply with statutory IT requirement from the FSA in 2016 (2017 report), we wanted to know what progress was being made in this area. The company confirmed that they have since upgraded their IT following the demands of the FSA, but MSCI has not updated their report yet. Therefore they (and we) expect them to score better in the next review.

We have asked management to accelerate their downscaling of operations in Gibraltar and are adding a ‘Governance’ premium while these operations persist. We continue to monitor the FSA’s evaluation of the company’s IT systems and will increase our ‘Social’ premium if inadequately addressed. As a result of this engagement we chose to increase the risk premium we ascribe to the stock, but this did not necessitate a change in the position size.

ESG factor and explanation

In 2018, we met with the management of a food and beverage company in the Philippines. The company is in the process of relisting, taking its public float from 4% to 20%, making it one of the largest deals in the Philippines in years.

Although the company is a market leader in beer and food, its parent company has a history of poor corporate governance. In the past, the parent company has used funds raised by its subsidiaries to buy unrelated business assets from the parent company at questionable valuations. For example, in 2011, the food business bought shares of a power distribution company from the parent company after the food company raised cash from investors. The assets were bought at a substantial premium to what the parent company paid for them a year earlier. In a second situation, the brewery business raised funds then bought the branding rights for beer from the parent company. This raised questions about why the brewery business did not own the key assets from the onset.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

We discussed this history with management and asked what steps would be taken to improve governance and investor confidence going forward. We were disappointed in management’s response. The company emphasized that it provides ethics training to its employees and that roughly one-third of its directors will be independent. However, we get little comfort from this, as the company is still controlled by the parent company, which has a poor history of protecting minority shareholder rights. At the time of our meeting, management did not share intentions to take any additional steps toward protecting investors.

Steps that we would like to see the company take toward addressing corporate governance include requiring that all major related-party transactions be approved by minority shareholders and requiring that the board of directors be dominated by truly independent directors. We would like to see the company create a more credible process to protect shareholders before we invest.

ESG factor and explanation

We wanted to understand the drivers of a company's low ESG score on Financial Product Safety, Insuring Health & Demographic Risk and Human Capital Deployment; and determine whether the scores were warranted.

This company operated insurance joint ventures (JVs) with global insurance companies in Brazil. The  structure of the JVs were set up so that this company would provide access to distribution in Brazil through its partnership with a major bank and the JV partners would provide the business operating expertise. While this company had a majority economic stake in the JVs, they had a minority of the voting rights – effectively their JV partners controlled the insurance operating companies. It was therefore surprising to see that a major international rating agency awarded low ESG scores to this company for  Financial Product Safety, Insuring Health & Demographic Risk and Human Capital Deployment, while it awarded much higher ratings to their JV partners.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

We engaged with the company on several occasions, holding discussions with the CFO and Investor Relations. During our discussion it became apparent that the rating agency had misunderstood this company’s business model. The rating agency scored this company poorly on Financial Product Safety  but a significant portion of their insurance products are plain vanilla bancassurance products directly linked to a loan meant to insure the debtor in adverse conditions. The rest of their business is mostly savings products invested in more conservative fixed income securities. Regarding their Insuring Health & Demographics risk we learned that their JV partners use the same underwriting processes that they use in their home countries to run the business in Brazil – the same processes that receive high scores by the same rating agency. 

As a result of our engagement the company proactively reached out to the rating agency to better understand their rating. We later learned that the rating agency had been looking at outdated websites for the company that did not contain the detailed disclosure that would have helped them better assess these risks. Based on our engagement, we remained confident in the company and maintained our position in our portfolios. 

13.2. Additional information.[Optional]


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