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Australian Ethical Investment Ltd.

PRI reporting framework 2019

You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income

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
100 Screening alone
0 Thematic alone
0 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%
Corporate (financial)
100 Screening alone
0 Thematic alone
0 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.

When applying our Ethical Charter to governments, we recognise that democratically elected governments play an important role in in advancing the interests of people, animals and the environment. To assess a government we therefore focus on its accountability and the general quality of its democracy, taking into account things like political rights, civil liberties and rule of law. We will not invest in undemocratic states, and democratic governments can also be excluded for militarism.

Even governments operating in strong democracies will have many polices which we disagree with. In these cases we think the most effective way for us to pursue positive change is to advocate for more sustainable policies through government consultations and submissions, and through our public voice in the media which can influence both governments and voters.

When investing in corporate fixed income securities, the screening under our Charter creates a universe of sustainable companies. Our broad and deep research of short and long term social and environmental impacts of companies and sectors builds a more complete understanding of the prospects and risks of the companies and sectors in our universe. As well as defining a sustainable investment universe, this enables more impactful engagement with companies.

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)
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  

specify description

          Industry, government, responsible investment, scientific and civil society sources
        

Indicate who provides this information  

specify description

          Industry, government, responsible investment, scientific and civil society sources
        

Indicate who provides this information  

specific description

          Industry, government, responsible investment, scientific and civil society sources
        

Indicate who provides this information  

specify description

          Economist Intelligence Unit Democracy Index; BICC Global Militarization Index.
        

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

Our ethics research and investment analysts use the above types and sources of information for the following purposes:

  • Screening of governments: Rankings and associated analysis from Economist Intelligence Unit Democracy Index, BICC Global Militarization Index and other sources help us assess the legitimacy of governments and their militarism.
  • Screening and ESG integration for corporate issuers: Data and analysis from ESG research providers, ESG broker research and from industry, government, scientific and civil society sources help us identify and assess key ESG issues affecting companies and sectors.

02.4. Additional information. [Optional]


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]


(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)
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

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

Our positive screen leads us to support sustainable and positive impact businesses such as energy efficiency and energy storage technologies, renewable energy, recycling, efficient transport, responsible banking and other sustainable products and services.

Our negative screen leads us to avoid, for example, tobacco, weapons, fossil fuels, emissions intensive transport, irresponsible lending, discriminatory and exploitative business practices and other unsustainable products, and services and companies.

When applying our Ethical Charter to banks we assess the ‘Paris alignment’ of bank lending; sales and marketing practices; financial product design; evidence of exploitative trading activity; and ESG integration into lending decisions.

When applying our Ethical Charter to governments, we recognise that democratically elected governments play an important role in in advancing the interests of people, animals and the environment. To assess a government we therefore focus on its accountability and the general quality of its democracy, taking into account things like political rights, civil liberties and rule of law. We will not invest in undemocratic states, and democratic governments can also be excluded for militarism.

04.3. Additional information. [Optional]


FI 05. Examples of ESG factors in screening process

05.1. Provide examples of how ESG factors are included in your screening criteria.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Development banks (DBs) established by groups of countries can be positive for alleviating poverty and otherwise contributing to human happiness. To be aligned with our Ethical Charter, a DB must meet the following conditions:

  • The DB pursues a purpose which is aligned with the Charter. An example is a purpose to alleviate poverty in developing countries and improve living standards of those who are less well off in those countries.
  • The DB integrates ESG considerations into their funding processes and decisions. This includes a requirement that DB funding processes are designed to align the DB’s lending and other activities to the economic transition needed to limit warming to well below 2 degrees.

These tests are designed to ensure that we only invest in DBs which are making a positive contribution to development i.e. if the DB did not exist, there would be poorer development outcomes in the countries which the DB seeks to benefit. We consider the following:

  • DB use of intermediaries
  • DB responsibility for harm caused by funded projects
  • climate alignment of lending
  • genuine pursuit of purpose (e.g. interests of developing countries are prioritised; don’t support authoritarian regimes or have ‘trickle down’ development focus)
  • DB transparency.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Australian Ethical invests selectively in the banking sector. We exclude banks if they are not aligning their lending activities with the transition needed to limit warming to 2 degrees. We use a climate scorecard which assesses:

  • bank lending to the fossil fuel sector, including lending restrictions and the type of fuel and its emissions intensity
  • bank lending to renewable energy and energy storage
  • bank lending to technologies and activities which reduce energy usage or store carbon (e.g. green buildings, low-emissions transport and reforestation)
  • bank support for government climate policy aligned with the 2 degree transition (both directly and indirectly through participation in industry associations).

We also exclude banks if:

  • The bank markets and sells products in a way which encourages customers to buy products that cause them harm. For example, if the bank systematically encourages customers to over-borrow. Or the bank systematically misleads customers about fees or about the merits of investment opportunities arranged by the bank.
  • The bank systematically designs financial products which do not serve a legitimate function. For example, if the bank systematically designs investment products which facilitate tax avoidance.

05.2. Additional information.


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?
Positive/best-in-class screening
Norms-based screening

06.2. Additional information. [Optional]


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