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PRI reporting framework 2019

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You are in Direct - Listed Equity Incorporation » ESG incorporation in actively managed listed equities » Implementation processes » (C) Implementation: Integration of ESG factors

(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the ESG factors you systematically research as part of your investment analysis and the proportion of actively managed listed equity portfolios that is impacted by this analysis.

ESG issues

Proportion impacted by analysis




Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]

We continue to evolve our ESG integration process. During 2018 we continued to roll-out proprietary ESG analysis tools to our investors and increased collaboration across asset classes.  We hired a dedicated ESG integration manager to strengthen ESG integration across investment desks.

Responsibility for ESG analysis primarily lies with our investment analysts as part of their company research. They are trained on ESG issues and evaluated on their analysis. Portfolio holdings are screened against 3P ESG ratings as a sense check. Some teams do additional work on ESG issues independently.

Our voting decisions are made in line with our ESG policy which was drafted following investor consultation. Fund managers are consulted on controversial decisions, those against the recommendation of our proxy research provider and against company management recommendations. Investors meet with governance specialists to discuss market-wide and company-specific issues. At this time voting decisions and reports are circulated to investors for a final review.

On a regional basis investors have regular meetings with corporate governance specialists to review voting decisions, discuss regional issues and best practice, identify companies at risk and set engagement priorities. Information from these meetings is circulated widely. Around the AGM season there is additional engagement on voting.

LEI 09. Processes to ensure integration is based on robust analysis

09.1. Indicate which processes your organisation uses to ensure ESG integration is based on a robust analysis.

          Holdings of companies with poor or declining ESG ratings are flagged to investment teams each quarter.

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

09.5. Describe how ESG information is held and used by your portfolio managers.

          Case studies on how ESG analysis has influenced decisions are recorded for investment processes.

09.6. Additional information.[Optional]

An analysis of relevant and material ESG factors is incorporated within company research notes by financial analysts, whether embedded within the main text, as part of the assessment of quality and risks or more specifically in an ESG section. These research notes are uploaded onto our global research platform and are easily accessible to all analysts and investors.

In addition the Sustainable Investment team periodically reviews a sample of research notes from the investment desks to assess the quality of ESG analysis, highlight best practice and provide feedback on how to enhance analysis. This is an important part of our process to continuously enhance the level of ESG integration within investment processes.

There are regular meetings for senior investors in which our sustainability and ESG research is discussed in more depth. This also enables investors to shape the research pipeline for their needs. Sector emails of relevant ESG research are regularly circulated to both analysts and fund managers.

Finally, desk holdings are reviewed on a quarterly basis and those companies with poor or declining ESG ratings are flagged to investment teams.

LEI 10. Aspects of analysis ESG information is integrated into

New selection options have been added to this indicator. Please review your prefilled responses carefully.

10.1. Indicate which aspects of investment analysis you integrate material ESG information into.

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

          A specific issue, for example litigation or possible future fines provision, would be capitalised in the valuation.

Proportion of actively managed listed equity exposed to investment analysis

10.2. Indicate which methods are part of your process to integrate ESG information into fair value/fundamental analysis and/or portfolio construction.

          Value at Risk analysis for carbon risk

10.3. Describe how you integrate ESG information into portfolio weighting.

Securities are rated 1 to 4 by financial analysts responsible for covering each company. ESG analysis is incorporated into analysts' valuation models and grading, these in turn influence the portfolio construction process. Where ESG risks are material, position sizing may be adjusted to reflect these risks according to upside to fair market value, level of conviction and portfolio risk. Where ESG risks are more manageable a program of engagement on the relevant issue will take place.

10.4. Describe the methods you have used to adjust the income forecast / valuation tool

The adjustments to income, forecasts and valuation tools will differ according to the company and sector. When we feel that the company is of a high quality and managing ESG risks well we may assign a higher target multiple to earnings or EV/EBITDA. If using a Sum of the Parts method, a discount or premium may be applied given the quality of governance. We may impair assets on the balance sheet if we feel that their useful life is impacted. With a DCF we may adjust the terminal growth figure, the company maturity year or WACC. In other instances ESG considerations may directly impact the cost or revenue lines e.g. carbon price in operating costs.

Our Carbon Value at Risk model highlights EBITDA at risk from rising carbon prices while our physical risk model shows the potential impact to EV based on companies’ asset exposure to the physical risks of climate change. For information, please see

For our systematic equities, we developed a model which looks at the net impact companies have on the environment and society and capitalises externalities.

10.5. Describe how you apply sensitivity and/or scenario analysis to security valuations.

We believe climate change will be a defining driver of the global economy, society and financial markets over coming years, decades and beyond. Therefore much of our scenario work has centred around this risk.   

Our Climate Progress Dashboard monitors 12 indicators to show the progress governments and industries around the world are making towards decarbonising the global economy. It compares projections made by international organisations to estimate the temperature change implied by the progress in each area. Together, they suggest we are heading for a rise closer to 4° than the 2° commitment global leaders made in 2015. For more information see:

We have examined the extent to which company profits and investor returns could be at risk from tougher climate policies and higher carbon prices. Our Carbon Value at Risk model shows almost half of listed global companies would face a rise or fall of more than 20% in earnings if carbon prices rose to $100 a tonne (see: Our forecast of $100 a tonne is in line with where carbon prices have to rise over the medium term to limit global warming to 2° according to our dashboard, but this can be flexed for different scenarios.   

10.6. Additional information. [OPTIONAL]

There is no set tool for integrating ESG considerations into valuations, just as there are various methods of applying a valuation to a company. Analysts are free to explore whichever tool works best for the type of analysis they are undertaking. For example, it maybe that a cost of carbon will affect earnings and so is reflected in investment forecasts or we may adjust our future margin assumptions to reflect living wages.  However, for some ESG factors that are difficult to put a number on, such as board diversity relevant issues may be reflected in valuation tools such as discount rates.