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Wellington Management Company LLP

PRI reporting framework 2020

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ESG incorporation in actively managed listed equities

Implementation processes

LEI 01. Percentage of each incorporation strategy

01.1. Indicate which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities; and the breakdown of your actively managed listed equities by strategy or combination of strategies.

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
67 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
32 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
1 %
Total actively managed listed equities 196%

01.2. Describe your organisation’s approach to ESG incorporation and the reasons for choosing the particular strategy/strategies.

At Wellington Management, we consider environmental, social, and corporate governance (ESG) criteria as one set of factors among many that should be weighed appropriately to inform investment decision making. We view ESG analysis and integration as both return enhancing and risk mitigating. To help our portfolio managers and investment teams better assess risks and opportunities in client portfolios, we have integrated the analysis of ESG factors into our investment and risk-management processes firmwide.

In addition to our ESG integration process, we serve as the investment manager of various screened investment portfolios, where we invest in, or exclude certain types of companies based on pre-agreed guidelines and criteria from the client.  These client SRI issues extend across a broad range of social concerns including tobacco, gambling, alcohol, weapons, pornography, labor issues, as well as specific countries like the Sudan. Wellington also manages a variety of equity and fixed income strategies that have explicit sustainability objectives. This includes impact investing strategies, in addition to strategies focused on deep ESG integration and engagement. Many of our impact approaches align with the UN Sustainable Development Goals and also produce Key Performance Indicator (KPI) reporting. 

01.3. If assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]

Wellington Management sub-advises two of Domini Impact Investment's mutual fund offerings in the U.S. market, one equity and one fixed income. The Domini Impact Bond Fund is a domestic, intermediate term fixed income fund, with a focus on community economic development. The objective is to create a fixed income vehicle aligned with the goals of seeking universal human dignity and environmental sustainability, while also achieving competitive financial returns. To that end, potential investments are screened by Domini for approval based on Domini's own ESG criteria. While potential investments may be screened out due to negative factors, the approach also seeks to proactively invest in issuers that are having a positive impact on society.


LEI 02. Type of ESG information used in investment decision

02.1. Indicate what ESG information you use in your ESG incorporation strategies and who provides this information.

Type of ESG information

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 

Indicate who provides this information 

02.2. Indicate whether you incentivise brokers to provide ESG research.

02.3. Describe how you incentivise brokers.

Semi-annually, all investment professionals are asked to evaluate the usefulness of externally provided research using our Research Services Voting Platform. This is a rigorous bottom-up process that quantifies the usage and relative impact of each service. The feedback collected from this process is used to manage our broker/dealer relationships and help ensure that our investment personnel continue to receive this support, which benefits our client portfolios. This platform also allows investors to certify that all research services consumed meet our eligibility criteria broadly.

02.4. Additional information. [Optional]


LEI 03. Information from engagement and/or voting used in investment decision-making

03.1. Indicate whether your organisation has a process through which information derived from ESG engagement and/or (proxy) voting activities is made available for use in investment decision-making.

03.2. Additional information. [Optional]

Since 2017, the ESG Research team has used an engagement tracking tool to monitor progress of portfolio companies towards engagement objectives. This tool is used to systematically generate notes and summary takeaways from the ESG engagement. The email is immediately sent to all holders (equity and debt) and interested investors of the company, as well as to the central research collaboration platform for future reference.

While the ESG Research team provides proxy voting recommendations, the portfolio manager for the client account has the authority to decide the final vote, absent a material conflict of interest. This discussion about whether to vote against management includes all equity holders and is stored in the central research collaboration platform for future reference. We believe this is the best way to ensure consistency between ESG philosophy and vote execution.


(A) Implementation: Screening

LEI 04. Types of screening applied

04.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

In addition to our ESG integration process, we serve as the investment manager of various screened investment portfolios, where we invest in, or exclude certain types of companies based on pre-agreed guidelines and criteria from the client.

Screened by

Description

In addition to our ESG integration process, we serve as the investment manager of various screened investment portfolios, where we invest in, or exclude certain types of companies based on pre-agreed guidelines and criteria from the client.

04.2. Describe how you notify clients and/or beneficiaries when changes are made to your screening criteria.

We serve as the investment manager of various screened investment portfolios, where we invest in, or exclude certain types of companies based on pre-agreed guidelines and criteria from the client.


LEI 05. Processes to ensure screening is based on robust analysis

05.1. Indicate which processes your organisation uses to ensure ESG screening is based on robust analysis.

05.3. Indicate how frequently third party ESG ratings are updated for screening purposes.

05.5. Additional information. [Optional]


LEI 06. Processes to ensure fund criteria are not breached

06.1. Indicate which processes your organisation uses to ensure fund criteria are not breached.

06.2. If breaches of fund screening criteria are identified, describe the process followed to correct those breaches.

Investment decisions, portfolio construction and related activities, including trading and trade reconciliation, are inherently complex processes. As a result, mistakes and imperfections occur, some of which cause losses in our clients’ portfolios. However, not all mistakes and imperfections are compensable errors. We generally consider something a compensable error when we determine that our actions did not meet the applicable standard of care for managing a client’s assets and that our client suffered a loss as a result. Our Error Resolution Council, a cross functional group of senior professionals, reviews the facts and circumstances underlying potential errors on a case-by-case basis in order to assess whether the events constitute a compensable error. In conducting the assessment, the Error Resolution Council often consults other relevant personnel, including the portfolio manager(s) for the client account and the client’s relationship manager.

If we determine that we have made an error in a client’s account, we will typically compensate the client for the direct monetary losses (if any) the error caused in the client’s account. Unless prohibited by applicable regulation or a specific agreement with the client, we net the client’s gains and losses from the error or a series of related errors with the same root cause and compensate the client for the net loss. We typically notify clients as soon as practical of any errors that violate client guidelines, or that result in a material loss in the client’s account. However, we generally do not notify clients about an event when we have determined that it does not constitute a compensable error.

06.3. Additional information. [Optional]

Our policies and procedures with respect to investment guidelines are defined in the firm’s Portfolio Guideline Monitoring Policy and Procedures. In its role as investment adviser or subadviser, the firm has responsibility for managing client portfolios in accordance with clients’ identified objectives, guidelines, and restrictions. We employ a variety of procedures and controls that are designed to assist investment professionals in complying with client guidelines. Primary responsibility for compliance with each client’s investment objectives and restrictions rests with the Portfolio Management Teams. We provide the Portfolio Management Teams with the appropriate professional support and infrastructure to ensure that they have the resources reasonably necessary to meet client guidelines.

Fidessa’s Sentinel contains the rules applied to each account that are tested by our compliance screening processes. Sentinel compliance screening can be performed on a pre-trade basis, in an overnight post-trade process, or both. Our proprietary investment and trading systems are linked to compliance screens, which enable most investment restrictions to be tested at the time an order is entered. Pre-trade overrides are reviewed throughout the day by Guideline Monitoring. Compliance tests are also applied to account holdings overnight, with results reviewed the next morning. Users throughout the firm have read-only access to the rules managed and maintained by Guideline Monitoring.

In addition, Wellington Management annually engages PwC to perform the following third-party control examinations, which include a review of our guideline monitioring policies and procedures. These reports are made available to clients upon request.

  • Report on Wellington Management’s Description of Its Investment Adviser System and on the Suitability of the Design and Operating Effectiveness of Controls prepared pursuant to Attestation Standard AT-C section 320 and International Standard on Assurance Engagements 3402 (SOC 1 Report).
  • Report on Management’s Assertion for Specified Compliance Controls (Compliance Controls Report).

 


(B) Implementation: Thematic

LEI 07. Types of sustainability thematic funds/mandates

07.1. Indicate the type of sustainability thematic funds or mandates your organisation manages.

07.2. Describe your organisation’s processes relating to sustainability themed funds. [Optional]

Wellington manages a variety of equity strategies that have explicit sustainability objectives. This includes impact investing strategies, in addition to strategies focused on deep ESG integration and engagement. Many of our impact approaches align with the UN Sustainable Development Goals and also produce Key Performance Indicator (KPI) reporting. Please see below for brief descriptions of our sustainable investing approaches, including those that are funded, in incubation, or under development.  

Wellington Sustainable Investment Platform

  • Climate Strategy: a global equity portfolio designed to help address carbon and sustainability under-investment in a targeted approach that delivers both environmental and financial returns on capital. This strategy is focused on climate change mitigation and adaptation through five broad sustainability categories: low carbon electricity, energy efficiency, water and resource management, low carbon transport, and resilient infrastructure.
  • Emerging Market Development: an emerging markets equity strategy that invests in companies taking advantage of social pressure and policy initiatives supporting conscious consumption of energy. This strategy is focused on four structural changes happening as a result of economic development: enhanced productivity, inclusiveness, improving living standards, and sustainability.
  • Global Impact: a global equity portfolio that invests in innovative companies whose core business addresses the world’s major social and environmental challenges with a measurable impact. This is determined by Wellington’s proprietary bottom-up global fundamental research.  This strategy is focused on 11 impact themes, which can be summarized into three categories: life essentials, human empowerment, and environment.
  • Global Stewards: concentrated, high active share, global large cap equity approach that seeks to identify best-in-class companies that are deemed attractive on a 10-year fundamental perspective, able to sustain above-industry returns on capital, and demonstrate superior stewardship qualities. We are deliberate with our portfolio construction, emphasizing stock selection to be the primary source of alpha while minimizing the costs of active management through low turnover and thoughtful trading.
  • Low Carbon Emerging Markets Systematic Equity: an emerging markets equity portfolio managed by Wellington’s Quantitative Investment Group whose objective is to maximize net-of-cost alpha relative to risk while conforming to a specific set of carbon-intensity constraints.
  • Advancement of Women: a global equity portfolio designed to invest in high-quality companies that value the inclusion and promotion of women. As part of the fundamental research process, the investment team focuses on female representation at the board and senior management levels as a proxy for companies’ commitment to diversity. This strategy uses engagement to assess whether a company’s commitment to diversity is genuine and to encourage goal-setting, transparency in reporting, and improvement toward gender parity.
  • Broader Perspectives: a global large cap equity approach that takes an alpha-first mindset to ESG integration given that an ESG perspective can yield differentiated conclusions on management behavior and business practices. The portfolio reflects a combination of ESG leaders, as well as businesses we believe are showing improvements over time.

Denotes a strategy that is currently in incubation

The firm also serves as the investment manager of various screened investment equity portfolios, where we invest in, or exclude, certain types of companies based on pre-agreed ESG guidelines and criteria from the client.

Wellington Management sub-advises two of Domini Impact Investment's mutual fund offerings in the U.S. market, one of which is an equity strategy.


(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the proportion of actively managed listed equity portfolios where E, S and G factors are systematically researched as part of your investment analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]


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 robust analysis.

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.

09.6. Additional information. [Optional]


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

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

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

Our ESG Research Team helps portfolio managers and analysts gather deeper intelligence on ESG topics and integrate these considerations into the investment process. Our ESG team works closely with investment teams to incorporate our research into the investment process - conducting in-depth portfolio reviews with investment teams to discuss holdings with the greatest ESG risks and strengths.

Portfolio managers develop their own investment approaches, whereby ESG considerations are integrated into their research and decision-making processes to the extent that they believe these issues may affect the long-term success of a company and investment returns. This can manifest within the investment thesis or portfolio weighting for a security, as well as within proxy voting and company engagement efforts.

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

In accordance with our ESG integration philosophy, we believe that, all else equal, the quality of companies' performance on key ESG issues increases the probability that they will be able to sustainably create value over time. One way to reflect this higher probability is to apply a valuation premium to these companies relative to their peers or a valuation discount to companies whose ESG risks are underappreciated by the market.

The physical climate change research with Woods Hole Research Center (WHRC) is also leading investors to consider adjusting their growth expectations for markets and companies where we believe that certain climate variables will have a systemic impact on economic growth. Companies with exposure to acute climate events should see this reflected in assumptions about volatility of earnings. As part of these efforts, the Climate Research team is developing a DCF tool that incorporates probability of an event, and then the impact of that event on the terminal value.

10.6. Additional information. [OPTIONAL]


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