This report shows public data only. Is this your organisation? If so, login here to view your full report.

Wellington Management Company LLP

PRI reporting framework 2020

Export Public Responses
Pdf-img

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
0 Screening alone
0 Thematic alone
80 Integration alone
20 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (financial)
0 Screening alone
0 Thematic alone
85 Integration alone
15 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (non-financial)
0 Screening alone
0 Thematic alone
80 Integration alone
15 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
5 All three strategies combined
0 No incorporation strategies applied
100%
Securitised
0 Screening alone
0 Thematic alone
80 Integration alone
20 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.

Each of our portfolio managers and investment teams develops their own investment approach 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 itself within the investment thesis or portfolio weighting for a particular security, as well as within our proxy voting and company engagement efforts.

01.3. Additional information [Optional].

At Wellington Management, fixed income portfolios are managed by independent portfolio management teams, including dedicated teams specializing in various sectors of the market. Our firm does not have a central investment committee. Each of the investment styles offered by Wellington Management is managed by an individual Portfolio Manager or team of managers, by a group of research analysts, or by a combination of these structures. Each portfolio management team has broad investment discretion within the pre-defined parameters of its investment approach and each has access to the full research resources of the firm.


While the investment process and philosophy may differ by fixed income approach, portfolio management teams generally use a fundamental investment process with quantitative rigor. Certain parts of the process may have a quantitative element to help identify market signals, which might inform fundamentally-driven processes for making buy and sell decisions.

Note that the AUM for Corporate (Non-Financial) includes a figure for all three incorporation strategies. This figure reflects the firm's Global Impact Bond strategy, which is a multi-sector strategy that allocates across corporate (financial and non-financial) as well as securitised and supranational issuers.  Given the structure of the form, we've included all assets in this single field.


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)
Corporate (non-financial)
Securitised
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  

Indicate who provides this information  

Indicate who provides this information  

Indicate who provides this information  

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

Our ESG Research Team uses data from a number of different sources in order to evaluate companies’ level of disclosure and reporting on ESG indicators. As inputs to our approach, we use ESG research from Morgan Stanley, Credit Suisse, CLSA, Goldman Sachs Sustain, UBS, Bank of America Merrill Lynch, Société Générale, MSCI, Bloomberg, ISS, Sustainalytics, Glass Lewis, and FactSet amongst others. Data from select sources feeds a proprietary algorithm that we have developed in order to provide internal ESG ratings on more than 7,000 companies. We are continually evaluating new data providers to improve the coverage and quality of inputs into our ESG analysis. These ratings and external research providers serve as a starting point for further research and engagement by the ESG Research team.

For our government bond portfolios, we have resources available to help investors assess the ESG risks or opportunities that would impact the long term economic growth and sustainable development of the respective countries. For example, ESG issues relative to sovereign bonds can include political stability, social inequality, investment in education, and climate change management.

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.

          Forums including our daily Morning Meeting and investor team meetings facilitate sharing and debating ESG insights.
        

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)
Corporate (non-financial)
Securitised
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

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

In addition to our ESG integration, we serve as investment manager for various screened investment portfolios, where we invest in, or exclude certain types of companies or countries based on pre-agreed guidelines and criteria from the client. Approximately 24% of FI assets under management are subject to an SRI screen.

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

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

E – Through our physical risk research with Woods Hole Research Center, we map acute and chronic climate risks globally. In particular, we have identified risks of heat, drought, and water scarcity in the Middle East region, both in absolute terms and in terms of change relative to its own historical experience. In the context of urbanization and population growth in the region, we expect these to stress scarce water resources, adversely affecting livability in the region and potentially leading to conflict and mass migration. Although the worst chronic climate events may not be fully realized within the emerging market debt portfolio’s investment horizon, the research left the portfolio managers less willing to take long duration exposure in the region. As a result, the Emerging Markets Debt team trimmed exposure to long duration bonds of several Middle East countries. Valuation also played a role in the investment team’s decision framework.

S – We do not impose any firm-wide portfolio restrictions on the basis of controversial business activities but we do implement such restrictions at the request of our clients. For example, in several of the emerging markets debt portfolios we manage, we have set up restrictions not to contribute to the financing of cluster munitions or cluster bombs. This is an outright exclusion and does not depend upon any revenue threshold.

G –  Governance quality is a critically important factor in assessing both the probability of default and the relative value of government debt. Governance is a key component of the EM team’s country rating quantitative model that is used in portfolio construction. The governance score includes political stability, quality of policies, and strength of institutions; we are exploring future enhancements to this score by adding additional considerations such as corruption and tax avoidance measures. The governance score is a component of the country dashboard so that we can evaluate economic health, credit quality, ESG scores, and valuations by country on one report, for use in the day-to-day management of portfolios and the assessment of all sovereign issuers.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

We do not impose any firm-wide portfolio restrictions on the basis of controversial business activities but we do implement such restrictions at the request of our clients. For example, in several of the securitized portfolios we manage:

E— Certain strategies have implemented their own screens to disqualify securities from the investable universe. This includes our Global Impact Bond strategy, which prohibits investments in issues and issues with involvement in coal, oil, and nuclear power, among other social restrictions.

S – We have set up restrictions not to invest in securities that receive more than 10% or more than 30% of their revenues from gambling. Clients can adjust their preferred revenue threshold upon request. We have also set up restrictions not to invest in securities that are tied to tobacco production and manufacturing. This can take the form of an outright exclusion or a revenue-based exclusion; if the latter, clients can adjust their preferred revenue threshold upon request.

G – Certain strategies have implemented their own screens to disqualify securities from the investable universe. For example, our municipal bond strategy considers governance of the issuing entity in a local context when considering potential negative impacts on credits. Examples of qualitative screening criteria that may lead to reduced portfolio weightings or sales include composition of the board, evidence of undue political influence, and history of ethical scandals.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

We do not impose any firm-wide portfolio restrictions on the basis of controversial business activities but we do implement such restrictions at the request of our clients. For example, in several of the corporate (non-financial) bond portfolios we manage:

E – We have set up restrictions not to invest in securities issued by companies with significant environmental violations. This is an outright exclusion and does not depend upon any revenue threshold.

S – We have set up restrictions not to invest in securities that are tied to tobacco production and manufacturing. This can take the form of an outright exclusion or a revenue-based exclusion; if the latter, clients can adjust their preferred revenue threshold upon request.

G – Certain strategies have implemented their own screens to disqualify securities from the investable universe. For example, our global high yield team considers confidence in management and boards to be central considerations. Examples of screening criteria that may lead to reduced portfolio weightings include evidence of excessive equity awards to executives, entrenched boards, and related party dealings.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

We do not impose any firm-wide portfolio restrictions on the basis of controversial business activities but we do implement such restrictions at the request of our clients. For example, in several of the corporate (financial) bond portfolios we manage:

E— We have set up restrictions not to invest in securities that are tied to thermal coal production. This can take the form of an outright exclusion, revenue-based exclusion, or generation-based exclusion; if the latter, clients can adjust their preferred revenue or generation threshold upon request.

S – We have set up restrictions not to invest in the financing arms of sin-related businesses (e.g. gambling, tobacco, alcohol). Clients can adjust their preferred revenue threshold upon request.

G – Certain strategies have implemented their own screens to disqualify securities from the investable universe. For example, our investment grade credit analysts covering financials consider management quality and trust as a regular part of their frameworks. Examples of qualitative screening criteria, gleaned through direct engagement, that may lead to more positive or negative recommendations include whether or not the CEO can demonstrate technical knowledge (or defers to other members of management) and consistency of messaging over time.

05.2. Additional information.

Restricted lists are typically sourced from our primary screening vendor, MSCI ESG, or directly from the client at the inception of the mandate. Once agreed upon, this list or definitive rule is then coded into our trading systems. Wellington's guidelines monitoring team is responsible for oversight of this process.


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]

Analysis is performed to ensure that issuers meet screening criteria.

Each client account’s guidelines are input into the monitoring systems by Guideline Monitoring. Information is categorized and rules are assigned based on the individual restrictions contained in the guidelines. Our compliance system has the flexibility to handle many types of restrictions; however, not all client restrictions are capable of automated monitoring. To verify that guidelines are coded completely and accurately within Sentinel, an additional review occurs. A secondary review is performed by a guideline monitoring analyst or manager to verify that investment restrictions set out in the guidelines have been accurately reflected in Sentinel.

We ensure that data used for the screening criteria is updated at least once a year.

The Guideline Monitoring team meets with our third-party ESG vendor on a quarterly basis to ensure the accuracy and the equality of the data being provided.

Automated IT systems prevent our portfolio managers from investing in excluded issuers or bonds that do not meet screening criteria.

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. Pre-trade screening takes place at the time the order is first entered into Wellington Management’s systems. For each restriction that returns a result on a pre-trade basis, the user receives a message detailing the issue and requiring the submitter to either alter the intended order or make a specific override decision. Override decisions for compliance issues are documented in the system and reviewed by Guideline Monitoring throughout the day. In the event that an exception is detected, the submitter may change the terms of the transaction and reenter the trade or may override the exception warning. If the override feature is used, the submitter must indicate a reason for that override. Guideline Monitoring reviews all portfolio management pre-trade overrides. Any issues are escalated accordingly.

Audits of fund holdings are undertaken yearly by internal audit or compliance functions.

Overnight screening is performed against each client portfolio’s end-of-day holdings. Results of the batch screening process are accessible to Portfolio Management teams and relationship management via the Intranet and are also reported out by Guideline Monitoring. Guideline Monitoring monitors results across all client portfolios and assists in the resolution of any issues identified by the screening process.

The purpose of the SOC 1 Report and PwC engagement is to conduct an examination of internal controls related to the processing of investment transactions as well as information technology controls. PwC’s examination includes procedures to obtain reasonable assurance that the controls included in the description are suitably designed to achieve the specified control objectives if those controls were complied with satisfactorily, and that the relevant aspects of such controls had been in place. PwC applies tests to specified control activities to obtain evidence of their effectiveness in meeting the related control objectives.


(B) Implementation: Thematic

FI 07. Thematic investing - overview (Private)


FI 08. Thematic investing - themed bond processes

08.1. Indicate whether you encourage transparency and disclosure relating to the issuance of themed bonds as per the Green Bonds Principles, Social Bond Principles, or Sustainability Bond Guidelines..

08.2. Describe the actions you take when issuers do not disburse bond proceeds as described in the offering documents.

For every issuer held in the portfolio we produce a key performance indicator (KPI) which seeks to quantify the level of impact that the issuer is having on society or on the environment. For example, for a green bond focused on renewable energy generation we measure its impact based on metric tons of CO2 emissions avoided. For a housing bond, we measure the percentage of the cost burdened population in a given area that was provided with affordable housing. For a bond issued by a recycling company, we measure the amount of CO2 and methane emissions avoided by waste not being sent to landfills. We have a dedicated research associate on the team who is focused exclusively on researching and measuring KPIs. In this process, the research associate references industry filings, green bond reports, sustainability reports, academic research, and also engages directly with issuers held in our portfolio. If we were to find that an issuer no longer meets our impact criteria and is not generating a measurable impact, then we would sell the position from the portfolio.

08.3. Additional information. [Optional]


FI 09. Thematic investing - assessing impact

09.1. Indicate how you assess the environmental or social impact of your thematic investments.

09.2. Additional information. [Optional]

For every issuer held in the portfolio we produce a key performance indicator (KPI) which seeks to quantify the level of impact that the issuer is having on society or on the environment. For example, for a green bond focused on renewable energy generation we measure its impact based on metric tons of CO2 emissions avoided. For a housing bond, we measure the percentage of the cost burdened population in a given area that was provided with affordable housing. For a bond issued by a recycling company, we measure the amount of CO2 and methane emissions avoided by waste not being sent to landfills. We have a dedicated research associate on the team who is focused exclusively on researching and measuring KPIs. In this process, the research associate references industry filings, green bond reports, sustainability reports, academic research, and also engages directly with issuers held in our portfolio. If we were to find that an issuer no longer meets our impact criteria and is not generating a measureable impact, then we would sell the position from the portfolio.


(C) Implementation: Integration

FI 10. Integration overview

10.1. Describe your approach to integrating ESG into traditional financial analysis.

Wellington Management considers environmental, social, and corporate governance (ESG) criteria as one set of factors among many that should be weighed appropriately to inform investment decision making. To help our portfolio managers and investment teams better assess risks and opportunities in client portfolios, Wellington has integrated the analysis of ESG factors into our investment and risk-management processes firmwide. To aid in the integration of ESG analysis, our specialized in-house ESG team manages several investor tools, including an innovative portfolio review process, ESG ratings, and reference guides that examine ESG factors by sector and country. Our ESG team also works closely with our portfolio managers and analysts to engage with company managements each year.

10.2. Describe how your ESG integration approach is adapted to each of the different types of fixed income you invest in.

SSA

For government bond portfolios, we have resources available to help investors assess the ESG risks or opportunities that would impact the long-term economic growth and sustainable development of the respective countries. For example, ESG issues relative to sovereign bonds can include political stability, corruption, social inequality, investment in education, and climate change management.

In addition, portfolio managers may develop their own custom approach to ESG integration. For example, we employ a proprietary country scoring model in our Emerging Markets Debt approach that enables us to quantify the sovereign credit outlook for the 60 emerging market countries that we cover and rank them according to their credit strength from high to low. The primary aim of the model is to provide greater rigor to our country research and to highlight potential vulnerabilities in individual countries. The resulting score for each country is adjusted to reflect important qualitative factors such as political stability, which then facilitates cross-country comparisons. The country scoring model is one element of the research process, and as such the Portfolio Manager does not have to override the output of the model.

The scoring process begins with a top-down quantitative assessment of macroeconomic and debt sustainability conditions using a proprietary model that assigns a numerical score to each emerging markets country. The specific inputs and their weights in the model are proprietary, but they include what we have determined to be the key drivers of credit spreads, such as a country's economic performance and debt burden, the government's fiscal position, and the country's quality of governance. Overall, the model employs 10 factors that we found to be the most valuable in determining the credit strength of individual countries.

In emerging markets, however, quantitative measures alone cannot tell the whole story. Rather, the quantitative component of the analysis ensures that every country is reviewed with the same disciplined framework. Our team of experienced sovereign analysts then adapts the raw quantitative score to reflect those less quantifiable factors that may have a meaningful impact on credit spreads, such as political risk, central bank independence, and structural reform progress. Usually, the quantitative and fundamental credit scores are similar, however, in some cases; the politics are such that the final score is meaningfully different than the raw credit score, reflecting a greater credit risk than the numbers alone might imply.

The core of the country scoring model has remained consistent since the inception of our emerging markets debt approach in 1999. We do recalibrate the model every few years, however, in order to refine the specific factors and improve the effectiveness of the model.

Historically, research has focused on a sovereign’s ability to pay its debts. However, ability to pay is no longer the only consideration for investors; they also need to gauge the willingness of sovereigns to make their bond payments. We use a number of factors to gauge the ability and willingness of governments to pay their debts. Inputs include contingent liabilities of the state or metrics such as total debt to exports or revenue to debt, among others. However, the issue of willingness to pay necessitates the inclusion of politics into one’s risk assessments, as it can be a major factor in determining how bond markets will behave.

To assess willingness to pay, we consider the World Bank’s Government Effectiveness index in our bond rating analysis. Research shows that sovereigns with strong governance scores tend to be awarded high credit ratings, while countries regarded as having corruption problems tend to have lower credit ratings.

Inputs that can be used to assess the ability to pay include financial and economic ratios as the ones mentioned above. However, to assess the ability to pay, we also look at social factors, such as the World Bank’s Ease of Doing Business index, which indicates how well the regulatory framework in a country supports the setting up and running of businesses. The more-business friendly a country is, the higher tends to be the credit rating. A business-friendly environment is also consistent with higher tax revenues for the state that positively affect the ability to pay.

Corporate (financial)

Our approach to corporates taps into the issuer research conducted by our central ESG Research team.
We provide central ESG integration resources to portfolio teams firm-wide, and we approach ESG integration as a tailored process that can be applied to all asset classes. We do this by analyzing ESG risks and opportunities in our clients' portfolios, engaging with companies in which we invest to discuss material ESG issues, and voting proxies on our clients' behalf to support decisions that we believe will maximize the long-term value of securities. Wellington Management's culture is built to support collaboration and our open-architecture "community of investors" naturally lends itself to the integration of ESG considerations.

Our ESG Research team, part of the central Investment Research function, helps our portfolio managers and analysts gather deeper intelligence on ESG topics and integrate these considerations into the investment process. We believe that a holistic understanding of how companies deploy capital - financial, physical, and human - is helpful in framing an investment thesis, and examining ESG issues gives us a more complete picture. Our ESG analysts are responsible for conducting in-depth analysis of the ESG factors most relevant to the sectors within their coverage area. They are also responsible for coordinating the ESG engagement strategies for the companies in their sectors with equity and fixed income analysts and portfolio managers. Our ESG team works closely with investment teams to incorporate our research into the investment process - regularly conducting in-depth portfolio reviews with investment teams to discuss holdings with the greatest ESG risks and strengths.

Each of our portfolio managers develops their own investment approach 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 itself within the investment thesis or portfolio weighting for a particular security, as well as within our proxy voting and company engagement efforts.

Corporate (non-financial)

Our approach to corporates taps into the issuer research conducted by our central ESG Research team.
We provide central ESG integration resources to portfolio teams firm-wide, and we approach ESG integration as a tailored process that can be applied to all asset classes. We do this by analyzing ESG risks and opportunities in our clients' portfolios, engaging with companies in which we invest to discuss material ESG issues, and voting proxies on our clients' behalf to support decisions that we believe will maximize the long-term value of securities. Wellington Management's culture is built to support collaboration and our open-architecture "community of investors" naturally lends itself to the integration of ESG considerations.

Our ESG Research team, part of the central Investment Research function, helps our portfolio managers and analysts gather deeper intelligence on ESG topics and integrate these considerations into the investment process. We believe that a holistic understanding of how companies deploy capital - financial, physical, and human - is helpful in framing an investment thesis, and examining ESG issues gives us a more complete picture. Our ESG analysts are responsible for conducting in-depth analysis of the ESG factors most relevant to the sectors within their coverage area. They are also responsible for coordinating the ESG engagement strategies for the companies in their sectors with equity and fixed income analysts and portfolio managers. Our ESG team works closely with investment teams to incorporate our research into the investment process - regularly conducting in-depth portfolio reviews with investment teams to discuss holdings with the greatest ESG risks and strengths.

Each of our portfolio managers develops their own investment approach 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 itself within the investment thesis or portfolio weighting for a particular security, as well as within our proxy voting and company engagement efforts.

Securitised

Our approach to securitised debt taps into the issuer research conducted by our central ESG Research team.
We provide central ESG integration resources to portfolio teams firm-wide, and we approach ESG integration as a tailored process that can be applied to all asset classes. We do this by analyzing ESG risks and opportunities in our clients' portfolios, engaging with companies in which we invest to discuss material ESG issues, and voting proxies on our clients' behalf to support decisions that we believe will maximize the long-term value of securities. Wellington Management's culture is built to support collaboration and our open-architecture "community of investors" naturally lends itself to the integration of ESG considerations. During 2017, the ESG team hired an experienced analyst from Wellington's municipal credit analysis team, which has greatly increased the team's focus on fixed income and securitized assets specifically. 

Each of our portfolio managers develops their own investment approach 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 itself within the investment thesis or portfolio weighting for a particular security, as well as within our proxy voting and company engagement efforts.

In our assessment of securitized issuers, in particular mortgages and commercial mortgages, we pay particular attention to physical climate related risks given the nature of these fixed assets. 

10.3. Additional information [OPTIONAL]


FI 11. Integration - ESG information in investment processes

11.1. Indicate how ESG information is typically used as part of your investment process.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
ESG analysis is integrated into fundamental analysis
ESG analysis is used to adjust the internal credit assessments of issuers.
ESG analysis is used to adjust forecasted financials and future cash flow estimates.
ESG analysis impacts the ranking of an issuer relative to a chosen peer group.
An issuer`s ESG bond spreads and its relative value versus its sector peers are analysed to find out if all risks are priced in.
The impact of ESG analysis on bonds of an issuer with different durations/maturities are analysed.
Sensitivity analysis and scenario analysis are applied to valuation models to compare the difference between base-case and ESG-integrated security valuation.
ESG analysis is integrated into portfolio weighting decisions.
Companies, sectors, countries and currency and monitored for changes in ESG exposure and for breaches of risk limits.
The ESG profile of portfolios is examined for securities with high ESG risks and assessed relative to the ESG profile of a benchmark.
Other, specify in Additional Information

11.2. Additional information [OPTIONAL]

The application of ESG by credit analysts varies by sector, as each analyst has their own philosophy and process that informs recommendations.


FI 12. Integration - E,S and G issues reviewed

12.1. Indicate the extent to which ESG issues are reviewed in your integration process.

Environment
Social
Governance
SSA

Environmental

Social

Governance

Corporate (financial)

Environmental

Social

Governance

Corporate (non-financial)

Environmental

Social

Governance

Securitised

Environmental

Social

Governance

12.2. Please provide more detail on how you review E, S and/or G factors in your integration process.

SSA

For government bond portfolios, we have resources available to help investors assess the ESG risks or opportunities that would impact the long-term economic growth and sustainable development of the respective countries. For example, ESG issues relative to sovereign bonds can include political stability, corruption, social inequality, investment in education, and climate change management. 

In addition, portfolio managers may develop their own custom approach to ESG integration. For example, we employ a proprietary country scoring model in our Emerging Markets Debt approach that enables us to quantify the sovereign credit outlook for the 60 emerging market countries that we cover and rank them according to their credit strength from high to low. The primary aim of the model is to provide greater rigor to our country research and to highlight potential vulnerabilities in individual countries. The resulting score for each country is adjusted to reflect important qualitative factors such as political stability, which then facilitates cross-country comparisons. The country scoring model is one element of the research process, and as such the Portfolio Manager does not have to override the output of the model.

We employ a proprietary country scoring model that enables us to quantify the sovereign credit outlook for the 60 emerging market countries that we cover and rank them according to their credit strength from high to low. The primary aim of the model is to provide greater rigor to our country research and to highlight potential vulnerabilities in individual countries. The resulting score for each country is adjusted to reflect important qualitative factors such as political stability, which then facilitates cross-country comparisons. The country scoring model is one element of the research process, and as such the Portfolio Manager does not have to override the output of the model.

The scoring process begins with a top-down quantitative assessment of macroeconomic and debt sustainability conditions using a proprietary model that assigns a numerical score to each emerging markets country. The specific inputs and their weights in the model are proprietary, but they include what we have determined to be the key drivers of credit spreads, such as a country’s economic performance and debt burden, the government’s fiscal position, and the country's quality of governance. Overall, the model employs 10 factors that we found to be the most valuable in determining the credit strength of individual countries.

In emerging markets, however, quantitative measures alone cannot tell the whole story. Rather, the quantitative component of the analysis ensures that every country is reviewed with the same disciplined framework. Our team of experienced sovereign analysts then adapts the raw quantitative score to reflect those less quantifiable factors that may have a meaningful impact on credit spreads, such as political risk, central bank independence, and structural reform progress. Usually, the quantitative and fundamental credit scores are similar, however, in some cases; the politics are such that the final score is meaningfully different than the raw credit score, reflecting a greater credit risk than the numbers alone might imply.

The core of the country scoring model has remained consistent since the inception of our emerging markets debt approach in 1999. We do recalibrate the model every few years, however, in order to refine the specific factors and improve the effectiveness of the model.

There has been particular interest and involvement from the Emerging Markets Debt team in the physical climate risk research being conducted with Woods Hole Research Center (WHRC). Given that the sovereign market is geographically concentrated by nature, there is strong alignment in the geographically-based findings of the physical climate risk research. We are building tools for sovereign debt analysts to systematically visualize expected changes in acute and chronic physical climate risks to the countries in which they invest. All else equal, we expect climate vulnerabilities to influence the investment decision between two securities with otherwise similar fundamental characteristics.

Corporate (financial)

We provide central ESG integration resources to portfolio teams firm-wide, and we approach ESG integration as a tailored process that can be applied to all asset classes. We do this by analyzing ESG risks and opportunities in our clients' portfolios and engaging with companies in which we invest to discuss material ESG issues. Wellington Management's culture is built to support collaboration and our open-architecture "community of investors" naturally lends itself to the integration of ESG considerations. 

Our ESG Research team, part of the central Investment Research function, helps our portfolio managers and analysts gather deeper intelligence on ESG topics and integrate these considerations into the investment process. We believe that a holistic understanding of how companies deploy capital - financial, physical, and human - is helpful in framing an investment thesis, and examining ESG issues gives us a more complete picture. Our ESG analysts are responsible for conducting in-depth analysis of the ESG factors most relevant to the sectors within their coverage area. They are also responsible for coordinating the ESG engagement strategies for the companies in their sectors with equity and fixed income analysts and portfolio managers. Our ESG team works closely with investment teams to incorporate our research into the investment process - regularly conducting in-depth portfolio reviews with investment teams to discuss holdings with the greatest ESG risks and strengths.

Each of our portfolio managers develops their own investment approach 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 itself within the investment thesis or portfolio weighting for a particular security, as well as within company engagement efforts.

The ESG Research team has been incorporated into several key elements of the credit research process and information flow, facilitating more real-time integration. For example, ESG analysts are included in emails announcing new issues. Credit analysts provide their opinion on the new issue for interested portfolio managers, and ESG analysts can add material takeaways from recent research and engagement. Weekly corporate credit meetings are open to others in Investment Research, including ESG analysts. This provides another forum for ESG issues to be discussed at the security level.

Our Climate Research team conducts climate portfolio reviews to assess the physical climate risk of the holdings we own on behalf of clients.  This process allows portfolio managers to make better informed investment decisions and facilitates more robust engagement on physical climate risk issues.  In addition, we have reviewed the carbon footprint of each of our representative accounts.   Portfolio managers can use this to assess their portfolio’s footprint and the largest contributors.  This too enables more informed investment decisions.

Corporate (non-financial)

We provide central ESG integration resources to portfolio teams firm-wide, and we approach ESG integration as a tailored process that can be applied to all asset classes. We do this by analyzing ESG risks and opportunities in our clients' portfolios and engaging with companies in which we invest to discuss material ESG issues. Wellington Management's culture is built to support collaboration and our open-architecture "community of investors" naturally lends itself to the integration of ESG considerations. 

Our ESG Research team, part of the central Investment Research function, helps our portfolio managers and analysts gather deeper intelligence on ESG topics and integrate these considerations into the investment process. We believe that a holistic understanding of how companies deploy capital - financial, physical, and human - is helpful in framing an investment thesis, and examining ESG issues gives us a more complete picture. Our ESG analysts are responsible for conducting in-depth analysis of the ESG factors most relevant to the sectors within their coverage area. They are also responsible for coordinating the ESG engagement strategies for the companies in their sectors with equity and fixed income analysts and portfolio managers. Our ESG team works closely with investment teams to incorporate our research into the investment process - regularly conducting in-depth portfolio reviews with investment teams to discuss holdings with the greatest ESG risks and strengths.

Each of our portfolio managers develops their own investment approach 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 itself within the investment thesis or portfolio weighting for a particular security, as well as within company engagement efforts.

The ESG Research team has been incorporated into several key elements of the credit research process and information flow, facilitating more real-time integration. For example, ESG analysts are included in emails announcing new issues. Credit analysts provide their opinion on the new issue for interested portfolio managers, and ESG analysts can add material takeaways from recent research and engagement. Weekly corporate credit meetings are open to others in Investment Research, including ESG analysts. This provides another forum for ESG issues to be discussed at the security level.

Our Climate Research team conducts climate portfolio reviews to assess the physical climate risk of the holdings we own on behalf of clients.  This involves an analysis of company disclosure, and a comparison to our climate research findings, to determine the materiality of a company’s climate risk and current management of climate exposure. This process allows portfolio managers to make better informed investment decisions and facilitates more robust engagement on physical climate risk issues.  In addition, we have reviewed the carbon footprint of each of our representative accounts.   Portfolio managers can use this to assess their portfolio’s footprint and the largest contributors.  This too enables more informed investment decisions.

Securitised

In 2017, the ESG team hired an experienced analyst from Wellington's municipal credit analysis team, which has greatly increased the team's focus on fixed income and securitized assets specifically.

Each of our portfolio managers develops their own investment approach 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 itself within the investment thesis or portfolio weighting for a particular security.

There has been particular interest and involvement from the securitized teams in the physical climate risk research being conducted with Woods Hole Research Center (WHRC). This is driven by a number of factors, including the longer holding period and lower liquidity of certain holdings. Given that some segments of the securitized market are geographically concentrated, there is strong alignment in the geographically-based findings of the physical climate risk research as well.  We are building tools for investors to systematically map securitized holdings overlaid onto expected changes in acute and chronic physical climate risks. All else equal, we expect climate vulnerabilities to influence the investment decision between two securities with otherwise similar fundamental characteristics.

12.3. Additional information.[OPTIONAL]


Top