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Wellington Management Company LLP

PRI reporting framework 2020

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You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income » (A) Implementation: Screening

(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.


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