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Wellington Management Company LLP

PRI reporting framework 2020

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Objectives and strategies

SG 05. RI goals and objectives

05.1. Indicate if and how frequently your organisation sets and reviews objectives for its responsible investment activities.

05.2. Additional information. [Optional]

The ESG Research team sets out annual engagement priorities in the ESG segment of the firm’s annual Investment Outlook. This outlook discusses high-level themes that we believe apply across multiple sectors and geographies. However, each ESG analyst has his/her own sector coverage and is responsible for his/her own research agenda within each sector. This research agenda is determined in collaboration with counterparts in equity and credit research as well as global portfolio managers. The research objectives and areas of focus are subject to change more regularly based upon findings from engagement, iterative dialogue with counterparts, or other material events in the sector that warrant further research.


SG 06. Main goals/objectives this year

06.1. List the main responsible investment objectives that your organisation set for the reporting year.

Responsible investment processes

Key performance indicator

          Investor engagement (number of portfolio teams and frequency who request portfolio reviews); Portfolio implications (buy/sell) where ESG issues informed the decision
        

Progress achieved

Ongoing interactions between the centralized ESG team and portfolio managers related to company engagement, proxy voting, and portfolio reviews are all opportunities to bring ESG issues and trends to the attention of investors and educate them about evolving best practices in each sector. Portfolio managers, industry analysts, and ESG analysts all take part in our ongoing dialogue with companies, and we share information from these engagements with one another using a central collaboration platform. Analysts regularly discuss issuers, write investment notes, and make comments in our morning investment meeting.  This collaboration is a form of ongoing “training” within our firm.

Throughout 2019, the Sustainable Investment team developed and delivered an ESG training module for all members of our Investment Products and Fund Strategies (IPFS) group. The IPS Group is responsible for investment integrity for Wellington’s platform of investment strategies. Given its deep understanding of each portfolio management team’s philosophy and process, we believe the IPS Group is well positioned to monitor that portfolio holdings are consistent with the stated investment and stewardship approaches and communicate evidence of ESG integration to clients.

Please refer to the additional comments on this indicator for a continuation of our response.

Key performance indicator

          Frequent research notes to investors shared widely and posted to online research collaboration platform; ESG-related dialogue in the Wellington morning meeting; investor engagement
        

Progress achieved

In 2019, we built further upon investor education by formalizing our ESG analysis of issues like employee engagement, turnover, and corporate culture, especially for companies that are highly acquisitive. The ESG Research team consulted with members of our own Human Resources department to develop a set of human capital-related questions we could ask during engagements with companies going through major M&A transactions. These questions are shared with all investors via email and Morning Meeting discussions.

As engagement and dialogue with boards have become a more significant input into our ESG analysis, the ESG Research team interviewed numerous public company board directors to gain perspective about how we can better assess corporate boards. We were able to solicit the views of former Wellington partners who now serve as directors. Investors were keen to learn about tips for engaging with boards, the best questions to ask, and potential red flags when evaluating boards.

ESG analysts attend conferences with governance professionals, board directors, and company representatives. We use the opportunity to share recommendations about how to engage with us and ask corporates how Wellington can improve our engagement practices. These best practices are shared with investors and are incorporated into meeting structure.

Key performance indicator

          Investor engagement (clicks) to ESG pages on research collaboration platform; investor engagement (responses, follow-up) to ESG Research monthly emails
        

Progress achieved

There is a dedicated ESG page on the central research collaboration platform, showing ratings, recent engagements, and voting history. ESG analysts began rolling out coverage of peer groups. A new ESG Rating Signal shows when our fundamental research led to a differentiated view from quantitatively derived ratings. ESG analysts provide feedback on the development of the next-generation collaboration platform to improve accessibility of ESG research.

A monthly Engagement Hub convenes to share case studies and promote best practices and collaboration across asset classes.

The ESG team manages an internal SharePoint site to store all of our materials and notable research so that colleagues from both investment and business functions can access our most recent research.

Sustainable Investment Director, Investment Stewardship Committee Chair, CEO Leadership, and investor line managers send emails detailing the evolution of our ESG research and integration.

We seek to “walk the walk” with our ESG views. We promote independent leadership by supporting the separation of board chair and CEO roles. Our private partnership structure is different from public companies, but the Executive Committee agreed that our CEO no longer uses the Chairman title and that committees are chaired by colleagues not involved in the function being overseen.

Key performance indicator

          Tracked progress towards meeting engagement objectives
        

Progress achieved

In 2019, we introduced an investor tool which will provide an interface to allow users to add topics, feedback, and outcomes of recently attended company meetings. This information will be used to source Shareholder Rights Directive II reporting. Company meeting and attendee information will be sourced from our existing Global Investment Calendar (GIC). Users will be presented with a list of meetings they attended and can enter engagement information associated with each meeting.

The proportion of ESG-focused engagements with investors present has increased meaningfully compared to prior years. We know that our message is stronger when equity and debt holders participate in these conversations. Similarly, our ESG sector analysts are participating in more investor-led engagements. As a result of continued collaboration between ESG and fundamental equity and credit analysts in engagement. Companies are more likely to discuss how management of material ESG factors fits into the strategy and vision.

Key performance indicator

          Assessment of ESG integration by Investment Products and Fund Strategies; Ability to provide examples to CEO and other investors during post- morning meeting portfolio reviews
        

Progress achieved

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.

The increased involvement of the Investment Products & Fund Strategies group in the ESG integration dialogue continues to improve the systematic tracking of ESG issues to investment decisions.

Financial performance of investments

ESG characteristics of investments

Key performance indicator

          Ability to articulate examples of when ESG characteristics influenced position sizing
        

Progress achieved

Consistent with the objective of improved ESG incorporation into investment decision making processes, portfolio managers may express their views about the impact of ESG considerations relevant to their holdings in their investment decisions. 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.

Key performance indicator

          Each PM develops their own ESG integration approach, so KPIs vary from a “best in class” approach to “potential to improve” approach.
        

Progress achieved

In the past year, our increased reporting transparency around ESG, which now includes our internal ESG ratings, has led to increased discussion between clients and portfolio managers regarding the companies identified as laggards in the context of the investment strategy. At the same time an additional emphasis on these factors throughout the research process, has led to greater emphasis within the investment decision making process. In some cases, this has resulted in portfolio managers taking steps to work with ESG and fundamental analysts to identify potential investments with similar exposures and more favourable ESG profiles for inclusion in the portfolio.

Key performance indicator

          Meeting client objectives.
        

Progress achieved

As required by specific client guidelines and objectives, we are able to manage portfolios in accordance to specific carbon reduction targets. Please refer to section LEI 07.2 for example, Low Carbon Platform.

In addition, our Quantitative Investment Group has developed a process for reducing the overall carbon footprint while minimizing tracking risk implications. While portfolio managers are not required to implement this approach, it is being piloted with numerous fundamental, active, diversified portfolios for consideration as an input into their investment process and portfolio construction.

Other activities

Key performance indicator

          Level of participation in the initiatives; insights gleaned from participation
        

Progress achieved

Our Director of Sustainable Investment, Wendy Cromwell, was elected to the PRI Board of Directors in 2019 as an asset manager representative.

Two of our global industry analysts are members of the SASB Standards Advisory Groups for their respective industries (Renewable Resources & Alternative Energy and Technology & Communications).

Chris Goolgasian, Director of Climate Research, is a member of Climate-Related Market Risk Subcommittee of US Commodity Futures Trading Commission (CFTC), which identifies challenges to managing climate risks and ways to bolster scenario analysis, reporting and governance efforts, and explores potential policy initiatives and risk disclosure best practices. Marjorie Winfrey, Sustainable Investment Analyst, is a member of the PRI's EU Taxonomy Practitioners group, which shares tools and experiences to overcome implementation barriers.

In 2019, we joined the Ceres Investor Network on Climate Risk and Sustainability, and signed the Global Investor Statement to Governments on Climate Change in 2019, reiterating support for coordinated policy development to accelerate investment in the low-carbon transition and to enhance climate-related financial reporting.

We also joined the Investor Forum, a UK investor collaborative effort that escalates material issues with UK-listed companies. All holders are welcome to participate and share views.

Key performance indicator

          
        

Progress achieved

In December 2017, we signed the Statement of Support for the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. Since then, we have been using engagement to encourage uptake of the framework from companies across sectors and improvement of disclosure over time. We are encouraged by the progress of adoption; not surprisingly, we have seen the broadest uptake from European companies, but global awareness for the framework continues to grow. We believe that this is due in part to the non-prescriptive nature of the framework, as disclosure can be tailored to unique business models and material risks. While the quality of disclosure varies, we see three primary areas as opportunities for improvement: 1) attention to physical risks, 2) assessment of expected future financial costs/benefits, and 3) consideration of multiple climate scenarios.

In addition, we are often asked by asset owners and other asset managers about the value Wellington derives from membership and regarding the expectations of members/signatories of the various initiatives with which we are involved. In particular, we received multiple inquiries about PRI and Transition Pathway Initiative over the course of 2019. We are happy to share our perspectives and encourage new organizations to consider participating.

Key performance indicator

          Participation from global investors in Hub meetings; notes from Hub meetings
        

Progress achieved

The ESG Research team maintains an ongoing library of the most effective company engagements as well as notable portfolio manager investment decisions to which ESG issues contributed.

In 2018, Wellington launched an Engagement Hub (alongside other thematic research Hubs) in order to identify opportunities for engagement, share case studies, promote best practices and collaboration across asset classes, and provide a space for discussion on the topic of engagement. One of the primary goals of this Hub is the documentation and socialization of best practices throughout the investment platform.

Key performance indicator

          Publication of ESG Research Update; delivery of strategy-level examples during review meetings
        

Progress achieved

We include case studies to demonstrate engagement and ESG incorporation in our quarterly publication, the Global ESG Research update, which is available on our web site. Each quarter includes three summaries of representative engagements with companies across sectors and geographies.

06.2. Additional information.

Provide training on ESG incorporation - Progress Achieved (cont)

Wellington has a formal internal review process for all portfolio managers through a series of peer review groups comprised of senior management and investment personnel. The reviews conducted by these groups generally cover a manager’s investment philosophy, process, performance, portfolio characteristics, adherence with compliance standards, and the people and resources that support the investment management of client portfolios. The goal of the process is to review all teams or managers of client portfolios on an annual basis. The portfolio manager’s ESG integration approach is discussed in this forum, and the Director of ESG Research, Director of Sustainable Investment, and ESG analysts are regularly present to provide feedback and suggestions.

Every spring, the ESG Research team hosts a proxy season preview to educate investors about major governance developments, focusing on a selection of ‘hot topics’ we expect to be most pertinent throughout the season. This gives the ESG Research team an opportunity to reiterate any shifts in our approach to vote recommendations on certain topics. These sessions deepen understanding of key issues ahead of time so that we can have more productive debates about significant votes.

As engagement and dialogue with boards has become a more significant input into our ESG analysis, the ESG Research team interviewed numerous public company board directors to gain perspective about how we can better assess corporate boards. We synthesized and disseminated to investors tips for engaging with boards, the best questions to ask, and potential red flags when evaluating boards.

We also conduct training on material ESG themes. In developing these materials, we leverage relevant expertise around the firm. Examples of past and ongoing training modules include:

At the conclusion of the research on each variable, representatives from Woods Hole Research Center (WHRC) and Wellington present the scientific findings and capital market implications to investors. This forum provides investors with a regular opportunity to ask questions directly to WHRC scientists and debate capital market implications with the broad investment community. In addition, weekly meetings deepen the scientific understanding of a subset of cross-asset class investors expected quarterly update meetings to discuss scientific findings. This has been underway since September 2018 and will continue on a periodic basis for the next several years.
At the beginning of 2020, the ESG Research team developed a training module focused on carbon emissions, footprinting, and transition risks. Multiple sessions are being provided to all levels of seniority and customized by group including investors on the Investment Platform, Investment Products & Fund Strategies, and Global Relationship Group. We review key terminology of carbon and transition risks, discuss data sourcing and estimation methodology of major providers, evaluate the calculation methodology behind carbon footprint analysis, and debate the merits and drawbacks of using carbon emissions as a proxy for policy risk across different geographies and industries.

In 2019, our Director of Sustainable Investment held regional training sessions open to all colleagues on the topic of ESG and Sustainable Investment. In addition, we held a dedicated session for our Investment Research group, and we launched a four-part training series for our Global Relationship Group.

In addition, Wellington Management maintains multiple internal email distribution lists related to ESG and sustainable investing in order to facilitate information sharing across multiple functions of the firm. Content shared in this forum could include trends or common questions among clients of a certain channel and recent academic studies regarding ESG.


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