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Loomis, Sayles & Company, L.P.

PRI reporting framework 2020

You are in Direct - Listed Equity Incorporation » ESG incorporation in actively managed listed equities

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%
95 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
5 %
Total actively managed listed equities 100%

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

Loomis Sayles’ Approach to ESG Integration

Each investment team considers ESG integration according to its investment philosophy; we do not subscribe to a single investment process.  ESG risks and opportunities stem from factors including an issuer’s management strength and strategy, the use of human and natural resources, as well as regulatory and political considerations.  ESG factors can be critical to evaluating the sustainability of an issuer and the expected impact on investment performance.  Loomis Sayles’ investment teams determine the materiality of these factors in investment decisions, other than where client or regulatory restrictions apply.

Engagement is at the Core of Loomis Sayles’ Investment Processes

Engagement is an integral part of our fundamental analysis across all asset classes.  ESG criteria are an inextricable part of this analysis.  Direct engagement by our fixed income and equity investment professionals allows the assessment of the quality of a company’s management, strategy, and operations.  Our sovereign investment professionals also engage with policy makers and regulators.  At the firm level, Loomis Sayles seeks to collaborate with various investor and industry groups to foster best investment management practices.

Exercising our proxy voting responsibility is an important component of ESG engagement for our equity strategies.  Our investment teams vote in ways that they believe serve the best interests of long-term shareholder value creation.  Our Proxy Voting Guidelines are part of this process. 

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

Our response in LEI 01.2 above explains our firm wide approach to ESG integration.  For portfolios where we also incorporate ESG screening, it is mandated by our clients' guidelines or by regulation and is in addition to our ESG integration work.  Loomis Sayles does not impose any ESG restrictions or exclusions on the investment process. We have the ability to code specific screening restrictions within our trading compliance system.


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.

As a large, global, cross-asset class investor, our analysts and portfolio managers have access to the research from many sell-side firms as well as independent research providers.  Their work can be a valuable complement to our internal research.  ESG research from brokers, credit rating agencies, and independent research providers has significantly increased in volume over the last several years.  We continue to assess vendors, and have systematically added to the number of external providers of ESG research to ensure that our investment teams have the data and resources that they require, to assess the quality and efficacy of the information to their investment process.  ESG research is a growing focus, and we have met with many of the brokers/vendors over the last year, providing feedback, ideas for enhancement, and questions about conflicting methodologies across the vendors.  We attend many of the ESG conferences held by the sell-side and industry organizations, to help encourage standardization and transparency of the data and related research.

02.4. Additional information. [Optional]

Further examples related to the question answered above in LEI 02.3:

- Our analysts have identified specific ESG issues that brokers or vendors have raised, and requested further research into those issues.  

- Our equity broker commission/evaluation process is organized by product team, and each team has the ability to write specific comments about what research and which analysts were particularly helpful to them during the time period.  Though we don't have a separate section by topic (like ESG), there is an opportunity for specific comments that could certainly include ESG research.

- Our firm recognizes the importance of ESG to our clients, and the surging availability of ESG data as companies report more and the ESG research continues to grow.  We have no specific budget limit on external ESG research, and our firm remains committed to providing our investment teams with the data and resources that they require.

 


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]

Engagement:

Engagement is an integral part of our fundamental analysis across all asset classes.  Our ESG engagement database allows us to document and track engagement with issuers.  For each meeting/call with issuers, our investment professionals document their engagement related to E, S, and G issues.  This database allows us to monitor the impact that we may be having on ESG related issues, and to prepare for future conversations.    These ESG issues can include climate change related issues, as we further integrate EGS data. The database is available to all investment teams.

Proxy voting:

Exercising our proxy voting responsibility is an important component of ESG engagement for our equity strategies.  Our investment teams vote in ways that they believe serve the best interests of long-term shareholder value creation.  Our Proxy Voting Guidelines are part of this process.  In the fourth quarter of 2019, we purchased and integrated the ISS Communicator proxy communication tool.  Since then, we are in the process of educating our equity teams on the functionality of the tool and creating reports for the teams and their clients to assess and analyze their voting history.


(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

Screening is conducted in accordance with client-specific guidelines and/or the mandate of a given product.  We use vendors, such as MSCI, within our trading and compliance system to monitor activity related to a client's particular screening requirements.  We also have a number of clients that have asked us to manage to a 'restricted list'.

Screened by

Description

Depending on the fund or client, different types of screening may be employed. For example, one client has requested that we follow its sustainability policy which requires first excluding worst-in-class issuers based on their rubric, along with collaboration with the Loomis Sayles portfolio manager on the team, and then selecting among the pool of resulting best-in-class issuers.

Screened by

          We are able and willing to manage to norms-based screening based on client requests.
        

Description

We are increasingly in discussions with prospects about their interest in hiring us to manage a portfolio using norms-based screening, and with clients who wish to overlay one of our products with their choice of 'norms-based' screening.  The UN Global Compact Principles is a good example of norms-based screening that is under consideration for application with certain clients.

We also have several clients for whom we manage to a specific norms-based list, and we have clients for whom we manage to their norms-based ESG policy.

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

When changes are made that impact investment guidelines, such as modifications to screening criteria, we communicate that information directly to 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.

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

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

05.4. Indicate how frequently you review internal research that builds your ESG screens.

05.5. Additional information. [Optional]

In 5.1: We selected "Companies are given the opportunity by you or your research provider to review ESG research on them and correct inaccuracies" because we understand that our ESG vendors attempt to vet analysis and ratings, and provide the issuers an opportunity to respond to analysis on a regular basis. 

In 5.2:  Our fundamental investment professionals incorporate the key, material factors that they believe will have impact on the performance of the securities that they own. We also supplement their work with external data vendors such as MSCI and Sustainalytics. We have found that there is a range of coverage by the external vendors.  For example, most of the large cap equities have ratings, while the smaller cap and emerging market stocks are not as well covered.  Because we are a large investor with holdings across a wide range of issuers, not all of our holdings are covered by the external vendors.


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.

          Portfolio specialists: spot check, CRD: pre-trade & batch compliance review, EY acts as internal auditors, parent company and regulators perform external audits.
        

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

Consistent with its fiduciary duty, Loomis Sayles’ policy is to take the utmost care in making and implementing investment decisions for client accounts. To the extent that trade errors or investment guideline breaches occur, Loomis Sayles seeks to ensure that its clients’ best interests are served when correcting such errors and that the client will be reimbursed for any loss caused by our error. Loomis Sayles’ Trade Error and Investment Guideline Breach Policies and Procedures ("Procedures") guide the resolution of, and help to prevent the recurrence of, such errors.

If it appears that a trade error or investment guideline breach has occurred, Loomis Sayles will review all relevant facts and circumstances to determine an appropriate course of action. When it is determined that Loomis Sayles has caused or contributed to a trade error or investment guideline breach, the client will be reimbursed by Loomis Sayles for any net loss attributable to our error or will retain any net gain realized in connection with the error correction, except as described below. Clients are informed in writing of all errors unless the error is an operational error (e.g., overdraft charge for failed trades) involving a small reimbursement amount or the error is corrected pre-settlement.

If an error is discovered after the settlement of the transaction (thus having occurred in the client’s account), the “correcting” transactions will be executed in the client’s account and the client will either be reimbursed for the loss or will retain any gain realized in connection with the error correction as described above. However, if an error is discovered prior to the settlement of the transaction, the trade will be moved to the error account of the executing broker or Loomis Sayles’ error account and will not be reflected on the client’s account statement. In this latter circumstance, Loomis Sayles and the broker-dealer, custodian or other parties involved in the transaction (other than the client) will determine who among them is obligated to bear any loss or entitled to retain any gain realized in connection with the error correction. Additionally, securities purchased in error for one client’s account may be reallocated to another client’s account if Loomis Sayles determines that it would be appropriate to do so under the facts and circumstances. Such reallocations require the approval of the Chief Investment Officer and Chief Compliance Officer.

All trade errors or investment guideline breaches will be resolved with the approval of the Chief Compliance Officer and other legal/compliance, portfolio management, trading, or other personnel, as appropriate, in accordance with the Procedures. The party responsible for the trade error will complete the Trade Error Correction Form in an automated system implemented for this purpose, and submit the form to the Chief Compliance Officer for final approval as required by the Procedures. Such errors and their resolutions are reported to Loomis Sayles’ Risk Management Committee, Trading Oversight Committee and Audit Committee on a quarterly basis.

As a policy matter we do not provide outside parties with information regarding violations of client mandates unless the violation has been in their account.  

06.3. Additional information. [Optional]


(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]

Our objective is to equip analysts on our equity investment teams with ESG resources, tools and trainings, etc. Climate change has been recognized as an ESG issue and has been prioritised as a topic for 2020. 

Although the analysts on our equity investment teams incorporate E, S, and G factors as part of their fundamental analysis, the process is not standardized across the teams. This may result in different percentages of E, S and G focus for different investments. In addition, each industry has different exposures to E, S, and G issues. The material E, S, and G factors are researched by each equity team for each investment, but the concept of 'materiality' and the definition of 'systematically' may be interpreted differently by each investment team.

 


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.

          An ESG review is incorporated into the structured, periodic meetings attended by members of investment product teams and the firm's Chief Investment Risk Officer.
        

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.

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

          We have an internally-developed application, our ESG Center, for the collection of data from external and internal vendors. See below.
        

09.6. Additional information. [Optional]

We have an internally-developed application, our ESG Center, for the collection of external and internal ESG data.  We originally brought MSCI ESG data in-house, and in 2018 integrated TrueValue Labs and the SASB Framework.  We are in the process of integrating Sustainalytics.  The portfolio managers are able to use the ESG Center to assess ESG metrics within their portfolios, and in the benchmarks relevant to their client accounts.

Semiannually, our Chief Risk Officer conducts an investment risk review with each investment product team.  The review includes exposure by ESG rating for the representative account, performance by ESG rating and a review of the lower ESG rated securities held in the portfolio with each portfolio management team in order to assess awareness of ESG issues in the portfolios.  The CIRO has recently incorporated climate-related data into the portfolio reviews.  Based on the review, the Chief Risk Officer shares processes and practices across all investment teams.

 

 


LEI 10. Aspects of analysis ESG information is integrated into

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

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

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

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

          Each team integrates ESG metrics within its own process.  ESG integration can be a part of fundamental analysis, valuation, engagement, portfolio construction, and risk management.
        

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

Each investment team assesses the ESG risks and opportunities within its own investment process.  

The portfolio management teams have incorporated ESG information as part of their portfolio management processes using a range of approaches.  Our senior management believes it is critical to give the investment professionals the best ESG tools and data we can, and to allow each investment team the autonomy to integrate it as part of its unique investment process. Each portfolio manager has determined how and where ESG concepts are implemented within their investment process, and can (despite not not being mandated to) include macroeconomic analysis, fundamental analysis, valuation analysis, technical analysis, engagement with management teams, portfolio management, and risk management.  

For portfolio weighting in particular:

- Our portfolio managers have the ability to review their investment portfolio ESG metrics within our ESG Center. They have the ability to see ESG metrics from external vendors for both their portfolios and their respective benchmarks.  

- We also have ESG vendor data in Factset, which is a common platform used by our equity portfolio managers.   

- Our Chief Inestment Risk Officer reviews portfolio construction vs the appropriate benchmarks.

 

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

Each investment team assesses the ESG metrics that they believe are material and that could constitute a specific risk or present an opportunity)as part of the investment thesis.  It is up to each investment team to determine what they use to supplement their valuation analysis and whether they use it.  Our teams have developed their own fundamental forecasting models, and may consider ESG metrics as a subset of the fundamental metrics.  ESG metrics may be in a variety of places within the forecasts, but are not necessarily systematically 'labeled' as such within the models.  Some ways that investment teams may incorporate ESG within their fundamental models and valuation analysis include:

- Incorporate within the revenue model, if there are sustainability-related products or services that can drive revenues

- Incorporate within expenses

- Incorporate within intangibles 

- Incorporate within the cost of capital assessment as part of the discounted cash flow analysis

- Incorporate within assessment of management strategy and corporate governance

Increasingly, our equity analysts are learning more about incorporating ESG data as part of scenario analysis, particularly related to climate transition risks.  We expect to review and integrate one or more scenario analysis tools in 2020.

 

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

We are in the process of reviewing and assessing a number of climate transition related scenario analysis tools, and we expect to offer one or more of these tools to our investment teams in 2020. For example, PACTA is currenty under consideration.  We are also in the process of becoming a supporter of the TPI (Transition Pathways Initiative). We expect that these developments will allow our analysts to better incorporate climate related metrics into their valuation models, both from a DCF forecast perspective and from a valuation perspective (e.g. potentially higher discount rates or lower earnings multiples for higher risk companies).

10.6. Additional information. [OPTIONAL]

We conducted training on the SASB framework for our investment teams because we believe the SASB materiality map is a robust and practical way to assess the material factors wihtin each sector and industry.


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