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Loomis, Sayles & Company, L.P.

PRI reporting framework 2020

You are in Direct - Fixed Income » Outputs and outcomes

Outputs and outcomes

FI 17. Financial/ESG performance

17.1. Indicate whether your organisation measures how your incorporation of ESG analysis in fixed income has affected investment outcomes and/or performance.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
We measure whether incorporating ESG impacts portfolio risk.
We measure whether incorporating ESG impacts portfolio returns.
We measure the ESG performance/profile of portfolios (relative to the benchmark).
None of the above

17.2. Describe how your organisation measures how your incorporation of ESG analysis in fixed income has affected investment outcomes and/or ESG performance. [OPTIONAL]

17.3. Additional information.[OPTIONAL]


FI 18. Examples - ESG incorporation or engagement

18.1. Provide examples of how your incorporation of ESG analysis and/or your engagement of issuers has affected your fixed income investment outcomes during the reporting year.

ESG issue and explanation

ESG Issue: Environmental

Global automakers face significant challenges due to stricter future regulatory requirements on emissions, rapid technological change, and evolving customer preferences - all of which pose risks to the longer term viability of the industry and require substantial resources for investment today. This company’s ambitious goals to meet these challenges present significant costs and risks compared to better capitalized competitors.

This company has outlined goals such as achieving 15-25% of it sales in Battery Electric Vehicles (BEVs) by 2025 as well as a carbon neutral fleet by 2039. The LS analyst has had in-depth discussions about these initiatives with management and has factored the financial impact of the investments into his credit rating and opinion. The company has a strong, premium brand and substantial resources that allow it to take the steps now to address these future concerns including significant R&D, capital expenditures, as well as sharing technologies and partnerships.

Impact on investment decision or performance

To offset the risks described above, Loomis required additional compensation compared to similarly rated bonds. We have also focused on shorter duration investments, given the risks of implementing the company's aggressive long term environmental goals, including carbon neutrality.

ESG issue and explanation

ESG Issues: Governance & Social 

Allegations of a scandal caused bond spreads to widen significantly for this bank. Governance improved with additional controls put in place and the closing of the offending facility. The negative social impacts were partly mitigated through donations of all profits generated from the bank’s illicit operations to organizations charged with preventing financial crimes.

History indicates that incidences of money laundering have a material impact on an issuer’s bond prices. In this instance, the bank was required to offer a substantial premium, compared to its peers, in order to complete its inaugural non-preferred senior bond issue. After carefully reviewing the facts and estimating a range of potential financial penalties, we became comfortable that the premium offered by the issuer compensated bondholders for even the most severe potential outcomes. A meeting the Loomis Sayles analyst had with management revealed that corrective action was underway, including the creation of a platform with other regional banks to share data to help prevent future incidences of money laundering. This understanding led to our comfort investing in the bonds.

 

 

Impact on investment decision or performance

Prior to our decision to invest in the new offering, we met with the management team. They were able to identify the corrective steps taken to address the problem. At this time, we also stressed that our continued investment was reliant on their adherence to increased vigilance surrounding recently implemented anti-money laundering protocols, in order to demonstrate renewed emphasis on quality governance at the issuer.

ESG issue and explanation

ESG Issues: Governance & Social

Management decisions at this fashion retailer led to loss of market share, revenue, and margin, putting the brand on a downward spiral. Our analyst also noted that the CEO and board member, who is also the co-founder, had publicly expressed views on social topics that resulted in loss of customers and market share. The company, which sells its products to mostly young female consumers, had a primarily male board with an average age over 70 yrs. Of the 3 female board members, one is a family member to the co-founder. In addition, the company relies on outdated marketing strategies that do not account for recent trends in customers’ lifestyles. Despite having the #1 market share in its category, and adequate free cash, the company’s idiosyncratic risks due to a poor management structure and questionable decisions led the LS analyst to flag her concerns and downgrade her forward-looking rating. 

 

Impact on investment decision or performance

The LS analyst spoke with several representatives at different levels of management over time to discuss among other matters, including the governance structure. The analyst learned that, while each brand is separately run with distinct brand CEOs, they appeared to have minimal ability to implement meaningful change. Based upon this assessment, one of our investment teams sold its entire position in the company. 

ESG issue and explanation

This country scores poorly on a range of social and governance indicators. Fiscal transparency has been a key area of concern and improved transparency is needed in order to support the efficient allocation of government resources, ensure government accountability and reduce the risk of corruption. Some steps to improve fiscal transparency have occurred (new quarterly budget performance reports, medium term fiscal projections and a published pre-budget). However, according to the IMF, the budget statement still needs to provide projections for revenues and expenditures by both category and ministry, and also must provide the costs of new policy proposals in order to bring fiscal management and disclosure practices in line with international standards. Our concern is that the transfer of a particular state-owned enterprise to the Public Investment Fund would allow the sovereign wealth fund to take over state transfer payments or the finance budget, rather than just making public investments. This in effect would result in a real parallel budget that is even less transparent than the original budget. This country could make the public budget more transparent, meeting international standards, while at the same time having unchecked sole discretion over the off-balance sheet budget.

Impact on investment decision or performance

As a result of weak governance and lack of transparency, we have sought a higher risk premium from this country than similarly rated credits.

 

ESG issue and explanation

This country scores well on both social and governance indicators. However, the country remains susceptible to climate related environmental risks, with droughts and bushfires a regular occurrence. Recently, the fires have been unprecedented in scale and magnitude. Given the ongoing nature of the disaster, estimates around the cost of the fires is uncertain. The analyst believes that near-term growth will be impacted via the disruption to economic activity. This will arise due to reduced consumption, lower productivity from poor health, damaged infrastructure leading to supply-side bottlenecks, and a fall in tourism. The analyst believes that the central bank will have to cut rates further to support growth.

Impact on investment decision or performance

The crisis is being managed appropriately in this country, and as a result we continue to hold the sovereign bonds. However, given the potential for lower policy rates an underweight in the currency is recommended.

18.2. Additional information.


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