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Loomis, Sayles & Company, L.P.

PRI reporting framework 2020

You are in Direct - Listed Equity Incorporation » Outputs and outcomes

Outputs and outcomes

LEI 12. How ESG incorporation has influenced portfolio composition

12.1. Indicate how your ESG incorporation strategies have influenced the composition of your portfolio(s) or investment universe.

Describe any reduction in your starting investment universe or other effects.

Our ESG incorporation strategy can include both screening and ESG integration.  

For screening:  The screened investment universe depends on specific client guidelines as to what is required to be excluded from the starting investment universe, therefore the percentage reduction varies depending upon the screening criteria imposed by the client.  We have a variety of screening 'types', from specific industry exclusion (tobacco, alcohol etc), to formal restriction lists and specific stock exclusions.  Some of our investment teams incorporate ESG factors as part of their quality assessment within their process.  To the extent a stock does not meet this quality hurdle due to ESG factors that process can also reduce the universe.

For ESG integration:  The impact on the investment universe is less clear.  For example, if a particular stock looks very attractive from a long term total return perspective but there are ESG risks associated with it, we may be comfortable owning it while engaging with management to understand how the company is addressing these issues or whether the information is updated and accurate.

Specify the percentage reduction (+/- 5%)

10 %

Select which of these effects followed your ESG integration.

12.2. Additional information.[Optional]

ESG factors are taken into account in our fundamental analysis, and consequently have historically impacted and continue to impact many facets of our investment decision making process. 


LEI 13. Examples of ESG issues that affected your investment view / performance

13.1. Provide examples of ESG factors that affected your investment view and/or performance during the reporting year.

ESG factor and explanation

Environmental consideration for a consumer staples company:  product packaging

ESG incorporation strategy applied Integration

Impact on investment decision or performance

Aluminum is this company’s preferred and primary drinks packaging material.  About 95% of its product is sold in aluminum cans which are 100% recyclable.  The company is committed to pre- and post-consumer content and approximately 42% of each can is sourced from a recycled can.  High density polyethylene accounts for just 0.3% and PET (polyethylene terephthalate) plastic accounting for 0.9% of the packaging.  The company recently reduced the weight of 750ml plastic bottles from 44.7 grams to 38 grams and reduced the weight of 500ml and 550ml plastic bottles from 35 grams to 31 grams, respectively. The ability to recycle is directly tied to the ability to collect used containers.  Aluminum is far ahead compared with PET plastic where recycled PET is currently more expensive than virgin PET.  Approximately 98% of the company’s packaging is recyclable per FTC guidelines in at least 60% of curbside collections systems and programs.  The company is responsible for arranging the purchase/delivery to its third-party bottlers and co-packers of its containers.  Longer-term, as the cost of recycling goes down, material costs will go down, which can improve margins and create shareholder value. 

ESG factor and explanation

Governance: Importance of supply chain management

 

ESG incorporation strategy applied Integration

Impact on investment decision or performance

In the context of China’s immature national supply chain networks, this quick-serve restaurant has invested significant resources for over 30 years to build its wholly-owned supply chain and distribution infrastructure.  Spanning procurement through consumption, the company’s supply chain encompasses all aspects from suppliers and their upstream management, to logistics and distribution, to restaurant management, and delivery.  As a result, the company controls an infrastructure with over 600 suppliers that reaches more than 1,200 cities, and covers more land mass than any other restaurant operator in China. Unmatched scale, efficiency, and reliability enables the company to better control food safety and product consistency.  We believe these efforts have enabled the company to expand its operations, including in lower-tier cities that are growing faster and are more profitable than the top-tier cities.  Competitors, on the other hand, use third-party supply chain operators which we believe has been an impediment contributing to their smaller presence.  Control and tight supervision in its supply chain is key to not only the company’s quality assurance, but its growth and competitive positioning – and ultimately building and maintaining a strong brand – which contribute to shareholder value creation.

ESG factor and explanation

Governance issues: product safety and quality, and lack of transparency in CEO succession plan 

This multi-national consumer goods company experienced a cyberattack in 2017, which we believe was the direct result of under-investing in its infrastructure, and a weak corporate culture. Subsequently, we had increasing concern with this company, primarily based on three issues: product safety, quality, and governance. Examples include a humidifier sanitizer issue in South Korea, failed innovation in certain products, and product quality issues related to an acquired infant formula business. We were also increasingly concerned about the culture at the firm and management compensation. In addition, we were surprised by the sudden - rumored to be forced - retirement of the very well-regarded CEO in early 2019.

ESG incorporation strategy applied Integration

Impact on investment decision or performance

We sold the stock.

ESG factor and explanation

Governance and social issues: global life insurance 

We have held this global life insurance company stock for several years.  We regularly meet with the chairman, either in person or via one-on-one video conference, to engage on governance and social issues.  Both of our team's portfolio managers have joined these meetings.  Our most recent meeting with the Chairman was in November 2019, when we discussed CEO succession planning, and efforts to improve board and senior management racial and gender diversity.  We also sought understanding of how the company is integrating ESG principles in its investment portfolio and how it is achieving its social objectives via urban regeneration and the financing of low-income housing.  

ESG incorporation strategy applied Integration

Impact on investment decision or performance

This company is a leader in ESG - its MSCI ESG score of AA puts it in the top 12% of its peers.  Its leadership position on ESG is part of our quality assessment of the company, which is a key part of our investment process. We continue to hold the stock.

13.2. Additional information.[Optional]

Our equity investment teams all integrate ESG in line with their own process and philosophy.  The examples above are from more than one team. 

The language below provides more detail from the team that provided examples 1 and 2 above:

We are an active manager with a long-term, private equity approach to investing. Through our proprietary bottom-up research framework, we look to invest in those few high-quality businesses with sustainable competitive advantages and profitable growth when they trade at a significant discount to intrinsic value. Given the rare confluence of quality, growth, and valuation, we may study dozens of companies but may only invest in a select few businesses each year. We believe identifying those few businesses with these characteristics is an art, not a science. As a result of this rigorous approach, ours is a selective, high-conviction portfolio of 30-40 names.

As long-term investors, we believe a company’s ability to generate shareholder value over our investment time horizon is linked to the sustainability of its quality characteristics and growth opportunities.  A successful business will attract competition and capital.  Without the sustainable competitive advantages, or high barriers to entry, profit margins could shrink and returns on invested capital could be lowered for that business.  We believe that long-term results cannot be realized by management focused on short-term objectives.  Therefore we want to invest with management teams that share our long-term perspective.  We evaluate their ability to allocate capital to investments that create long-term value and look for incentives aligned with long-term shareholder interests.  We believe the ability to generate sustainable free cash flow growth, at levels required to meet reinvestment needs, is another key characteristic of a high-quality quality business.  Continuous reinvestment in the business, by management teams who lead with vision and integrity, and who are not influenced by short-termism, allows the company to sustain and extend its competitive advantages and quality characteristics.  We believe the short-termism, so prevalent in today’s market, is detrimental to sustainability and value creation.  In our view, investors can benefit when environmental, social, and governance considerations are analyzed from an active, long-term bottom-up research perspective – and intimately linked to a company’s sustainable competitive advantages and profitable growth opportunities.  We believe it is these characteristics and structural view that enable management teams to look beyond the next quarter’s results and invest in ways that sustain and extend a company’s ability to generate long-term shareholder value. 

We believe the materiality and relevance of ESG considerations cannot be identified and understood by fixed rules and quantitative screens. Instead, we believe ESG issues must be viewed in the context of specific industries and companies and in relation to any potential impact on a company’s long-term competitive advantages, intrinsic value, and ultimately long-term investment performance. Understanding how an investment philosophy informs a manager’s decision-making process can provide meaningful insights into how and why a particular investment manager approaches environmental, social, and governance (ESG) criteria.  In our view, investors can benefit when ESG considerations are an integral part of an active, long-term, research-driven investment process.  With an owner’s mindset, we seek to develop a deep understanding of the drivers, opportunities, and limits of each company, including material ESG elements, through our disciplined and thorough bottom-up fundamental analysis. Loomis Sayles provides third party ESG research to which we have access and evaluate independently. Ultimately, we rely upon our independent, proprietary analysis to determine the materiality of ESG issues on a company-by-company basis.

The language below is more detail from the team that provided examples 3 and 4 above:
We believe that ESG factors are a critical part of our research analysis, valuation, portfolio construction, and risk management. Our investment process targets three alpha drivers: Quality, Intrinsic Value Growth and Valuation. ESG factors are one of the seven dimensions that we analyze as part of the Quality assessment. Specifically, our ESG analysis includes a review of company financial statements and specific ESG data. We engage with company management on ESG topics that we believe are material to the financial outlook. We document these engagements in our proprietary engagement database. Our ESG research is tailored to each company; ESG issues may present different levels of risks or opportunities, depending on the industry. Lastly, we incorporate ESG opportunities and risks into our valuation. We construct three scenarios for each holding: a base, best and downside case. Material ESG opportunities and risks are reflected in this analysis.


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