This report shows public data only. Is this your organisation? If so, login here to view your full report.

Dimensional Fund Advisors

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%
90 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
10 %
Total actively managed listed equities 111%

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

There are two ways in which Dimensional incorporates ESG considerations and the reasons for each approach are described below.

1.      Integration Alone

Dimensional incorporates ESG considerations into its investment analysis and decision-making processes and reflects those considerations in its policies and practices, as appropriate. In determining how to incorporate ESG considerations in the investment process, Dimensional performs a significant amount of research with the goals of improving our understanding of expected returns across securities, better managing risks in the portfolios, and reducing costs in the management of the portfolios.

Examining the research, we find that first, decades of research support the notion that market prices quickly incorporate relevant information about a company. This information includes current expectations about ESG-related risks or opportunities facing a company. Second, that expected returns across securities are driven by prices investors pay and the cash flows they expect to receive. Our ESG research tests for information in ESG data that may give us insight into a company’s expected future cash flows or differences in the discount rates investors apply to those expected future cash flows. While we have not currently found reliable evidence that ESG variables contain additional information about differences in expected returns across securities once we control for known drivers such as company size, relative price, and profitability, this represents a continuing area of research for Dimensional.

Thus, we integrate ESG considerations in our investment process where we expect those considerations allow us to better control risk and/or add value for our investors. Generally speaking, we incorporate ESG issues across three aspects of the investment process: 1) portfolio design, 2) buy/sell/hold decisions in the portfolios, and 3) maximizing the value of holdings in the portfolios through activities such as investment stewardship.

  • Portfolio Design: Portfolio design refers to our process of selecting which securities are eligible in our portfolios and at what weight we may hold those securities in the portfolio. Dimensional incorporates ESG considerations in determining security eligibility within the portfolios. For example, we seek to exclude companies with heightened probabilities of fraud or expropriation of shareholder value through exchange eligibility decisions. We also exclude closely held companies in the portfolios, as these types of companies may have large strategic shareholders whose interests may not align with the broader shareholder base. While we believe information such as risk of fraud or strategic shareholder misalignment is reflected in market prices, it may present potential outcomes to which we do not want to expose our clients.
  • Buy/Sell/Hold Decisions: With respect to buy/sell/hold decisions in the portfolios, we generally consider ESG data for risk management purposes. We may halt buying securities or refer those companies to our stewardship team for engagement based on certain ESG-related controversies or on a case-by-case analysis for specific situations. For example, if there is an environmental controversy that we expect to change the company financials significantly, we may halt purchases of that company until there is more clarity on the impact of the controversy. In the case of an acquisition or merger that we believe is not in the interest of target shareholders, portfolio managers coordinate with our stewardship team to vote against such deals. The stewardship team may also choose to engage with the target board or management.
  • Corporate Governance/Investment Stewardship: Beyond our buying and selling decisions, Dimensional seeks to maximize the value of portfolio holdings by influencing positive governance practices across portfolio companies through our investment stewardship efforts. Dimensional believes that prices reflect relevant information about a company, including a company’s current governance and oversight of material ESG issues. We would expect successful efforts to improve governance practices to be reflected in higher prices through a combination of higher expected cash flows to shareholders and/or lower discount rates applied to those cashflows. Across all our equity portfolios, we therefore seek to encourage strong boards representing shareholder interests, including the mitigation of material environmental and social risks.

A main component of our stewardship activities is our engagement with portfolio companies. We use a systematic approach to identify E, S, or G issues that will inform our engagement efforts. We do not invest with the purpose or intended effect of changing or influencing control; however, our engagement practices are focused on letting boards know that we expect them to have processes to manage material ESG risks, to provide shareholders with information to assess the efficacy of those processes, and to act in the best interest of shareholders. More information about our approach to stewardship along with relevant policies and procedures may be found on the Corporate Governance section of our public website (www.dimensional.com).

 

2.      Screening and Integration

Dimensional also has dedicated sustainability mandates, which apply an additional layer of ESG integration in the buy/hold/sell decision process. This process uses a data-driven approach to evaluate companies on a focused set of sustainability issues whose impact can be readily measured and reported. For these strategies, the primary ESG consideration is environmental impact from company emissions, including greenhouse gas emissions and potential emissions from fossil fuel reserves. The strategies also seek to reduce exposure to a select list of other key sustainability considerations, such as coal, factory farming, palm oil, land use and biodiversity, toxic spills and releases, operational waste, water management, and the manufacture of civilian firearms. 

We also offer a variety of socially screened strategies that seek to exclude companies with meaningful involvement with client-specified business activities. These strategies can be readily customized to incorporate the ESG factors described above as well as additional considerations that clients may desire.

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

The response to this question is covered in LEI 01.2.

 


LEI 02. Type of ESG information used in investment decision (Private)


LEI 03. Information from engagement and/or voting used in investment decision-making (Private)


(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

Dimensional’s sustainability strategies are currently primarily designed to decrease exposure to companies that are significant contributors to emissions or those with large fossil fuel reserves (such as oil, gas, and coal) that may lead to future emissions. Other considerations, such as land use and biodiversity, toxic spills and releases, operational waste, and water management, are also variables in the sustainability score. Dimensional’s approach seeks to minimize or exclude investment in companies with lower sustainability scores. The strategies also seek to exclude companies connected to other environmental and social sustainability issues, including: coal, palm oil, factory farming, cluster munitions, civilian firearms, tobacco, and child labor.

Dimensional’s socially focused portfolios use screens to identify stocks for exclusion based on business activity across several issues, such as meaningful involvement in: nuclear weapons; the Republic of Sudan; tobacco; alcohol; gambling; or pornography. Also excluded are companies that are involved in: abortions, abortive agents, or contraceptives; landmines or cluster bombs, civilian firearms; stem cell research; or have had major recent controversies relating to child labor.

More broadly, Dimensional generally excludes closely held companies from its universe of eligible securities for its clients on governance grounds, as described in earlier sections.

Screened by

Description

Dimensional’s sustainability strategies are currently primarily designed to decrease exposure to companies that are significant contributors to emissions or those with large fossil fuel reserves (such as oil, gas, and coal) that may lead to future emissions. Other considerations, such as land use and biodiversity, toxic spills and releases, operational waste, and water management, are also variables in the sustainability score. Dimensional’s approach seeks to overweight investment in companies with higher sustainability scores. 

Screened by

Description

Apply these principles to certain accounts per client specification.

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

Criteria are established based on client input and reviewed on an ongoing basis. Eligible securities are updated quarterly. Clients are notified in writing of any changes.


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]


LEI 06. Processes to ensure fund criteria are not breached (Private)


(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]


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.

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.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

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

09.6. Additional information. [Optional]


LEI 10. Aspects of analysis ESG information is integrated into (Private)


Top