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British Columbia Public Service Pension Board of Trustees

PRI reporting framework 2020

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ESG incorporation in actively managed fixed income

Implementation processes

FI 01. Incorporation strategies applied

Indicate (1) Which ESG incorporation strategy and/or combination of strategies you apply to your actively managed fixed income investments; and (2) The proportion (+/- 5%) of your total actively managed fixed income investments each strategy applies to.
SSA
0 Screening alone
0 Thematic alone
0 Integration alone
100 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (financial)
0 Screening alone
0 Thematic alone
0 Integration alone
100 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (non-financial)
0 Screening alone
0 Thematic alone
0 Integration alone
100 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
0 All three strategies combined
0 No incorporation strategies applied
100%

01.2. Describe your reasons for choosing a particular ESG incorporation strategy and how combinations of strategies are used.

The combination of screening and integration of ESG factors is a critical component to identifying and managing the credit risk associated with our investment agent, BCI's, fixed income holdings. Screening from BCI's vendors provides an initial high level overview of ESG issues with specific issuers. As BCI delves deeper into potential investment opportunities, integration becomes a more critical component of its process and allows BCI to identify further issues and provide insights into the company's performance.

For mortgage holdings, BCI has developed a risk rating process that incorporates ESG factors as a contributor to the evaluation and pricing methodologies when identifying and managing credit risk. This process continues to evolve as new information becomes available. Integration of new strategies are tested and reviewed before implementation.

01.3. Additional information [Optional].


FI 02. ESG issues and issuer research (Private)


FI 03. Processes to ensure analysis is robust

03.1. Indicate how you ensure that your ESG research process is robust:

specify description

          ESG research by external providers is regularly benchmarked for quality against other providers by our investment agent, BCI.
        

03.2. Describe how your ESG information or analysis is shared among your investment team.

03.3. Additional information. [Optional]

BCI includes ESG as a component of their risk assessment and credit research is then integrated into BCI's investment decision making process. For Private Credit, the ESG analysis is a required component of all investment recommendations and is a standard agenda item for all of BCI's investment committee meetings.


(A) Implementation: Screening

FI 04. Types of screening applied

04.1. Indicate the type of screening you conduct.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

04.2. Describe your approach to screening for internally managed active fixed income

Across our investment agent, BCI's, assets, including Fixed Income, BCI excludes from their investment universe companies whose activities would violate the Anti-Personnel Landmines Convention or the Convention on Cluster Munitions. Furthermore, for corporate bonds (financial and non-financial) and private credit, certain industries and companies are avoided based on business involvement concerns.

For positive/best-in-class screening, BCI tracks the investable universe of green/social/sustainable bonds and when an issuance meets BCI's investment criteria from a credit and valuation perspective, they assesses the bond framework, second/third party opinion or certification and overall sustainability disclosure of the issuer to opine on positive E&S impacts. In addition, in the corporate (non-financial) investment grade space, BCI identifies companies that obtain high scores to the CDP disclosure frameworks.

04.3. Additional information. [Optional]


FI 05. Examples of ESG factors in screening process (Private)


FI 06. Screening - ensuring criteria are met

06.1. Indicate which systems your organisation has to ensure that fund screening criteria are not breached in fixed income investments.

Type of screening
Checks
Negative/exclusionary screening

other description

          Our investment agent, BCI's, exclusion list for Landmines and Cluster Munitions is communicated and shared with all of their investment staff.
        
Positive/best-in-class screening

06.2. Additional information. [Optional]


(C) Implementation: Integration

FI 10. Integration overview

10.1. Describe your approach to integrating ESG into traditional financial analysis.

Our investment agent, BCI has an ESG component in their risk analysis and credit research which is integrated into their investment decision making process. BCI's fixed income teams (including bond and private credit but excluding mortgages) recently increased engagement with BCI's team of dedicated ESG professionals to improve their understanding and integration of evolving ESG issues. Even when ESG factors are not sufficient to warrant an exclusion of issuers and companies, BCI assesses as part of their research process the potential for ESG factors to produce negative credit outcomes. In credit research, BCI is much more focused on potential negative outcomes as part of their process irrespective of if potential outcomes are ESG related or not due to the asymmetric nature of the asset class. BCI's teams also track and assess controversies related to ESG issues. In 2019, BCI implemented a portfolio monitoring process that tracks daily negative news coverage for issuers in the portfolios.

10.2. Describe how your ESG integration approach is adapted to each of the different types of fixed income you invest in.

SSA

BCI's SSA investments are predominantly limited to bonds issued by the Canadian federal government, provinces, municipalities and agencies or denominated in Canadian dollars. Credit rating agencies (CRAs) have increased the transparency of ESG integration into their ratings. BCI feels that governance and social factors that are material to credit worthiness are mostly captured by the CRAs, as well as priced in. While PMs consider environmental factors, BCI's processes could benefit from further formalization, especially should BCI consider new SSA issuers beyond their current exposure.

Corporate (financial)

BCI leverages some third party ESG providers as a general approach, and leverage sell-side research providers that BCI considers to have a strong ESG framework. Furthermore, for higher materiality issues in the bond space, BCI's Public Markets ESG team is engaged for in-house views and reviews.

Corporate (non-financial)

BCI leverages some third party ESG providers as a general approach, and leverage sell-side research that BCI considers to have a strong ESG framework. Furthermore, for higher materiality issues in the bond space, BCI's Public Markets ESG team is engaged for in-house views and reviews.

For Private Credit, all new potential investments seek an ESG review from BCI's in-house team no matter the materiality threshold. When opportunities arise, BCI performs an initial assessment of the creditworthiness of a borrower. If the opportunity passes this initial test, it is then subjected to more intensive due diligence, including ESG considerations, and ultimately presented to a formal credit committee that approves the investment. Each investment recommendation includes an ESG section. BCI has passed on certain investments due to ESG concerns.

10.3. Additional information [OPTIONAL]


FI 11. Integration - ESG information in investment processes

11.1. Indicate how ESG information is typically used as part of your investment process.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
ESG analysis is integrated into fundamental analysis
ESG analysis is used to adjust the internal credit assessments of issuers.
ESG analysis is used to adjust forecasted financials and future cash flow estimates.
ESG analysis impacts the ranking of an issuer relative to a chosen peer group.
An issuer`s ESG bond spreads and its relative value versus its sector peers are analysed to find out if all risks are priced in.
The impact of ESG analysis on bonds of an issuer with different durations/maturities are analysed.
Sensitivity analysis and scenario analysis are applied to valuation models to compare the difference between base-case and ESG-integrated security valuation.
ESG analysis is integrated into portfolio weighting decisions.
Companies, sectors, countries and currency and monitored for changes in ESG exposure and for breaches of risk limits.
The ESG profile of portfolios is examined for securities with high ESG risks and assessed relative to the ESG profile of a benchmark.
Other, specify in Additional Information

11.2. Additional information [OPTIONAL]

To facilitate our investment agent, BCI's, reporting in line with TCFD recommendations, BCI calculates a carbon footprint of their corporate bond portfolio (financial and non-financial). The overall carbon footprint is compared to that of the performance benchmark.


FI 12. Integration - E,S and G issues reviewed

12.1. Indicate the extent to which ESG issues are reviewed in your integration process.

Environment
Social
Governance
SSA

Environmental

Social

Governance

Corporate (financial)

Environmental

Social

Governance

Corporate (non-financial)

Environmental

Social

Governance

12.2. Please provide more detail on how you review E, S and/or G factors in your integration process.

SSA

ESG forms a key part of our investment agent BCI's risk assessment and credit research to evaluate the credit worthiness of issuers.

Corporate (financial)

ESG forms a key part of our investment agent BCI's risk assessment and credit research that evaluates the credit worthiness of issuers. Even when ESG factors are not sufficient to warrant an exclusion of a corporate issuer BCI assess as part of their research process the potential for ESG factors to produce negative credit outcomes. In credit research BCI is much more focused on potential negative outcomes as part of their process irrespective of if potential outcomes are ESG related or not due to the asymmetric nature of the asset class.

Corporate (non-financial)

Our investment agent BCI recently made an allocation to the private debt market. When opportunities arise, they perform an initial assessment of the creditworthiness of a borrower. If the opportunity passes this initial test, it is then subjected to more intensive due diligence, including ESG considerations, and ultimately presented to a formal credit committee that authorizes the investment. An ESG section is a required component of all investment recommendations that come to the committee.

12.3. Additional information.[OPTIONAL]


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