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Jupiter Asset Management

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
99 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
1 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (financial)
0 Screening alone
0 Thematic alone
0 Integration alone
99 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
1 All three strategies combined
0 No incorporation strategies applied
100%
Corporate (non-financial)
0 Screening alone
0 Thematic alone
0 Integration alone
99 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
1 All three strategies combined
0 No incorporation strategies applied
100%
Securitised
0 Screening alone
0 Thematic alone
0 Integration alone
99 Screening + integration strategies
0 Thematic + integration strategies
0 Screening + thematic strategies
1 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.

We apply an ESG integration approach to 100% of the fixed income assets we manage. We believe this approach is most suited to a) the heterogeneous fixed income investment universe in which we invest and b) to Jupiter’s fund manager led approach to ESG which allows them freedom to seek out what they believe to be the best opportunities in the market over the long-term with due regard to material ESG risk factors affecting the securities in which we invest.

Separately, we also have a requirement to exclude companies involved in the production of cluster munitions across our SICAV fund range and we have taken the decision to apply this exclusion across all our internally managed AUM. Consequently, the overwhelming majority of our fixed income AUM can most accurately be characterised as applying a screening + integration strategy.

For our thematic environmental fixed income strategy, we apply a combination of all three strategies (integration, thematic and positive screening) which we consider suitable to meet the strategy’s investment objectives on behalf of clients. These investment processes are described in more detail later in this assessment.

01.3. Additional information [Optional].

Jupiter’s ESG investment approach is fund manager led and this gives the fund managers the flexibility to integrate their ESG analysis into their investment approach. We believe that only through integration at a fund manager level can ESG issues truly be analysed and aid securities analysis through risk identification and mitigation as well as alpha generation. Our fund managers are supported by the Governance and Sustainability Team (‘GS Team’) who work with them on ESG engagement and proxy voting matters and provide input via a scheduled review process.

Our unconstrained, high conviction approach to active fund management is aligned with Jupiter’s approach and lends itself well to the incorporation and analysis of material ESG risk factors, incorporating direct engagement with issuers. Consideration of material ESG risks has always been a part of our process as credit analysts. The team’s approach has continued to evolve, just as the industry as a whole has evolved. This flexible investment strategy together with a broad investment mandate are, in our opinion, a significant driver of returns.

The fund managers and their team conduct thorough analysis on every company and government bond in which they invest. That means spending a lot of time conducting detailed research and meeting company management. This includes the identification and analysis of material ESG risk factors pertaining to a particular bond. The fixed income team integrate analysis of ESG considerations into their investment process, both when researching potential investment opportunities, considering portfolio construction and as part of an ongoing process of monitoring and engagement with investee companies.

As bond investors, we are ultimately looking to invest in issuers which are deleveraging and exhibit improved credit fundamentals. Our long experience of credit markets indicates to us that weak governance and material environmental and social risks can derail seemingly strong or improving credit stories, and in extreme situations can result in credit events such as default. Therefore, our ability to manage downside risk on behalf of clients depends on rigorous consideration of potential ESG risks alongside traditional financial analysis techniques. We do not view these factors in isolation but concentrate on trying to understand how these factors impact medium- and long-term investment performance and identify which, in our view, are relevant and material to investment decisions.


FI 02. ESG issues and issuer research

02.1. Indicate which ESG factors you systematically research as part of your analysis on issuers.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
Environmental data
Social data
Governance data

02.2. Indicate what format your ESG information comes in and where you typically source it

Indicate who provides this information  

specify description

          Direct engagement with issuers.
        

Indicate who provides this information  

Indicate who provides this information  

specify description

          Direct engagement with issuers.
        

Indicate who provides this information  

Indicate who provides this information  

02.3. Provide a brief description of the ESG information used, highlighting any differences in sources of information across your ESG incorporation strategies.

The fixed income team’s fundamental ESG research is informed by a variety of sources of information including public data such as issuer financial information, direct engagement with issuers and market participants, sell-side research specialists and ESG third party research and data. The credit analysts conduct research into material ESG factors as part of their fundamental credit analysis, overseen by the Head of Credit Research, and this process is described in further detail in section FI 10.1.

We use Sustainalytics as our primary ESG rating provider. This includes Sustainalytics Country Risk rating, applied to sovereign issuers in our portfolios. Within our portfolios, we monitor for involvement in controversial business activities and potential ethical controversies, including violations of global norms such as the UN Global Compact principles. We subscribe to RepRisk, a specialist ESG research provider which uses news and third-party public sources to identify potential issues. The tool is used by fund managers and the GS team, who conduct periodic reviews, used to identify potential issues which can then drive company engagement or other investment decisions.

02.4. Additional information. [Optional]

In selecting our external research providers we choose reputable organisations who can demonstrate a robust approach to research governance and validation. This forms one of the criteria on which we select providers and is reviewed when we review our subscriptions. Coverage forms another core pillar of provider selection and the team selected RepRisk, a specialist ESG data provider, on the basis of its strong coverage of both investment grade and high yield issuers, many of which are private companies.

To strengthen Jupiter’s capabilities, the CIO Office has invested in third-party ESG risk data and additional ESG personnel to help fund managers with their integration activities. The data is deployed in two ways: i) to augment day-to-day investee company monitoring, engagement and voting assessment at portfolio level and ii) CIO Office analysis of the ESG risk profile of our total assets under management, as further outlined below: 

i)             The data is used in conjunction with our existing research capabilities to enhance our understanding of companies, monitor for controversies, contribute to our engagement planning and develop the dialogue between fund managers and the GS team.

ii)            The data is utilised by the CIO Office with respect to management oversight. This involves analysis of our total assets under management to assess the overall ESG risk profile of our organisation. This process includes information relating to controversies and the environment, and specifically climate-related risks and opportunities. The CIO Office also uses this data to review individual portfolios and consult managers during the formal review process.

Our current ESG data providers are:

•            Sustainalytics - ESG rating (corporates) ESG rating, (sovereign), carbon risk rating, product involvement screening data (i.e. tobacco, coal). 

•            RepRisk - News aggregation service, monitors potential controversies and breaches of global business norms.

•            Bloomberg - ESG data and carbon footprinting tool.

•            CDP - Global GHG emissions and environmental impact database.

•            Transition Pathway Initiative - Assesses companies’ preparedness for the transition to a low carbon economy.


FI 03. Processes to ensure analysis is robust

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

specify description

          ESG implementation forms an element of the objectives of our investment personnel.
        

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

03.3. Additional information. [Optional]

Effective stewardship means maximising internal resources. One of the developments from the period was strengthening our Data Science Team and for them to also take an active leadership role to enhance ESG monitoring capabilities. Our Data Science and GS Team have worked in partnership to create an internal ESG Hub which is an online platform that gathers ESG risk data from third party providers and therefore allows not only our investment teams to be able to access ESG risk data across their portfolios or other stocks (as part of ESG integration) in an efficient manner, it is simultaneously used as a management tool for the CIO office to oversee fund managers. The data science capabilities are important as a great level of expertise is required in order to cleanse the data and challenge our data providers. The initial aim for the internal ESG hub is for it to channel third party data, but the next development will be to tailor metrics and weights in accordance to fund management preferences.The long-term goal will aim to use machine learning to see if we can use modelling to predict future ESG performance.


(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)
Securitised
Negative/exclusionary screening
Positive/best-in-class screening
Norms-based screening

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

Cluster munitions screening: On an annual basis Jupiter’s Compliance department, acting on behalf of the Fund's management company, Jupiter Unit Trust Managers Limited, sources the "Red Flag List of Cluster Munitions Producers" published by PAX (formerly IKV PAX Christi) in their report "Worldwide Investments in Cluster Munitions: a Shared Responsibility". The report is sourced from the PAX website. Clients are notified of the current exclusion list on request. This exclusion is then applied via automated IT systems to prevent managers from investing in excluded issuers or bonds.

Separately, our approach to labelled green bonds within our thematic environmental fixed income strategy is worth comment. Green bonds rarely finance green projects, instead they finance corporations who in turn promise to invest in green projects.  From an ‘impact’ perspective this subtle distinction is important and is why we have continued to tighten the criteria we apply to green bonds for investment as the market matures. Alongside our financial analysis we seek green bonds from organisations with robust environmental sustainability strategies which are directly linked into a green bond framework, providing a clear pathway to achieving those objectives through additional projects in future.

04.3. Additional information. [Optional]


FI 05. Examples of ESG factors in screening process

05.1. Provide examples of how ESG factors are included in your screening criteria.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

Marfrig issued a Sustainable Transition Bond in September 2019. The framework outlined strong steps the company was taking in addressing sustainable cattle sourcing and management. The projects that were “tagged” to the deal were the acquisition of cattle from suppliers that meet their environmental criteria. However, the bond failed to meet our criteria because we felt the policies outlined in the Transition Bond Framework were social standards that should be met across the firm and not specified to a transition bond. In addition, the bond focused on operating expenditure rather than creating long term impactful assets and the broader environmental impact of the company and its governance standards did not meet our “do no harm” criteria for our Sustainability Fund.  We have provided this feedback to the company and hope to see enhancements to their criteria in future issuance.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

We met representatives from FMO’s treasury team to discuss their Green and Sustainability Bond Framework. We were encouraged by the depth of knowledge of the representatives on climate and sustainability matters.  We supported and encouraged them to continue their good work on thinking through how to formulate an approach to considering the bank's alignment to 2 degrees but also to push for a 1.5 degree pathway. Their framework was particularly interesting to us as it not only met our green bond criteria, but we felt the social impact was also very strong because they help manage the local currency risk to end recipients who are often the people least able to manage it - a limitation of many USD denominated social bonds. We participated in the bond deal, however we did feel the organisation could improve the additionality of the bond and have encouraged them to consider this for future issuance.

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

We met with senior management of Hanwha Energy USA, its Korean parent Hanwha Energy and lenders from its guarantor bank (KDB) to discuss the issuance of a green bond tagged to the activity of Hanwha Energy USA. We did not participate in the deal because it did not meet our criteria due to the activities of the parent entity and a failure to demonstrate a ringfencing of proceeds at the US operating company. The US business and tagged activities are clearly green and consistent with a cleaner world, however the parent entity has substantial activities in coal generation and could not demonstrate a sustainability strategy or the ability to provide any data or reporting on environmental impact.  

Type of fixed income

ESG factors

Screening

Description of how ESG factors are used as the screening criteria

We met with representatives from the Government of Hong Kong (Deputy Chief Executive of HKMA and Assistant Director of Enviromental Protection Department) to discuss their green bond framework and approach to environmental sustainability. Our key concerns were air pollution levels in the city and harbour area as well as strategy to commitments under the Paris Accord. Even though the bond could have performed better under some of our criteria (stronger shorter-term targets to meet longer term ambitions), there were some strong positives (use of capital expenditure was high versus other sovereign bonds).  We did not participate in the bond deal as it was revealed after the meeting that there would be a tax incentive for domestic investors only.  

05.2. Additional information.


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

06.2. Additional information. [Optional]


(B) Implementation: Thematic

FI 07. Thematic investing - overview

07.1. Indicate what proportion of your thematic investments are (totalling up to 100%):

45 %
0 %
0 %

Specify

          ‘Other’ thematic investments indicated above refer to fixed income securities issued by companies which promote environmental or social solutions, in line with the objectives of the thematic environmental fixed income strategy.
        
55 %

07.2. Describe your organisation’s approach to thematic fixed income investing

Jupiter’s thematic environmental fixed income strategy is managed with a collaborative approach, bringing together the expertise of Jupiter’s environment and sustainability equities and fixed income and multi-asset teams. We analyse how an entity’s business risk profile and earnings are likely to evolve over time and consider the impact on the various stakeholders involved. Careful consideration of a company’s entire capital structure and the relative value of those securities is central to the process in order to determine where the best risk-adjusted returns can be found between its bonds and equity. This approach helps us to determine the right balance of securities to help mitigate downside risk for our investors while providing our clients with exposure to long-term environmental and sustainable solutions themes.

We continue to strengthen our Green Bond and Sustainability Bond Criteria. Last year we explicitly incorporated a “Do No Harm” component to the credit review process for labelled bonds whereby the full operations of the organisation (not just the labelled projects) are reviewed for potentially harmful activities. In addition, we expect our criteria to develop in line with those speicified under the EU Taxonomy in 2020.

07.3. Additional information [OPTIONAL]


FI 08. Thematic investing - themed bond processes

08.1. Indicate whether you encourage transparency and disclosure relating to the issuance of themed bonds as per the Green Bonds Principles, Social Bond Principles, or Sustainability Bond Guidelines..

08.2. Describe the actions you take when issuers do not disburse bond proceeds as described in the offering documents.

Instances in which an issuer has not disbursed bond proceeds as initially described have not so far occurred in our portfolio to date. As stated above, we seek green bonds from organisations with robust environmental sustainability strategies which are directly linked into a green bond framework, providing a clear pathway to achieving those objectives through additional projects in future. Should such an event occur in the portfolio, our initial approach would be to engage with the issuer to raise the issue and verify the situation. Should we receive an unsatisfactory response from the issuer we would seek to escalate the engagement, this could entail a variety of approaches including collective engagement with other bondholders, going public with our concerns or appealing to regulatory or market standard setting bodies. Our final option should we be unable to satisfactory resolve the situation would be to divest from the security. We would also disclose details of such an engagement and our decision making to clients in the interests of transparency.

08.3. Additional information. [Optional]


FI 09. Thematic investing - assessing impact

09.1. Indicate how you assess the environmental or social impact of your thematic investments.

09.2. Additional information. [Optional]

Environmental and social impact is assessed in the context of the specific solution provided towards recognised sustainability challenges. The fund seeks a combination of themes including but not limited to climate change mitigation; transition to a circular economy, waste prevention and recycling; protection of ecosystems; pollution prevention control and sustainable use and protection of water and marine resources. Therefore the range of impact outcomes and associated metrics vary by solution type.

We continue to strengthen our Green Bond and Sustainability Bond Criteria. Last year we have explicitly incorporated a “Do No Harm” component to the credit review process for labelled bonds whereby the full operations of the organisation (not just the labelled projects) are reviewed for potentially harmful activities. In addition, we expect our criteria to develop in line with those specified under the EU Taxonomy in 2020.


(C) Implementation: Integration

FI 10. Integration overview

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

Security selection

As part of their investment research process, Jupiter’s team of credit analysts identify relevant and material ESG risk factors to each issuer when assessing potential investment ideas. Their assessment covers a broad range of ESG factors using categorisations based on their investment experience and developed with the input of Jupiter’s in-house Governance and Sustainability specialists. Details of material issues identified are included in the research note prepared by the analysts and assessed by the fund manager. In addition, any engagement with management undertaken by the analyst where ESG matters are discussed is flagged and communicated to the GS Team.

The current methodology for the team’s identification and analysis of material ESG factors in corporate credit was designed in 2019 by the Head of Credit Research with the input of Jupiter’s GS Team. It draws on a range of ESG sources of best practice, such as the SASB materiality matrix.

For each prospective corporate credit investment, the credit analysts complete an initial ESG checklist to identify material ESG risk factors pertaining to an issuer. ESG factors identified via the team’s categorisation include:

  • Environmental factors (e.g. water stress, toxic emissions and waste, carbon emissions)
  • Social factors (e.g. labour practices, health and safety issues, sales practices)
  • Governance factors: (e.g. Corporate behaviour, corporate structure and shareholders, management integrity / track record)

The above categorisation is the starting point of ESG analysis and is attached to corporate credit memos prepared by the analysts for consideration by fund managers. These categorisations are used to indicate areas relevant for further discussion within the team, company engagement or additional research to deepen the team’s understanding of how these issues may affect the investment.

As a next step, the fund manager and the team of credit analysts carefully consider ESG risk factors pertaining to an issuer prior to making an investment decision. This process considers potential investee companies on a case-by-case basis, with due regard to the sectors in which they operate. In addition to traditional bottom-up security selection techniques, such as valuation, competitive position and industry dynamics, the assessment considers relevant ESG factors including the following where applicable:

  • The strategic track record of the management team and prevalent corporate culture with regard to risk appetite, conduct, safety and regulation.
  • The track record and credibility of the issue sponsor with regards to respecting bondholder rights.
  • Assessment of remuneration disclosures, where these are available, to consider executive alignment.
  • Ownership structures, such as the reputation of the controlling shareholder and their degree of control over a company’s board, the level of employee ownership and other factors which may indicate the level of alignment with bondholders.
  • Controversies, jurisdictional risks and the management of social and environmental risk factors which may affect the evolution of a company’s credit risk over time.

ESG risks relating to any of the areas above may lead to the fund manager choosing not to invest in a given issuer, and this is determined on a case by case basis. In relation to governance, we tend to focus on how effectively and efficiently a business is run with the aim of helping to preserve and enhance value in the long run. Environmental and social matters are typically assessed as part of a wider effort to understand the sustainability of an investee company’s business model, and we will engage as appropriate to help reinforce or potentially improve this sustainability.

Where potential risks are identified, we will consider whether the company has the capacity for ‘self-help’ in relation to improving its ESG profile, or if the issues are fundamental to the business. ESG factors are not viewed in isolation, rather the fund manager concentrates on trying to understand how these factors impact potential medium- and long-term investment performance, with reference to a company’s valuation, and identify which, in our view, are relevant and material to investment decisions.

Once invested – portfolio construction, monitoring and engagement

Once investments have been selected, ESG factors pertaining to each issuer inform position sizing and the process of portfolio review, underpinning our views on whether our confidence in an investment decision grows or reduces over time. As bondholders, we can also use duration management as a tool to express views on ESG risk factors, investing in bonds with longer or shorter term maturities depending on our views on possible downside risk or the time horizon over which we think identified ESG risk factors may materialise. This is in keeping with our unconstrained active management approach to seeking out the best opportunities for clients.

The team regularly engages with the management teams of investee companies as part of their investment process. This may include reviewing material relevant ESG risk factors and assessing how the company is managing these risks. The analysts and fund manager can also draw on the experience of the GS Team and other fund management team members when seeking to identify material ESG risks or when engaging with companies, both prior to investment and in relation to existing holdings.

An important consideration in global bond markets is the political cycle in the different economies in which we invest and the extent to which this can drive policy changes affecting sovereign and corporate issuers in the portfolio. The fund manager pays close attention to these developments which can incorporate economic factors, such as fiscal and monetary policy, but also a wide and varied range of ESG considerations. The latter may include transition risk relating to future changes in energy policy, social factors which may underpin political support for a political administration, or demographic trends which may influence monetary or fiscal policy, and thus impact bond prices. These broader themes can play a role in portfolio construction at any given time and the fund manager integrates this analysis into the continuous process of economic research and monitoring over time.  

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

SSA

When assessing sovereign bonds we consider governance and social factors such as a country’s political stability and cohesion and the credibility of its political and monetary institutions. We consider that these factors which effectively constitute and underpin a country’s governance are fundamental to sovereign credit analysis, so it is intuitive that our fund mangers take the lead on ESG integration, supported by the GS Team. The sovereign analysts will often conduct research trips to engage with government departments, local corporates, policy makers, NGOs and multilateral institutions to understand these risks. This applies to both G10 and emerging sovereigns. Material ESG factors assessed will be communicated in the investment memo and form part of the decision whether or not to invest. We pay particular attention to the risk of sanctions being imposed, either on sovereigns or quasi-sovereign entities themselves or on individuals associated with the sovereign. We conduct engagement and analysis to inform our understanding of these idiosyncratic risks.

An important consideration in global bond markets is the political cycle in the different economies in which we invest and the extent to which this can drive policy changes affecting sovereign and corporate issuers in the portfolio. The fund manager pays close attention to these developments which can incorporate of economic factors, such as fiscal and monetary policy, but also a wide and varied range of ESG considerations. The latter may include transition risk relating to future changes in energy policy, social factors which may underpin political support for a political administration, or demographic trends which may influence monetary or fiscal policy, and thus impact bond prices. These broader themes can play a role in portfolio construction at any given time and the fund manager integrates this analysis into the continuous process of economic research and monitoring over time. 

Corporate (financial)

The heterogeneity of our investable universe precludes the use of a ‘one size fits all’ approach to ESG analysis. Our analysts tailor their approach to the different instruments, sectors and geographies in which we invest. Our approach to monitoring and engagement varies depending on the type of security being considered.

We have a significant allocation to financials within our fixed income funds which can and have historically represented material ESG risks such as those relating to conduct, governance, misaligned incentives and regulatory or criminal fines. Our Head of Credit Research oversees our financials allocation and his credit selection and monitoring is informed by his significant experience of managing these risks and assessing their materiality to investment outcomes. He can also draw on external data such as RepRisk and the input of the GS team.

Below are themes that may arise in our ESG analysis and engagement with investee companies, including both financial and non-financial corporates. This does not represent an exhaustive list but indicates how stewardship factors are incorporated into the team’s process.

  • The strategic track record of the management team and prevalent corporate culture with regard to risk appetite, conduct, safety and regulation.
  • The track record and credibility of the issue sponsor with regards to respecting bondholder rights.
  •  Assessment of remuneration disclosures, where these are available, to consider executive alignment.
  •  Ownership structures, such as the reputation of the controlling shareholder and their degree of control over a company’s board, the level of employee ownership and other factors which may indicate the level of alignment with bondholders.
  •  Controversies, jurisdictional risks and the management of social and environmental risk factors which may affect the evolution of a company’s credit risk over time.

Corporate (non-financial)

The heterogeneity of our investable universe precludes the use of a ‘one size fits all’ approach to ESG analysis. Our analysts tailor their approach to the different instruments, sectors and geographies in which we invest. Our approach to monitoring and engagement varies depending on the type of security being considered. The level of ESG disclosures varies considerably between the different asset classes and geographies in which we invest. For example, there are typically fewer ESG disclosures in the high yield market due to the prevalence of private companies. We utilise direct engagement with issuers to gain investment insights and to understand relevant ESG considerations.

In the oil and gas exploration and production sector, for example, our approach is informed by uncertainty over the prospects for global oil demand in the coming decades. This is based on structural declines in oil consumption driven by increased vehicle fuel efficiency and by the transition to electrification of ground transportation.

This macro view influences our investment approach and our views on credit quality in the sector in several ways:

  • We look to invest in bonds with short maturities (typically less than five years) to reduce our exposure to longer-term oil demand trends.
  • We select issuers with cost-advantaged operations which are likely to be more resilient in a rapid energy transition scenario.
  • We look for companies with robust commodity price hedging programmes and management teams that favour capital preservation and balance sheet deleveraging over shareholder distributions.
  • We assess whether potential investee companies have strong track records for operational health, safety, security and environment (HSSE).

The energy transition theme and the possibility of tougher regulatory measures feed into our views on industrials, where we are cautious on companies with highly energy intensive business models. Many ‘traditional’ industrials, such as generic steel producers, fall into this category. We incorporate the impact of higher input prices into our models and consider risks around carbon credit costs. We view companies with robust commodity price hedging programmes favourably as this can reduce risk around short to medium term fluctuations in prices. We are currently researching potential investment ideas among industrials with more resilient business models, such as companies with upstream integration into clean power generation.

In the power sector, we are conscious of the structural decline of coal versus growth in renewables when assessing credits. We have a very negative view on thermal coal, even in emerging markets where it currently remains dominant, as we observe that the same structural issues are present albeit on a more distant timescale. In contrast, we see significant investment opportunities in emerging markets that are rolling out renewable energy programmes, such as India, Argentina and Eastern Europe.

In emerging markets, governance factors are a critical component of the analysis. We look for companies which we consider are likely to benefit from a lender of last resort, such as issuers which enjoy strong levels of government support. We will also consider the reputation and any political affiliations of major shareholders which might affect our investments. We pay particular attention to the risk of sanctions being imposed, either on the companies themselves or on individuals associated with them. We conduct engagement and analysis to inform our understanding of these idiosyncratic risks.

Securitised

The approach to ESG integration is identical to the approach to traditional corporate bonds as described above.

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)
Securitised
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]

We routinely consider the relative value of our prospective or existing bond holdings against peers and this analysis incorporates consideration of ESG risk factors identified by our credit analysts. Similarly, we will often increase or decrease position size based on improving or deteriorating confidence in our investment thesis and this includes material ESG risk factors.

Scenario analysis is another valuable tool in considering the impact of future events which exhibit uncertainty in terms of expected value and variance. The team use scenario analysis to consider potential risks which may affect our holdings. For example, this may incorporate the possible impact of regulatory changes, oil price assumptions or other inputs, considering a base case vs a worst-case scenario.

As bondholders, where the possible impact of ESG factors are hard to measure we can also use duration management as a tool to mitigate downside risk, investing in bonds with longer or shorter term maturities depending on our views on possible downside risk or the time horizon over which we think identified ESG risk factors may materialise. This is in keeping with our unconstrained active management approach to seeking out the best opportunities for clients.

As an additional benchmarking exercise, the emerging market fixed income team periodically compare their portfolio to a well-known ESG Index in order to assess the degree of variation between the two. Where investee companies are not constituents of the index, or are assigned a lower weighting within it, this may prompt further research or engagement with the company to understand the reasons for its non-inclusion/underweighting and any potential implications for the investment case.


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

Securitised

Environmental

Social

Governance

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

SSA

When assessing sovereign bonds we consider governance and social factors such as a country’s political stability and cohesion and the credibility of its political and monetary institutions. We consider that these factors which effectively constitute and underpin a country’s governance are fundamental to sovereign credit analysis, so it is intuitive that our fund mangers take the lead on ESG integration, supported by the GS Team. The sovereign analysts will often conduct research trips to engage with government departments, local corporates, policy makers, NGOs and multilateral institutions to understand these risks. This applies to both G10 and emerging sovereigns. Material ESG factors assessed will be communicated in the investment memo and form part of the decision whether or not to invest. We pay particular attention to the risk of sanctions being imposed, either on sovereigns or quasi-sovereign entities themselves or on individuals associated with the sovereign. We conduct engagement and analysis to inform our understanding of these idiosyncratic risks.

An important consideration in global bond markets is the political cycle in the different economies in which we invest and the extent to which this can drive policy changes affecting sovereign and corporate issuers in the portfolio. The fund manager pays close attention to these developments which can incorporate of economic factors, such as fiscal and monetary policy, but also a wide and varied range of ESG considerations. The latter may include transition risk relating to future changes in energy policy, social factors which may underpin political support for a political administration, or demographic trends which may influence monetary or fiscal policy, and thus impact bond prices. These broader themes can play a role in portfolio construction at any given time and the fund manager integrates this analysis into the continuous process of economic research and monitoring over time. 

Corporate (financial)

The heterogeneity of our investable universe precludes the use of a ‘one size fits all’ approach to ESG analysis. Our analysts tailor their approach to the different instruments, sectors and geographies in which we invest. Our approach to monitoring and engagement varies depending on the type of security being considered.

We have a significant allocation to financials within our fixed income funds which can and have historically represent material ESG risks such as those relating to conduct, governance, misaligned incentives and regulatory or criminal fines. Our Head of Credit Research oversees our financials allocation and his credit selection and monitoring is informed by his significant experience of managing these risks and assessing their materiality to investment outcomes. He can also draw on external data such as RepRisk and the input of the GS team.

Below are themes that may arise in our ESG analysis and engagement with investee companies, including financials. This does not represent an exhaustive list but indicates how stewardship factors are incorporated into the team’s process.

  • The strategic track record of the management team and prevalent corporate culture with regard to risk appetite, conduct, safety and regulation.
  • The track record and credibility of the issue sponsor with regards to respecting bondholder rights.
  • Assessment of remuneration disclosures, where these are available, to consider executive alignment.
  • Ownership structures, such as the reputation of the controlling shareholder and their degree of control over a company’s board, the level of employee ownership and other factors which may indicate the level of alignment with bondholders. 
  • Controversies, jurisdictional risks and the management of social and environmental risk factors which may affect the evolution of a company’s credit risk over time.

Corporate (non-financial)

The heterogeneity of our investable universe precludes the use of a ‘one size fits all’ approach to ESG analysis. Our analysts tailor their approach to the different instruments, sectors and geographies in which we invest. Our approach to monitoring and engagement varies depending on the type of security being considered. The level of ESG disclosures varies considerably between the different asset classes and geographies in which we invest. For example, there are typically fewer ESG disclosures in the high yield market due to the prevalence of private companies. We utilise direct engagement with issuers to gain investment insights and to understand relevant ESG considerations.

In the oil and gas exploration and production sector, for example, our approach is informed by uncertainty over the prospects for global oil demand in the coming decades. This is based on structural declines in oil consumption driven by increased vehicle fuel efficiency and by the transition to electrification of ground transportation.

This macro view influences our investment approach and our views on credit quality in the sector in several ways:

  • We look to invest in bonds with short maturities (typically less than five years) to reduce our exposure to longer-term oil demand trends.
  • We select issuers with cost-advantaged operations which are likely to be more resilient in a rapid energy transition scenario.
  • We look for companies with robust commodity price hedging programmes and management teams that favour capital preservation and balance sheet deleveraging over shareholder distributions.
  • We assess whether potential investee companies have strong track records for operational health, safety, security and environment (HSSE).

The energy transition theme and the possibility of tougher regulatory measures feed into our views on industrials, where we are cautious on companies with highly energy intensive business models. Many ‘traditional’ industrials, such as generic steel producers, fall into this category. We incorporate the impact of higher input prices into our models and consider risks around carbon credit costs. We view companies with robust commodity price hedging programmes favourably as this can reduce risk around short to medium term fluctuations in prices. We are currently researching potential investment ideas among industrials with more resilient business models, such as companies with upstream integration into clean power generation.

In the power sector, we are conscious of the structural decline of coal versus growth in renewables when assessing credits. We have a very negative view on thermal coal, even in emerging markets where it currently remains dominant, as we observe that the same structural issues are present albeit on a more distant timescale. In contrast, we see significant investment opportunities in emerging markets that are rolling out renewable energy programmes, such as India, Argentina and Eastern Europe.

In emerging markets, governance factors are a critical component of the analysis. We look for companies which we consider are likely to benefit from a lender of last resort, such as issuers which enjoy strong levels of government support. We will also consider the reputation and any political affiliations of major shareholders which might affect our investments. We pay particular attention to the risk of sanctions being imposed, either on the companies themselves or on individuals associated with them. We conduct engagement and analysis to inform our understanding of these idiosyncratic risks.

In emerging markets, governance factors are a critical component of the analysis. We look for companies which we consider are likely to benefit from a lender of last resort, such as issuers which enjoy strong levels of government support. We will also consider the reputation and any political affiliations of major shareholders which might affect our investments. We pay particular attention to the risk of sanctions being imposed, either on the companies themselves or on individuals associated with them. We conduct engagement and analysis to inform our understanding of these idiosyncratic risks.

Securitised

The approach to ESG integration and review is identical to the approach to traditional corporate bonds as described above.

12.3. Additional information.[OPTIONAL]

The team also participates in a periodic portfolio review process conducted by the GS Team, in which material ESG risk factors are discussed and potential areas for company engagement are identified using third party ESG rating data.


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