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Jupiter Asset Management

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You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income » (C) Implementation: Integration

(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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