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Baillie Gifford

PRI reporting framework 2020

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.

We believe governance and sustainability analysis adds value in controlling risk and identifying opportunities. Focusing on softer governance and sustainability topics invariably act as early warning signals at a company. The emphasis of governance and sustainability analysis will vary depending on the company’s sector, region, strength of financial position and maturity profile. We do not use an exclusion list, but instead incorporate material issues into the investment research and analysis. Contentious debates on governance and sustainability matters do not preclude investment. If we believe that a company is going to materially improve, or if we are being well-compensated for the risk, we can still invest, as long as other investment conditions are met. Our process is about being conscious of the relevant governance and sustainability issues and acting accordingly on this knowledge.

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

SSA

Our analysis on government bonds focuses on three key areas, namely Macroeconomic Sustainability, Economic Management and Growth Potential. Sustainability and governance are key elements intertwined in each of these areas. Within Macroeconomic Sustainability, we assess the sustainability of the fiscal situation, Balance of Payments, trends and credit growth. Economic Management incorporates analysis on the governance framework in the country, the rule of law and the credibility and durability of the government and its economic policies. If a country is governed effectively, its people respected, and its natural assets treated in the right way, all else equal there is a greater chance its potential growth will be more sustainable.

Corporate (financial)

A high quality company should have a durable competitive position, a good governance and sustainability strategy and an appropriate capital structure. Every new investment idea into the portfolio or current holding reviewed is considered from a governance and sustainability perspective. If any governance or sustainability issue is identified in our fundamental analysis, we would typically seek to engage with company management. The purpose of this engagement is to enhance our understanding of the risks involved in the potential or existing investment. Given the contractual nature of our relationship with issuers, we understand our ability to influence is limited. However, we believe there is still value in engaging on governance and sustainability matters to gain a better understanding of the risks involved in the investment case. The emphasis of governance and sustainability analysis will vary depending on the company’s sector, region, strength of financial position and maturity profile. We may wish, for example, to focus more on environmental analysis for a mining company whereas regulation may take precedence for a financial company. We are flexible in our approach, freeing ourself from a rigid framework across multiple businesses. A member of the Governance & Sustainability team is assigned as dedicated resource to Fixed Income and this integration supports our decision-making process through participation in discussions, contribution to research and keeping the team abreast of material governance and sustainability developments.

Corporate (non-financial)

A high quality company should have a durable competitive position, a good governance and sustainability strategy and an appropriate capital structure. Every new investment idea into the portfolio or current holding reviewed is considered from a governance and sustainability perspective. If any governance or sustainability issue is identified in our fundamental analysis, we would typically seek to engage with company management. The purpose of this engagement is to enhance our understanding of the risks involved in the potential or existing investment. Given the contractual nature of our relationship with issuers, we understand our ability to influence is limited. However, we believe there is still value in engaging on governance and sustainability matters to gain a better understanding of the risks involved in the investment case. The emphasis of governance and sustainability analysis will vary depending on the company’s sector, region, strength of financial position and maturity profile. We may wish, for example, to focus more on environmental analysis for a mining company whereas regulation may take precedence for a financial company. We are flexible in our approach, freeing ourself from a rigid framework across multiple businesses. A member of the Governance & Sustainability team is assigned as dedicated resource to Fixed Income and this integration supports our decision-making process through participation in discussions, contribution to research and keeping the team abreast of material governance and sustainability developments.

Securitised

We tend to invest in securitised bonds that are very similar in mature to corporate bonds and as such we do not differentiate between the asset classes. A high quality company should have a durable competitive position, a good governance and sustainability strategy and an appropriate capital structure. Every new investment idea into the portfolio or current holding reviewed is considered from a governance and sustainability perspective. If any governance or sustainability issue is identified in our fundamental analysis, we would typically seek to engage with company management. The purpose of this engagement is to enhance our understanding of the risks involved in the potential or existing investment. Given the contractual nature of our relationship with issuers, we understand our ability to influence is limited. However, we believe there is still value in engaging on governance and sustainability matters to gain a better understanding of the risks involved in the investment case. The emphasis of governance and sustainability analysis will vary depending on the company’s sector, region, strength of financial position and maturity profile. We may wish, for example, to focus more on environmental analysis for a mining company whereas regulation may take precedence for a financial company. We are flexible in our approach, freeing ourself from a rigid framework across multiple businesses. A member of the Governance & Sustainability team is assigned as dedicated resource to Fixed Income and this integration supports our decision-making process through participation in discussions, contribution to research and keeping the team abreast of material governance and sustainability developments.

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]


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

The integration of ESG factors allows a better assessment of risk and all relevant ESG factors are taken into account as part of investment analysis. The relevance of such factors depends on the country being assessed and the stage of development of said country. For example, rule of law is more pertinent in the assessment of a developing economy than in that of a developed one. The inclusion of these factors allows us to judge whether any threats to sustainability have been fully priced into the bond, therefore providing us with better insight into the likely performance of the investment over the long-term. Integration of ESG factors broadens the indicators reviewed in analysis from traditional quantitative measures into more qualitative areas such as government effectiveness, corruption, rule of law and political stability and absence of violence. ESG integration also broadens the sources of information that we look at when reviewing a country including NGO reports, World Bank Governance Indicators and local press. Part of the investment analysis regularly includes trips to the country being reviewed to speak with governments and local players to better assess the materiality of ESG risks and enhance financial analysis. This is particularly relevant when assessing emerging market debt.

Corporate (financial)

Enhanced governance and sustainability oversight encourages a deeper, broader discussion, focusing on softer topics, which invariably act as early warnings signals to issues that translate into the numbers, sooner or later. As such, every new investment idea into the portfolio or current holding reviewed is considered from a governance and sustainability perspective. We may dismiss new investments and sell out of current positions if we have a fundamental concern with a governance and sustainability issue. We discuss recent governance and sustainability developments at our weekly news and quarterly portfolio review meetings. If any governance or sustainability issue is identified in our fundamental analysis, we would typically seek to engage with company management. The purpose of this engagement is to enhance our understanding of the risks involved in the potential or existing investment. Given the contractual nature of our relationship with issuers, we understand our ability to influence is limited. However, we believe there is still value in engaging on governance and sustainability matters to gain a better understanding of the risks involved in the investment case. The depth of interaction varies on a case by case basis – from a formal report on a specific topic to participation in the team’s research discussions – depending on the materiality of the ESG factors in question. A member of the Governance & Sustainability team is assigned to cover our Fixed Income investments. Where required, we engage with bond issuers to better understand ESG factors both pre- and post-investment.

Corporate (non-financial)

Enhanced governance and sustainability oversight encourages a deeper, broader discussion, focusing on softer topics, which invariably act as early warnings signals to issues that translate into the numbers, sooner or later. As such, every new investment idea into the portfolio or current holding reviewed is considered from a governance and sustainability perspective. We may dismiss new investments and sell out of current positions if we have a fundamental concern with a governance and sustainability issue. We discuss recent governance and sustainability developments at our weekly news and quarterly portfolio review meetings. If any governance or sustainability issue is identified in our fundamental analysis, we would typically seek to engage with company management. The purpose of this engagement is to enhance our understanding of the risks involved in the potential or existing investment. Given the contractual nature of our relationship with issuers, we understand our ability to influence is limited. However, we believe there is still value in engaging on governance and sustainability matters to gain a better understanding of the risks involved in the investment case. The depth of interaction varies on a case by case basis – from a formal report on a specific topic to participation in the team’s research discussions – depending on the materiality of the ESG factors in question. A member of the Governance & Sustainability team is assigned to cover our Fixed Income investments. Where required, we engage with bond issuers to better understand ESG factors both pre- and post-investment.

Securitised

We tend to invest in securitised bonds that are very similar in nature to corporate bonds and as such we do not differentiate between the asset classes. Enhanced governance and sustainability oversight encourages a deeper, broader discussion, focusing on softer topics, which invariably act as early warnings signals to issues that translate into the numbers, sooner or later. As such, every new investment idea into the portfolio or current holding reviewed is considered from a governance and sustainability perspective. We may dismiss new investments and sell out of current positions if we have a fundamental concern with a governance and sustainability issue. We discuss recent governance and sustainability developments at our weekly news and quarterly portfolio review meetings. If any governance or sustainability issue is identified in our fundamental analysis, we would typically seek to engage with company management. The purpose of this engagement is to enhance our understanding of the risks involved in the potential or existing investment. Given the contractual nature of our relationship with issuers, we understand our ability to influence is limited. However, we believe there is still value in engaging on governance and sustainability matters to gain a better understanding of the risks involved in the investment case. The depth of interaction varies on a case by case basis – from a formal report on a specific topic to participation in the team’s research discussions – depending on the materiality of the ESG factors in question. A member of the Governance & Sustainability team is assigned to cover our Fixed Income investments. Where required, we engage with bond issuers to better understand ESG factors both pre- and post-investment.

12.3. Additional information.[OPTIONAL]


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