We assess ESG factors across our SSA holdings. In addition, we have developed a proprietary framework for our Australian strategies given the significant proportion of Government securities in our Australian composite fixed interest funds.

The Federal and State Governments in Australia generally have strong governance and social scores on an international comparison. However, the environmental scores are lower on an international basis and vary more across States. Following on from this analysis our investment team identified opportunities to add value from a risk/return perspective at a State Issuer level based on these identified environmental issues. 

An example of our scores are represented below which then translate into our active positioning vs benchmark which is in the second graph. Traditional framework (MSCI scoring system) is 50% Governance, 25% Environment and 25% Social. Australia rates highly for governance and social but poorer for environment. Therefore for internal state ratings, we make it 50% environment and 25% for social and governance. A score of 1 in the table below is the strongest score:

                    Environment   Governance   Social   Total      % Female MPs
TAS                      1                      2                  3        1.75                 50
ACT                     2                      2                  1        1.75                 56
Commonwealth 3                      2                  2         2.5                   33

In addition, Pendal is engaging with State borrowing authorities to support issuance of specific purpose bonds and reflect the importance of ESG scores to our investment process.

Drilling down further on the process outlined in FI 10.1 above, the top-down and bottom-up components provide additional information on how ESG factors are incorporated into our analysis of corporate (financial) issuers:

Top-down: the Credit Macro View is determined through other macro credit fundamentals; such as credit specific economic data, company earnings, balance sheet health, default rates and equity volatility. The results of the macro input stage determine a credit market view (positive, neutral, or negative) which influences the sector weightings (defensive versus cyclical sectors) and credit rating tilt. Once preferred sector exposures have been determined, it is combined with the bottom-up issuer research and culminates in issuer and then security selection.

Bottom-up: The credit research process incorporates fundamental issuer analysis (including ESG factors where they are material to the financial outcomes of the investment) and quantitative issuer modelling to identify investment opportunities whilst avoiding deteriorating credits. Collaboration with the Pendal's Australian Equities team and a third party global research house is an important component in the process. The bottom-up credit analysis focuses on business profile (ESG factors, industry factors, competition, business diversity), financial profile (earnings and cashflow volatility, balance sheet) and valuations. The credit research process culminates with analysts formalising a view on each applicable issuer based on both their fundamental strength and relative value versus both industry and peers. The aim is to identify which securities are the most attractive from a risk/return perspective.

Our Head of Responsible Investments works closely with all of our investment teams to ensure each team’s incorporation of ESG factors is relevant and consistent with the Pendal Australia’s overall RI Philosophy. Information is Our Responsible Investments team works closely with all of our investment teams to ensure each team's incorporation of ESG factors is relevant and consistent with the Pendal Australia's overall RI Philosophy. Information is shared across the asset class teams where ESG information synergies also exist, for example between our credit and equity analysts. This includes ESG information gathered from our Equity team engagements. Our RI Working Group is another forum that fosters ongoing and open dialogue across the investment teams and key support teams to ensure relevant ESG information is being incorporated into our investment products, policies and processes.

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 Drilling down further on the process outlined in FI 10.1, the above top-down and bottom-up components provide additional information on how ESG factors are incorporated into our analysis of corporate (non-financial) issuers:

Top-down: the Credit Macro View is determined through other macro credit fundamentals; such as credit specific economic data, company earnings, balance sheet health, default rates and equity volatility. The results of the macro input stage determine a credit market view (positive, neutral, or negative) which influences the sector weightings (defensive versus cyclical sectors) and credit rating tilt. Once preferred sector exposures have been determined, it is combined with the bottom-up issuer research and culminates in issuer and then security selection

Bottom-up: The credit research process incorporates fundamental issuer analysis (including ESG factors where they are material to the financial outcomes of the investment) and quantitative issuer modelling to identify investment opportunities whilst avoiding deteriorating credits. Collaboration with the Pendal's Australian Equities team and a third party global research house is an important component in the process. The bottom-up credit analysis focuses on business profile (ESG factors, industry factors, competition, business diversity), financial profile (earnings and cashflow volatility, balance sheet) and valuations. The credit research process culminates with analysts formalising a view on each applicable issuer based on both their fundamental strength and relative value versus both industry and peers. The aim is to identify which securities are the most attractive from a risk/return perspective.

Our Responsible Investments team works closely with all of our investment teams to ensure each team's incorporation of ESG factors is relevant and consistent with the Pendal Australia's overall RI Philosophy. Information is shared across the asset class teams where ESG information synergies also exist, for example between our credit and equity analysts. This includes ESG information gathered from our Equity team engagements. Our RI Working Group is another forum that fosters ongoing and open dialogue across the investment teams and key support teams to ensure relevant ESG information is being incorporated into our investment products, policies and processes.

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Our process for reviewing ESG factors in our SSA integration process is based on an analysis of those factors we believe to be material to the risk/return outcomes of that issuer. As part of this process, we utilise internal and external information sources. In addition, Pendal engages with SSA borrowing authorities to enhance our understanding of a particular issuer's exposure to current or emergent ESG issues and how well the issuer is managing those exposures. Where appropriate we will encourage the adoption of formal policies and enhanced disclosure to assist in the management and assessment of ESG issues.

For example, in late 2019, the investment team and Regnan (our internal ESG research team) have been working on a new factor to add to our “Environmental” score for governments in Australia. This factor is Water Security across the states given that we view this will be an important determinant in potential credit rating changes in the future. This research project is focussing on a number of elements that will drive our assessment of Water Security across the state governments.

Our credit analysis process incorporates fundamental issuer analysis and proprietary quantitative modelling to assess investment opportunities. In particular, the credit selection framework focuses on four categories:
1. Business profile (such as competitive position and quality of management);
2. Financial profile (such as cash flow metrics and debt maturity schedules);
3. Risk factors (including regulation and funding sources); and
4. Valuation factors (such as relative value, technical and covenant strength).

ESG factors are typically captured in the business profile and risk factor categories where they are deemed material to the financial outcomes of the fund using bottom-up analysis. Examples of some of the categories that may be considered (depending on specific sector, business factors, investment horizon, geographic exposures, regulatory factors, and product performance objectives) include:

• Environmental Management:
  • management of environmental impacts through the implementation of best practice environmental techniques, technologies and product design;
  • environmental performance against a range of environmental indicators including for example, greenhouse gas emissions, energy and water use and environmental incidents;
  • the capacity to consult key stakeholders in relation to activities that may have significant environmental impacts; and
  • adoption of best practice with regards to management and disclosure of material risks and opportunities associated with climate change.
• Social practices:
  • equal opportunity, anti-discrimination and industrial relations policies and practices;
  • staff incentives, development and training;
  • employee benefits and entitlements;
  • human capital management performance against a range of indicators, such as voluntary turnover and gender diversity in senior management;
  • products or services that provide positive social impacts such as improved health & community well-being, disease prevention, and education; 
  • management of contractors and suppliers; and
  • workplace health and safety performance against indicators such as fatalities and lost time injury frequency rates.
• Corporate governance and business conduct:
  • codes of conduct and the extent of their integration into the company’s operations;
  • provision of regular and appropriate training;
  • whistleblower policies and procedures;
  • ethical conduct and performance of employees and officers - the extent to which companies are adopting principles in areas such as complying with the law, fair and open dealings and accepting responsibility for their actions;
  • product safety and consumer protection; and
  • engagement practices with employees, shareholders and key community stakeholders.

For our review of ESG factors for credit, collaboration with Pendal's Equities teams is an important component in the credit research process. ESG data and research from Regnan is also used to enhance our own research and analysis of ESG factors.

In addition to the above, our Responsible Investments Working Group facilitate knowledge sharing and provide input into RI guidelines, strategy and solutions. The group consists of senior members of the investments (all asset classes) and corporate teams (Risk & Compliance, Legal, Sales and Marketing) and its responsibilities are set out in the Responsible Investments Governance Structure. The objective of the group is to review the development and application of Pendal's RI process across offerings and communications, to ensure alignment with Pendal's RI philosophy as well as client expectations and needs. The group does not replace prior risk management and compliance processes, however, serves to enhance the existing controls already in place.

Our credit analysis process incorporates fundamental issuer analysis and proprietary quantitative modelling to assess investment opportunities. In particular, the credit selection framework focuses on four categories:
1. Business profile (such as competitive position and quality of management);
2. Financial profile (such as cash flow metrics and debt maturity schedules);
3. Risk factors (including regulation and funding sources); and
4. Valuation factors (such as relative value, technical and covenant strength).

ESG factors are typically captured in the business profile and risk factor categories where they are deemed material to the financial outcomes of the fund using bottom-up analysis. Examples of some of the categories that may be considered (depending on specific sector, business factors, investment horizon, geographic exposures, regulatory factors, and product performance objectives) include:

Environmental Management:

• management of environmental impacts through the implementation of best practice environmental techniques, technologies and product design;
• environmental performance against a range of environmental indicators including for example, greenhouse gas emissions, energy and water use and environmental incidents;
• the capacity to consult key stakeholders in relation to activities that may have significant environmental impacts; and
• adoption of best practice with regards to management and disclosure of material risks and opportunities associated with climate change.

Social practices:

• equal opportunity, anti-discrimination and industrial relations policies and practices;
• staff incentives, development and training;
• employee benefits and entitlements;
• human capital management performance against a range of indicators, such as voluntary turnover and gender diversity in senior management;
• products or services that provide positive social impacts such as improved health & community well-being, disease prevention, and education; 
• management of contractors and suppliers; and
• workplace health and safety performance against indicators such as fatalities and lost time injury frequency rates.

Corporate governance and business conduct:

• codes of conduct and the extent of their integration into the company’s operations;
• provision of regular and appropriate training;
• whistleblower policies and procedures;
• ethical conduct and performance of employees and officers - the extent to which companies are adopting principles in areas such as complying with the law, fair and open dealings and accepting responsibility for their actions;
• product safety and consumer protection; and
• engagement practices with employees, shareholders and key community stakeholders.

For our review of ESG factors for credit, collaboration with Pendal's Equities teams is an important component in the credit research process. ESG data and research from Regnan is also used to enhance our own research and analysis of ESG factors.

In addition to the above, our Responsible Investments Working Group facilitate knowledge sharing and provide input into RI guidelines, strategy and solutions. The group consists of senior members of the investments (all asset classes) and corporate teams (Risk & Compliance, Legal, Sales and Marketing) and its responsibilities are set out in the Responsible Investments Governance Structure. The objective of the group is to review the development and application of Pendal's RI process across offerings and communications, to ensure alignment with Pendal's RI philosophy as well as client expectations and needs. The group does not replace prior risk management and compliance processes, however, serves to enhance the existing controls already in place.