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Pendal

PRI reporting framework 2020

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You are in Direct - Listed Equity Incorporation » ESG incorporation in actively managed listed equities » Implementation processes

Implementation processes

LEI 01. Percentage of each incorporation strategy

01.1. Indicate which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities; and the breakdown of your actively managed listed equities by strategy or combination of strategies.

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
94 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
1 %
Percentage of active listed equity to which the strategy is applied — you may estimate +/- 5%
5 %
Total actively managed listed equities 111%

01.2. Describe your organisation’s approach to ESG incorporation and the reasons for choosing the particular strategy/strategies.

Pendal's philosophy for all our funds, not just explicit Ethical or Sustainable mandates, is that where ESG factors are considered material to the risk and return outcomes of the investment, we incorporate them into the investment framework. More specifically, labour standards or environment, social and ethical considerations are taken into account when making investment decisions, to the extent that such issues may affect the financial performance of an investment. We incorporate ESG integration across all of our listed equity strategies.

For Pendal, ESG issues arise in the following contexts:

  • Our ability to deliver sustainable returns for both our clients shareholders
  • Our differing responsible investment strategies to meet varying client needs (e.g. ESG integration, ethical investing, sustainability-themed investing)
  • The actions we take as a corporate citizen that may impact upon the environment, the community or our other stakeholders

As an active investment manager, Pendal incorporates ESG factors as part of its core investment processes recognising that ESG issues can have a significant influence on the value placed on a company and its ability to drive shareholder returns on a sustainable basis. For more than a decade, we have been progressively factoring in ESG considerations more systematically into our investment process across multiple asset classes – including as a part of the research, analysis and due diligence undertaken – covering issues such as climate change, human capital and ethical conduct. Over this time we have seen first-hand that ESG issues have the potential to affect value, for example by creating new investment opportunities in the renewables and cleantech solutions sector or through findings of poor conduct having a material impact upon the financial sector. We know that the way a company handles ESG issues can provide insights into its exposure to negative incidents or emerging opportunities. We incorporate ESG as part of our fiduciary duty to clients.

ESG incorporation (bottom up, company specific incorporation of material ESG value drivers) is applied to all Pendal equity funds. Additionally, dedicated RI-labelled funds apply additional strategies including:

  • Screening (negative and positive) has been developed to meet the needs of clients seeking to align their investments with the mission of their organisation and/or individual values:
    • Our exclusionary screens are across a range of sectors (including fossil fuels, tobacco, alcohol, weapons, gambling, pornography, uranium). Some funds also employ temporary 12m exclusions for harmful activities such as breaches of environmental regulation, business conduct norms and labour rights. Sector-based screens are based on business involvement determined by revenue ranging from 0% to 10%, depending on the individual strategy (*except for Controversial Weapons - such as cluster munitions, landmines, nuclear weapons and biochemical weapons - where a 0% revenue materiality tolerance applies across the funds).
    • Best-in-class positive and negative screening. In assessing this best-in-class or relative performance on environmental and social practices, we consider companies' sustainability strategy, policy, management and performance in areas such as: environmental management, for example, climate change, greenhouse gas emissions, energy and water use; business ethics and conduct including stakeholder relations; occupational health and safety management and performance; human capital management, including workplace relations, equal opportunity, consultation and participation in the workplace and employee conditions and benefits. We exclude those companies considered to be laggards in their sector, and positively tilt towards those companies we deem to be demonstrating leading environmental and social practices. 
  • Sustainability-themed investing: this thematic approach has the objective of tilting towards companies offering products and services which contribute to positive environmental and social outcomes, such as renewable energy, energy efficiency, climate change adaptation, sustainable buildings and land use, improved health and community wellbeing. It may also include companies we deem to demonstrate leading environmental and social practices. This enables us to the needs of those clients interested in investing sustainably.  

01.3. If assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]

Within our equity offerings, our Ethical and Sustainable Series funds combine a number of RI strategies.

Negative screening firstly is used to define the investment universe. That is, excluding certain sectors (e.g. gambling, tobacco) and poor ESG performers (relative). Then an overlay of positive screening, tilting towards better ESG performers, is applied. In our Sustainable Series funds an additional overlay is applied, with active sustainability-themed tilts, for example towards businesses whose products or services contribute to positive social and environmental outcomes.

Finally, financially material ESG factors are incorporated into the final investment decision and weight of the holding.

The above strategies are used in various forms for our clients. The structure of which is customised in order to deliver investment solutions that align with the value and values objectives of our clients.


LEI 02. Type of ESG information used in investment decision (Private)


LEI 03. Information from engagement and/or voting used in investment decision-making

03.1. Indicate whether your organisation has a process through which information derived from ESG engagement and/or (proxy) voting activities is made available for use in investment decision-making.

03.2. Additional information. [Optional]

Active ownership is a natural extension of our active management investment process to manage risk, affect change and protect value over the long term. We undertake engagement on a direct basis as part of our bottom-up security selection process for all our asset classes (equities, fixed income and property).

Information derived from ESG engagement and proxy voting activities is collated in the equity team’s database and is systematically communicated where relevant during regular team investment meetings as part of the broader coverage of information material to the team’s investments.

Our in-house specialist ESG engagement and research team, Regnan, reports monthly on their separate engagement program to Pendal investment teams so they may also use this information to support decision making. 

 

 


(A) Implementation: Screening

LEI 04. Types of screening applied

04.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

Explicit ESG-related exclusions are undertaken for our range of Ethical and Sustainability strategies, as well as for some of our individually managed institutional accounts.

Our range of negative screens are:

  • Fossil Fuels (ranging from thermal coal to oil & gas and metallurgical coal and oil sands).
  • Tobacco
  • Weapons
  • Controversial weapons
  • Alcohol
  • Gambling
  • Pornography
  • Uranium
  • 'Red Flag' incidents (analysis of contentious, emergent and topical issues includes inputs from Regnan)
  • Abortifacients, any ties to abortion
  • Stem cell fetal tissue research
  • Stem cell human embryonic research
  • Contraceptives production
  • In Vitro Fertilisation (IVF) involvement
  • Entities related to sanctioned countries

The above screens - applied variously depending on the individual strategy - are based on a material revenue range of 0% to 50% in the specified sectors, again depending on the individual strategy.

 

 

Screened by

Description

For our Ethical and Sustainability strategies, our universe of positive screens (applied in various combinations across different funds) may include:

Industries with products and services that provides a direct benefit to social and/or environmental outcomes such as:

  • environmental management or remediation
  • environmental technologies
  • energy efficiency and renewable energy
  • low-impact products or products that reduce ecological footprint
  • sustainable buildings and property development
  • sustainable land use and food production
  • improved health and community well-being

Companies we deem to demonstrate leading environmental and social practices, in assessing this we have regard to sustainability strategy, policy, management and performance in the following areas such as:

  • Environmental management including for example, climate change, greenhouse gas emissions, energy and water use
  • Business ethics and conduct, including stakeholder relations
  • Occupational health and safety management and performance
  • Human Capital Management (HCM), including workplace relations, equal opportunity, consultation and participation in the workplace and employee conditions and benefits
  • Improving community health and wellbeing

Screened by

Description

Our norms-based screens are incorporated within our ethical overlay strategies and include issues such as human rights, labour standards, environmental and anti-corruption business practices based on international initiatives and guidelines (as noted above). Our Ethical Australian Shares fund includes explicit consideration of the Norms-based principles across issues such as:  

  • Environment: companies that have committed significant or recurrent breaches of environmental  regulation
  • Workplace and business ethics: companies that have committed significant or recurrent breaches of workplace health and safety, anti-discrimination, equal opportunity,  trade practices, or industrial relations legislation

 

04.2. Describe how you notify clients and/or beneficiaries when changes are made to your screening criteria.

The above screening criteria is based on extensive engagement with clients and other industry bodies as well as an in depth analysis of portfolio impacts related to each screen category.

The criteria is reviewed typically on a monthly basis or if significant events occur that require more immediate consideration. Some clients will be notified or any changes as part of their reporting arrangements whilst others will be notified during our regular presentations to them. 


LEI 05. Processes to ensure screening is based on robust analysis

05.1. Indicate which processes your organisation uses to ensure ESG screening is based on robust analysis.

05.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your ESG screening strategy.

05.3. Indicate how frequently third party ESG ratings are updated for screening purposes.

05.4. Indicate how frequently you review internal research that builds your ESG screens.

05.5. Additional information. [Optional]


LEI 06. Processes to ensure fund criteria are not breached

06.1. Indicate which processes your organisation uses to ensure fund criteria are not breached.

06.2. If breaches of fund screening criteria are identified, describe the process followed to correct those breaches.

Pendal has an effective incident management process in place to ensure prompt notification, escalation and rectification of any incidents or potential incidents. The process requires all employees to identify, report and escalate any known or suspected incidents. The Risk & Compliance and Legal functions are stakeholders in the incident management process to assist with assessing the incident, the actions required to contain and rectify the incident and the reporting implications. All incidents involving non-compliance with internal policies and procedures are assessed by Risk & Compliance to ascertain their significance and regulatory reporting requirements.

Incidents are governed by the Pendal Incident Management Policy, which is owned by Risk & Compliance. All incidents are reported to the Executive Committee Risk Forum on a monthly basis and the Pendal RE Boards, Managed Investment Compliance Committee and the Audit and Risk Committee on a monthly basis.

An example of the process used to ensure fund criteria is not breached is provided below:

  • Regnan data that sets the companies and issuers to be excluded from the portfolio is delivered directly to the Portfolio Management team as well as the Investment Risk team (data management, monitoring and reporting) within our Investment Operations group. This ensures the excluded securities are hard-coded into our trading systems to ensure compliance on a pre- and post-trade basis.
  • The Investment Risk team perform the post-trade monitoring on daily basis. In addition, there are hard-coded rules in system that restrict pre-trade activity. This will stop the portfolio from purchasing excluded securities. Any changes in ethical or sustainable ratings will be picked up by the post trade monitoring.
  • In case of a breach, e.g. a security is no longer classified as sustainable as per monitoring rule mentioned above, the alert notification is immediately sent to the Portfolio Manager of the fund to inform the status of the security. The Investment Risk team works with the Portfolio Manager in managing the resolution of the breach.
  • Depending on the nature of the security (liquidity) and financial consideration the security is sold out in feasible timely manner. All Portfolio guidelines breaches are reported to Executive Risk & Operations Group as part of Investment Risk's monthly reporting, where such items are discussed and noted.

06.3. Additional information. [Optional]


(B) Implementation: Thematic

LEI 07. Types of sustainability thematic funds/mandates

07.1. Indicate the type of sustainability thematic funds or mandates your organisation manages.

07.2. Describe your organisation’s processes relating to sustainability themed funds. [Optional]

Within Pendal's Ethical and Sustainable strategies we have active thematic tilts towards renewable energy, energy efficiency, climate change, sustainable buildings and land use, improved health and community wellbeing.

In addition, we have a number of institutional mandates with explicit environmental tilts (targeting specific levels of below benchmark carbon intensity and carbon price considerations with tilts towards sustainability environmentally themed industries and/or companies). These strategies are managed on a customised basis to align with specific client requirements.

 


(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the proportion of actively managed listed equity portfolios where E, S and G factors are systematically researched as part of your investment analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]

Pendal's philosophy for all our funds, not just explicit RI mandates, is that where any ESG factor is considered to be material to the risk and return outcomes of the investment, the investment teams take it into consideration. 

 


LEI 09. Processes to ensure integration is based on robust analysis

09.1. Indicate which processes your organisation uses to ensure ESG integration is based on robust analysis.

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

09.5. Describe how ESG information is held and used by your portfolio managers.

09.6. Additional information. [Optional]

Use of ESG Information:

Both our internal and externally sourced ESG data is used as inputs, both formally and informally, in stock analysis. In addition, for some strategies, ESG data is explicitly utilised for portfolio construction and management purposes formally and informally.

  • Analysis of company strategy and quality of management - this is undertaken by analysts on a systematic basis as part of their stock research.
  • Idea generation examples - environmental factors providing investment opportunities in areas such as the gas industry. Social factors are providing investment opportunities in the health care sector.
  • Portfolio construction - some of our strategies systematically look at the impact that ESG factors are having at the overall portfolio level whilst for our mainstream strategies the Portfolio Manager will on occasion look at the composition of the portfolio from an ESG perspective.

LEI 10. Aspects of analysis ESG information is integrated into

New selection options have been added to this indicator. Please review your prefilled responses carefully.

10.1. Indicate which aspects of investment analysis you integrate material ESG information into.

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

10.2. Indicate which methods are part of your process to integrate ESG information into fair value/fundamental analysis.

10.3. Describe how you integrate ESG information into portfolio weighting.

For the Australian equity portfolios managed by Pendal, the impact of ESG on our portfolio construction is primarily a function of the bottom up stock selection investment process employed by the team, combined with a recognition of specific opportunities and risks that have ESG elements, driving the Portfolio Manager’s decision on how much of the stock to own in the portfolio.

Portfolio construction - some of our strategies systematically look at the impact that ESG factors are having at the overall portfolio level whilst for our mainstream strategies the Portfolio Manager will on occasion look at the composition of the portfolio from an ESG perspective.

We recognise that ESG factors can have a significant influence on the value placed on a company and its ability to drive shareholder returns on a long term basis.

We believe ESG is relevant to a portfolio or investment decision if one or more of the following apply:

1. ESG is a predictor of future returns and cash flows.

2. ESG analysis can flag longer term risks that investment analysis may not factored into the long term discount rate.

3. ESG analysis indicates that there are regulatory or ethical issues which should be considered.

10.4. Describe the methods you have used to adjust the income forecast/valuation tool.

Our investment analysts'  income forecast and valuations may be adjusted based on ESG factors that we have identified to have a significant influence on the value placed on a company and its ability to drive shareholder returns on a long term basis.

We believe ESG is relevant to a portfolio or investment decision if one or more of the following apply:

1. ESG is a predictor of future returns and cash flows.

2. ESG analysis can flag longer term risks that investment analysis may not factored into the long-term discount rate.

3. ESG analysis indicates that there are regulatory or ethical issues which should be considered.

Analysis of company strategy and quality of management - this is undertaken by analysts on a systematic basis as part of their company research. We accept that there is a relationship between governance and investment returns. For this reason, Governance will be assessed in making asset allocation decisions.

10.6. Additional information. [OPTIONAL]

.

 

 


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