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Coronation Fund Managers

PRI reporting framework 2020

You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income

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

In line with our investment philosophy of investing on longterm fundamentals, we will forecast the long-term earnings potential and cash flow generation of a business in order to assess its ability to meet its debt obligations. ESG forms an intrinsic part of the investment assessment. We are valuation driven, security selectors and seek to be adequately compensated for the risk assumed.We do not construct portfolios based on themes. Themes may emerge as a result of where we find value from the bottom up. Each business faces its own unique set of environmental and social circumstances which may have an impact on future cash flows. Coronation will not explicitly screen out any shares due to ESG factors, instead we may require a greater riskadjusted upside or a higher yield before investing in relation to companies with a higher ESG risk profile. The only exception would be where we are concerned about a significant lack of corporate governance in a potential investee company and where, in Coronation’s view, it is unlikely that we would be able to influence management of the potential investee company to improve their corporate governance to the extent required.

01.3. Additional information [Optional].


FI 02. ESG issues and issuer research (Private)


FI 03. Processes to ensure analysis is robust

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

specify description

          While issuers do not review our research, we engage with them about disclosure and practices.
        

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

03.3. Additional information. [Optional]

There is a spectrum of opinion concerning materiality of ESG issues. These differences can be magnified with cultural or regional differences. Frameworks such as the materiality maps provided by the Sustainability Accounting Standards Board (SASB) are helpful in providing some guidance. We have developed our own view on what is most material.  For environmental and social issues, our focus centers around areas related to climate change, resource scarcity, waste management, general environmental impact; social controversies, health and safety standards, matters relating to labour policies and practices; approach to data security and privacy and in countries like South Africa, the company’s approach to and status of Black economic Empowerment. The responsibility to identify and evaluate the impact on the valuation resides with the analyst. We believe our investment strategy benefits from a culture that encourages individuals to challenge one another and a wide range of biases and assumptions, every day. In addition, we subscribe to MSCI for access to their independent ESG reports on companies as additional reference material for consideration by our analysts in interrogating their ESG assumptions and assessments. 


(C) Implementation: Integration

FI 10. Integration overview

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

We perform our own detailed proprietary research on issuers and structures in order to determine the full spectrum of risks that the instrument may carry and in order to determine the fair value for the assets, both at issue date and during the life of the instrument. We incorporate ESG issues into our investment decision-making process in a way that is fully consistent with our long-term investment horizon. Corporate social responsibility has the potential to increase the quality of a company's earnings stream and consequently its long-term investment potential. In our view, ESG issues form an intrinsic part of the mosaic for any investment case. We account for risk by demanding a higher yield. For example, we will require a wider credit spread to capture the future financial impact of companies with large carbon emissions. In other cases, more explicitly factor in any environmental taxes into the future earnings of a company when analysing the cash flow. Poor ESG performance may not necessarily exclude investing in a company, but it does force us to carefully consider the issues and engage management on those issues. Furthermore, we feel it is very important that we focus our attention and time on those ESG issues that have the most meaningful impact and where our expertise lies, rather than on issues that are intrinsically fraught with ambiguity. Coronation will not explicitly screen out any shares due to ESG factors, instead we may require a greater riskadjusted upside or a higher yield before investing in relation to companies with a higher ESG risk profile. The only exception would be where we are concerned about a significant lack of corporate governance in a potential investee company and where, in Coronation’s view, it is unlikely that we would be able to influence management of the potential investee company to improve their corporate governance to the extent required. We will also, depending on the circumstances, take instructions from segregated account mandate clients to exclude from their mandate’s investible universe certain companies that they object to on environmental or social grounds.

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

SSA

See above.

Corporate (financial)

See above.

Corporate (non-financial)

See 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)
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

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

SSA

In line with our investment philosophy of investing on long-term fundamentals, we will forecast the long-term earnings potential of a business in order to assess its implicit valuation or its ability to meet it future cash flow obligations. Each business will face its own unique set of environmental and social circumstances. These need to be examined carefully, especially as hard numbers and details may not be available. Consideration is given to understanding how these should be appropriately factored into forecasts.

Once all the factors relating to environmental and social issues have been considered, these are documented and factored into our models, and the valuation is calculated. Based on this outcome, the investment decision is made. Coronation will not explicitly screen out any issuers due to ESG factors, instead we may require a greater riskadjusted upside or a higher yield before investing in relation to companies with a higher ESG risk profile. The only exception would be where we are concerned about a significant lack of corporate governance in a potential investee company and where, in Coronation’s view, it is unlikely that we would be able to influence management of the potential investee company to improve their corporate governance to the extent required. We will also, depending on the circumstances, take instructions from segregated account mandate clients to exclude from their mandate’s investible universe certain companies that they object to on environmental or social grounds.

Given the differing nature of companies’ underlying business models, our approach is for our research analysts to treat ESG issues on an individual case-by-case basis. We focus on the material ESG issues that are considered likely to affect stakeholders, as this will ultimately have an impact on corporate performance and investment performance. The investment team comprises a large and experienced group of professionals with a deep knowledge of industries, asset classes across multiple geographies and associated material ESG risks and opportunities. In considering ESG factors, we recognize the importance of focusing our attention and time on those ESG issues that can have the most meaningful impact on a company’s long-term prospects. Accordingly, a significant amount of time is spent studying the corporate governance of the companies we invest in. Corporate governance lies squarely within the circle of competence of any institutional investor, and includes capital allocation, remuneration policies and empowerment deals (in the South African context). We favour transparency and comprehensive reporting as this provides the information basis to assess whether a company adheres to high standards of corporate governance and integrates ESG considerations. The environmental and social pillars are more complex, subjective and prone to differing approaches from subject matter experts. Social objectives vary significantly between investors around the world and issues are often fraught with ambiguity. In addition, each business will face its own unique set of environmental and social circumstances. While we systematically review and investigate the potential significance of environmental and social issues, we are cautious to make definitive rulings on complex issues. Our focus centers around areas related to climate change and resource scarcity (e.g. carbon emissions, water usage, energy efficiency, waste management, general environmental impact ); social controversies, health and safety standards, matters relating to labour policies and practices; approach to data security and privacy and in countries like South Africa, the company’s approach to and status of Black economic Empowerment.

In our view, the most crucial area of focus is governance. Boards and management are in an agency position, managing assets on investors' behalf. They should be held accountable to high standards. Since strategy and accountability start at the top, governance is crucial in managing a business, which includes the proper management of environmental and social issues. Governance is the cornerstone upon which the foundation of a company is built. Any weakness in this area, and all parts of the investment case, whether pure valuation or the handling of environmental and social issues, are at risk.

Coronation engages regularly with the boards and management of the companies it is invested in. All these engagements are documented to ensure detailed record-keeping and accountability for boards, as well as for investors to be fully informed as to how their investment is being exercised in the interests of good corporate governance.

When there are specific concerns, our first approach is to engage with management to deal with the respective issues. If this fails to deliver the appropriate action, we then escalate the issue to the board. When governance issues emerge, we do not believe selling out of a company is an appropriate first response. This runs the risk of incurring losses on the investment, and fails to live up to the demands of being a good corporate citizen, who should strive to ensure that companies are applying the correct standards of governance for the protection of all investors.

Corporate (financial)

See above.

Corporate (non-financial)

See above.

12.3. Additional information.[OPTIONAL]


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