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Redington

Service Providers Framework 2020

You are in Investment Consultancy » Investment research

Investment research

IC 10. Investment research activities

10.1. Indicate whether you incorporate ESG into your investment research services.

10.2. Indicate whether the following activities are part of your investment research process. Describe for each activity how you incorporate ESG.

Investment research activities

Describe how you incorporate ESG

          At the portfolio level we carry out the following research: climate stress testing following the PRA's climate stress tests for Life insurers; and position level analysis using Transition Pathway Initiative (TPI) data and MSCI data. Our primary focus is on climate risks and opportunities: we seek to highlight areas where the portfolio may be most exposed to climate risks and thus provide an opportunity for asset owners to engage with their asset managers on the most material risks impacting their portfolio.
        

Describe how you incorporate ESG

          ESG analysis is incorporated into Redington's performance monitoring in the following ways:
- Part of regular manager monitoring: reports include PRI Strategy and Governance scores at the asset manager level and MSCI ESG scores at the fund level for equity funds and some corporate credit funds. Where there is a meaningful exposure or change in exposure the Manager Research Team may include qualitative reporting commentary. Manager monitoring reports are under review in Q1 and ESG reporting will be expanded in 2020 to include carbon intensity reporting for a wider range of funds. 
- Part of portfolio level monitoring. As reported throughout this document, Redington has adopted the PRA's climate stress tests. Results of these stress tests are reported to clients at request. Our intention is to roll out climate stress tests to all clients as part of standard reporting in 2020. 
- Bespoke ESG reporting. A number of Redington clients receive bespoke ESG reporting. These reports are a deeper dive into the ESG performance of asset managers using MSCI analysis, Transition Pathway Initiative analysis and drawing on in-depth research into ESG integration in investment process and engagement from Redington's Manager Research Team.
        

Describe how you incorporate ESG

          We integrate ESG into all of the research we carry out when assessing asset managers. Occasionally we work with a client with specific ESG mandate requirements, an example is laid out below:

Situation
One of our clients wanted to design a fund that took integrating ESG one step further, looking for a strategy that didn’t just minimise the negative impact but used them to have a positive impact.
Their objectives were to a build a fund that was:
Actively managed with an investment philosophy focused on selecting companies that solve global sustainability challenges.
Use positive screening, not negative screening.  
Designed to outperform traditional developed market indices.
Good value for money.

Solution
Our advice was to implement a sustainable equity strategy. 
After running a bespoke manager research process for the client, the fund was constructed with one manager that met the client’s criteria.
The strategy is strictly focused on sustainability and the risks and opportunities associated with a transition to a sustainable global economy.
The manager employs a differentiated philosophy which effectively integrates ESG (as both a source of alpha and element of risk) into a more traditional fundamental quality equity process.
        

Describe how you incorporate ESG

          In November 2019 Redington's Manager Research Team conducted a review of ESG indices and their advantages and disadvantages. This research was approved by Redington's Investment Strategy Committee and is available to our clients and to our client facing consulting team. The research covered a comparison of ESG data vendors, the different methods of ESG index construction, an assessment of how clients could use these indices under different requirements / circumstances. This research is applicable to discussions about benchmark selection.
        

Describe how you incorporate ESG

          When assessing equity strategies, in addition to our overarching principles outlined in the section covering manager selection, we consider the following:

ESG Integration - expected
Equity investing lends itself well to ESG integration as ESG risks and opportunities both have the potential to have meaningful impact upon returns and it would demonstrate a lack of rigour to leave them out of the due diligence process. This is especially true for processes which have a longer time horizons (where ESG issues are more likely to have an impact). It is also easier for fundamental processes which suits the more qualitative nature of ESG analysis, but should still be considered at some level by quantitative managers. 

Engagement with companies - expected
Shareholders have the ability to have meaningful impact upon companies through using voting rights, meeting with company management to more aggressive activist approaches. For some processes, engagement can be a source of alpha and is a crucial element. It is more appropriate for longer term approaches where teams are able to build relationships with management teams and who will be around to see the benefits of changes taking effect. However, even processes with shorter time horizons will have some level of engagement and should take those responsibilities seriously. 

ESG reporting - expected
Public equities are increasingly well covered by various data providers and there is growing availability of information covering of E, S and G characteristics. Therefore, ESG reporting for public equity managers is improving as coverage progresses. The more advanced are able to provide greater coverage and detailed customisation including proprietary metrics.
        

Describe how you incorporate ESG

          When assessing credit strategies, in addition to our overarching principles outlined in the section covering manager selection, we consider the following:

ESG integration - expected
ESG related risks have long been a part of the overall risk assessment credit analysts perform when analysing the credit worthiness of an issuer and a specific bond.  However, over the last few years explicit ESG scoring frameworks have been implemented at many investment managers.   
Broadly managers agree that ESG considerations can impact a business’ profitability, earnings sustainability and financially material risks of bonds owned in their portfolios.  We expect managers to place a high level of importance on ESG related risks in their fundamental credit research process.
Beyond corporate credit integration is less advanced in other credit asset classes such as structured credit and sovereign debt but continue to improve. We expect asset manager to be able to describe their process for identifying material ESG risks even if it is still developing. 

Engagement: expected
Lenders have the ability engage with senior management on ESG related topics especially if they believe said topics pose a material threat to the creditworthiness of the entity. Additionally, with respect to corporate credit, in periods where a company is stressed and perhaps on the brink of default, managers who have a large holding in the bonds that are likely to command a large chunk of post restructuring equity will likely, too, have an ability to influence ESG related decisions at the firm. The overall power of a manager in this asset class in terms of influencing ESG related outcomes within an investment grade market is largely constrained mainly by size of potential demand for bonds.  In other words, size of investible assets under management. 

ESG reporting: preferred, dependent on the strategy
Coverage of ESG scores across the investable universe has increased over the last couple of years however, reporting is only feasible using a blend of internal and external ratings (not comparable across the board). Regarding engagement reporting, managers are in position to report annually the number of interactions with issuers. However, there is a certain level of ambiguity in terms of reporting interactions with companies’ management firm the extent to which said interaction was a) ESG related and b) had a material impact on management’s decision making with respect to ESG.
        

Describe how you incorporate ESG

          When assessing equity strategies, in addition to our overarching principles outlined in the section covering manager selection, we consider the following:

ESG integration - expected
ESG factors can be included in quantitative models used to forecast risk and return for individual securities. An increase in quantity and quality of ESG datasets has made integration of ESG factors possible. Governance, and to a lesser extent social factors are most commonly integrated into the investment process via quality factor signals. Importantly, there will be differences in integration of ESG factors across different sub strategies. I.e. integration will be more useful across equity style premia compared to risk parity or trend components. 

Engagement – challenging, proxy voting expected where applicable
Even for the sub-section of strategies that trade securities that allow engagement opportunities, high turnover and a large number of holdings mean that effective engagement is often not possible.  There is also an issue that single name equity exposure is often achieved through derivative form (i.e. swaps and CFDs); as a consequence managers have no voting rights.
Where applicable we expect voting on proxies. 

Reporting – not yet available, we expect managers to engage with us to think about how we could design reporting for clients
Managers are committed to working on ESG reporting, but are currently unable to provide this service.
        
          Private Assets Research
        

Describe how you incorporate ESG

          We carry out asset class level research as an integral part of selecting asset managers. Please see the section covering manager selection for more information.
        

10.4. Additional information. [OPTIONAL]


IC 11. Demonstrating value on investment research

11.1. Describe how you measure, track or otherwise demonstrate your value on investment research activities.

          We do not attempt to disaggregate the impact of individual research projects to the overall client experience. Our advice is delivered and measured on a holistic basis.

The Redington Investment Committee use a SCOTSMAN framework to assess whether an investment research topic should be commissioned. This framework has allowed us to research the asset classes that have added value whilst avoiding those which do not meet client requirements. The framework can also be used to retrospectively judge the value added by research carried out and thus inform future decision making.

The SCOTSMAN framework assesses the following key questions:

Solution: Is one or more fund managers available to select and manage the asset ?
Capacity: Is the asset available in large enough size to make a meaningful allocation to client portfolios?
Originality: Does the asset give a risk/return profile unavailable from other asset strategies?
Timescales: Can the asset strategy be researched and modelled within a realistic timescale?
Strategy: How well does the asset strategy sit with our investment process and investment principles?
Money: What is the balanced between potential revenues and costs associated with researching and modelling the asset strategy?
Authority: is the strategy sponsored by a member of the Investment Committee?
Need: is this asset class needed by one or more of our clients in order to achieve their objectives?
        

11.2. Additional information. [OPTIONAL]


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