We believe that ESG factors can have a meaningful impact on the risk-adjusted returns generated for all investment strategies. Our ESG investment approach applies rigorous analysis toward the evaluation of ESG risks and opportunities.
Assessing ESG Risks & Opportunities
Our investment teams leverage a combination of data from leading organizations specializing in ESG research with internal proprietary analytics in order to identify and assess the potential impact of ESG risks and opportunities. External sources of research and data are used to expand the breadth of our coverage by supplementing our robust fundamental and quantitative analysis. All this information is integrated into our proprietary analytics platforms which act as repositories for our analysts’ financial models, company meeting notes, and other research information, and are accessible to all investment professionals. Recognizing that ESG research is an evolving discipline, we continually monitor ESG developments to ensure that the most recent and relevant information is available for our investment professionals. Analysis of ESG factors and the impact on our investment decisions varies by asset class, based on materiality and other considerations.
ESG & Engagement In Fundamental Research
Engagement is a critical component of our investment approach. Our investment professionals engage directly with companies and issuers of securities in order to understand, influence, or exchange perspectives on ESG issues. All of our investment professionals are responsible for incorporating ESG factors into their respective investment processes. Given their sector and company expertise, our fundamental analysts are best positioned to provide in-depth knowledge of the related ESG factors. Our portfolio managers integrate the research teams’ bottom-up analyses with their top-down views when constructing portfolios. We view our ability to allocate capital as a tool to contribute to global sustainability.
Our pursuit of managing risk effectively is naturally aligned with active ownership, as we seek to identify companies and issuers of securities with strong corporate governance and to avoid the adverse effects associated with poor environmental and social practices. Engagement not only informs our investment decisions, it also gives us the opportunity to amplify the collective voice of our clients to drivepositive change, while focusing on constructive, long-term value creation.
The Investment Stewardship Council
Our Investment Stewardship Council actively engages with our research analysts and portfolio managers to fully integrate ESG factors into our engagement efforts and investment decision-making process. The Council, which includes leaders from investments, distribution, and other areas of the organization, works closely with our investment professionals to ensure a sharp focus and effective engagement on ESG issues. Our approach to ESG engagement, which is formalized in our Engagement Policy, reflects the principle that engagement can take a variety of forms with varying levels of intensity. Our Engagement Policy includes an escalation process comprised of a series of steps representing progressive levels of engagement intensity.
Investment Stewardship Council – Levels Of Engagement Intensity
Fundamental Engagement – Seeking Positive Outcomes
ESG factors are incorporated into the fundamental research of every investment strategy. We believe direct engagement with the companies and issuers in which we invest can produce positive change. The following examples represent some of the ways in which fundamental engagements contributed to positive impacts.
Corporate Bond Engagement
In early 2020, we identified a mining company within our fixed income portfolio that had significant ESG risks. Consistent with our Engagement Policy, the Credit Analyst and portfolio managers met with our Investment Stewardship Council to discuss the ESG concerns and develop an engagement plan for this issuer. The Credit Analyst and Investment Stewardship Council formalized an engagement plan which focused on the disclosure and reporting of key ESG metrics, including water usage and energy usage. Specifically, water use reduction, total energy consumption, percentage from grid and percentage renewable, and development of carbon emission targets were identified as key metrics and areas of disclosure to monitor. In September 2020, we met with company management to discuss these initiatives and articulated our intent to monitor progress. We are actively tracking progress of these initiatives and discussing progress with management on a quarterly basis. We believe the engagements are having a positive impact, and the company is heading in the right direction with regard to its ESG practices.
We engaged with the management team of a semiconductor company on multiple occasions to discuss what we felt was elevated ESG risk and a lack of disclosure on related issues. In a joint effort led by our Research Analyst and Director of Investment Stewardship, we worked with the company management to encourage the company to improve its public disclosures related to material ESG factors. In addition, we assisted the company in navigating the complexities of ESG ratings systems and disclosure frameworks. During the course of our discussions, the company committed to improving their ESG disclosure consistent with the Sustainability Accounting Standards Board (SASB) framework. We worked with the company as it navigated some of the challenges of spanning multiple industries and helped it understand which ESG issues we viewed as material. Following our engagement, the company released an ESG report for the first time that was largely in line with our recommended disclosures and allowed us to properly evaluate some of the ESG risks associated with the company.
In researching an asset-backed security opportunity, we met with the issuer to learn about its
business. Upon receiving indicative terms for a prospective deal, we submitted comments and
followed up with another engagement. During this engagement, we sought to learn more about the
management team and discuss the rationale for our comments, which included ESG concerns.
Specifically, one of our concerns involved the proposed governance standards and potential conflicts
regarding the finance company’s valuation method for returned lease vehicles. Consistent with
our engagement objectives, the issuer agreed with our concerns and conceded our comments,
ultimately agreeing to third-party vehicle-valuation requirements and documentation requirements
for all returned lease vehicles.