Sustainable, Responsible &/or ESG Policy:
The Fund seeks to achieve long term income and capital returns from a diversified portfolio of ethically-screened corporate bonds and other credit instruments. In addition to a rigorous credit selection process, the Fund avoids investment in companies which are materially engaged in certain sectors, including the production or distribution of tobacco, alcohol, armaments, gambling and adult entertainment. The Investment Manager purposefully favours exposure to organisations that, in its view, fulfil an environmentally or socially beneficial role and that employ high standards of governance.
Sarasin has an overall bond investment process that specifically examines and evaluates ESG risks as part of our credit research, and applies the conclusions to all of our clients’ funds (i.e. we have firm-wide “ESG Integration”). However, the Responsible Corporate Bond Fund goes further than this. It uses a strict sector exclusion screen (e.g. armaments and tobacco) and applies an ESG protocol to ensure a “minimum standard” across the E, S and G characteristics of an obligor. There is also a Fund preference for certain sectors (e.g. Housing Association, Charities), but this is not unconditional; the bonds must also be attractively priced from a purely investment perspective.
Sustainable, Responsible &/or ESG Process:
Our fixed income investment process contains both top-down and bottom-up elements. It uses a macro-economic research foundation, drawing upon the expertise of the in-house economists with particular emphasis on longer-term structural considerations. This feeds into interest rate exposure management, but may also influence fixed income sector disposition and credit structure preferences. In parallel, and underpinning credit portfolio construction and management, is thorough analysis of each credit using a consistent research process.
Environmental, Social and Governance analysis is integral to our credit review process. Analysts review the ESG risks pertaining to an obligor from a creditor’s perspective. The factors considered vary by sector. However, there are some common elements, such as the commitment to a financial profile that supports the interests of the investor.
- Environmental – climate change, resource input, waste output, indirect exposures, indirect effects
- Social – labour relations, supply chain labour standards, product safety, regulatory scrutiny, political environment, data breach risk
- Governance – ownership structure, the board, internal controls, external controls, attitude to bondholders, ratings policy and history, litigation risk and overhang.
The approach is to allocate scores from zero to ten to each of the three ESG considerations:
10 - No impact on Probability of Default or Severity of Loss. The factor will have no impact on credit rating or bond price.
7 - May affect Probability of Default or Severity of Loss. The factor would not trigger a credit rating event but may induce temporary adverse price action.
5 - Somewhat affects Probability of Default or Severity of Loss. The factor would trigger a credit rating event and modest permanent spread widening.
3 - Major impact on Probability of Default or Severity of Loss. The factor would trigger a multi-notch downgrade and major permanent spread widening.
0 - Potential event of default. The factor would trigger default with a low expected recovery rate.
How we assess the relative importance of E, S & G risks:
- Sector norms are established for the E, S and G weights
- Individual obligor weightings differ from the norm if their profile differs from the sector average. For example, the ‘Banks’ ESG ratio is used as a starting point for Building Societies, but adjusted to reflect their mutual status
- As creditors, Governance is often the dominant consideration for a bond investor
- These weighting allow us to establish the Average ESG Factor Score and Indicated ESG Rating for a security,
If the borrower has an Investment Grade ESG rating and all individual ESG scores exceed 3 out of 10, the security will be eligible for the portfolio (from an ESG perspective). Those that fail this test could still be eligible for selection, but only if they pass our Stewardship Team’s “Red Flag” Deep Dive Process, offer satisfactory engagement and if they have an improving ESG trend.
In terms of data sources, we do not use any third-party data subscriptions in our fixed income process, with the exception of Bloomberg data which we use for our proprietary data-driven ESG tool. Bloomberg provides an extensive and rapidly-expanding database of ESG metrics - we use these to assess “relative ESG value” between issuers in the same industry.
Resources, Affiliations & Corporate Strategies
Internal Resources
All of our analysts and portfolio managers consider ESG factors when discussing stock ideas and building an investment case. Thus, we consider the entire team an ESG resource.
The stewardship specialists are directly responsible for engagement efforts, and work with the analysts to help them develop their ESG analysis and ratings for stocks.
Whilst the analysts own their ratings, this must be approved by the stewardship team to ensure joint accountability. It is important to note that our stewardship specialists are part of the global equity team, and are involved in team discussions and decisions.
We utilise our own framework and ratings systems to represent our proprietary ESG analysis. This analysis is bottom-up and driven by extensive primary research carried out by our analysts, supplemented with ESG data from MSCI, ISS and other sources.
Affiliations and Memberships
In addition to the UN PRI, we are signatories to the 2020 UK Stewardship Code – and passed the Financial Reporting Council’s assessment for this in September 2021s. Other memberships / initiatives including those listed below, are often the forum in which we work to improve ESG standards and taxonomy:
ENVIRONMENTAL
- IIGCC Paris-aligned accounting and audit working group (Chair)
- IIGCC Net Zero Banking initiative (co-Chair)
- Net Zero Asset Managers Initiative (NZAM)
- Taskforce for Climate-related Financial Reporting
- Climate Action 100+
- “Say on Climate” Initiative
- Carbon Accounting Project (PRI)
- Ellen MacArthur Foundation Plastics Initiative
- Plastic Solutions Investor Alliance (PSIA)
- Finance for Biodiversity Initiative (F4B)
SOCIAL
- 30% Club
- Find It, Fix It, Prevent It initiative (FFP) – Modern Slavery
- Workforce Disclosure Initiative (WDI)
- International Accord for Health and Safety in the Textile and Garment Industry
- Investor Statement of Solidarity to Address Systemic Racism and Call to Action
- World Benchmarking Alliance Digital Inclusion Collective Impact Coalition
GOVERNANCE
- International Corporate Governance Network (ICGN)
- UK Corporate Reporting and Auditing Group (CRAG)
- Advisory Group for International Audit & Assurance Standards Board
We also support The Local Authority Pension Fund Forum (LAPFF).
Many of these commitments provide us with a network of peers and supporters for key ESG related issues. It is important for us to remain engaged with group advocacy work, collaborative endeavours, such as engagements, but also to keep aware of best practice.
Often, we find these networks to be useful sources of data and information either on a broad ESG related issue or on company specific metrics that may not be found in other sources.
While the majority of our company engagements are pursued on our own, as outlined in later responses, we will collaborate with other investors where we are seeking to escalate due to resistance from the board or executives. Often having a larger shareholding united on a matter of concern can be more impactful. Wherever we explore collaboration, we ensure the steps we take are consistent with local laws and regulations. In certain cases, these collaborations link into broader initiatives that we support, such as ICCR Covid-19 engagement; the Workforce Disclosure Initiative; the Ellen MacArthur global commitment on recycling; or Climate Action 100+.
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