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Fixed Income Investor Guide

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Fixed Income Investor Guide An investor initiative in partnership with UNEP Finance Initiative and UN Global Compact FIXED INCOME INVESTOR GUIDE PUTTING RESPONSIBLE INVESTMENT INTO PRACTICE IN FIXED INCOME THE SIX PRINCIPLES PREAMBLE TO THE PRINCIPLES As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time). We also recognise that applying these Principles may better align investors with broader objectives of society. Therefore, where consistent with our fiduciary responsibilities, we commit to the following: We will incorporate ESG issues into investment analysis and 1 decision-making processes. We will be active owners and incorporate ESG issues into our 2 ownership policies and practices. We will seek appropriate disclosure on ESG issues by 3 the entities in which we invest. We will promote acceptance and implementation of the Principles 4 within the investment industry. We will work together to enhance our effectiveness in 5 implementing the Principles. We will each report on our activities and progress towards 6 implementing the Principles. This publication is intended to promote the application of Principles 1, 2, 3, and 6 of the Principles as they relate to fixed income investing. The PRI Initiative was launched by the United Nations in 2006 after former UN Secretary-General Kofi Annan brought together a group of the world’s largest institutional investors, academics and other advisors to draft a set of sustainable investment principles. PRI DISCLAIMER The information contained in this report is meant for the purposes of information only and is not intended to be investment, legal, tax or other advice, nor is it intended to be relied upon in making an investment or other decision. This report is provided with the understanding that the authors and publishers are not providing advice on legal, economic, investment or other professional issues and services. PRI Association and the PRI Initiative are not responsible for the content of websites and information resources that may be referenced in the report. The access provided to these sites or the provision of such information resources does not constitute an endorsement by PRI Association or the PRI Initiative of the information contained therein. Unless expressly stated otherwise, the opinions, recommendations, findings, interpretations and conclusions expressed in this report are those of the various contributors to the report and do not necessarily represent the views of PRI Association, the PRI Initiative or the signatories to the Principles for Responsible Investment. The inclusion of company examples does not in any way constitute an endorsement of these organisations by PRI Association, the PRI Initiative or the signatories to the Principles for Responsible Investment. While we have endeavoured to ensure that the information contained in this report has been obtained from reliable and up-to-date sources, the changing nature of statistics, laws, rules and regulations may result in delays, omissions or inaccuracies in information contained in this report. Neither PRI Association nor the PRI Initiative is responsible for any errors or omissions, or for any decision made or action taken based on information contained in this report or for any loss or damage arising from or caused by such decision or action. All information in this report is provided “as-is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information, and without warranty of any kind, expressed or implied. 2 PRI FIXED INCOME INVESTOR GUIDE | 2014 DOCUMENT CREDITS This document was written by Archie Beeching, manager of the PRI’s Fixed Income Work Stream. It has been compiled with support from Tomi Nummela, senior manager – listed assets (PRI), an external consultant and a number of PRI signatories listed below. Work stream strategy and planning for this project has been supported by members of the PRI Fixed Income Steering Committee. WORKING GROUP ■ AMP Capital Adam Kirkman - Head of ESG & Steven Hur - Portfolio Manager, Fixed Income ■ ACTIAM Carl Haarnack - Portfolio Manager & Hyung-Ja de Zeeuw - Portfolio Manager ■ Breckinridge Capital Advisors Robert Fernandez - Vice President - Credit Research & Kevin Lehman - ESG Analyst - Credit Research ■ Insight Investment Andy Evans - Responsible Investment Advisor ■ KfW Bankengruppe Fabian Tscharf - Senior Manager Investment Strategies, Sustainability, Marion Marinov - CFA; Senior Manager Investment Strategies, Sustainability & Solveig Pape-Hamich - Head of Investment Strategies, Sustainability (sponsor and interviewee) ■ MSCI Laura Nishikawa - Head of Fixed Income ESG Research ■ National Employment Savings Trust (NEST) Diandra Soobiah - Responsible Investment Manager & Paul Cox - Adviser ■ Oekom Research Till Jung - Director Business Development ■ Union Investment Florian Sommer - Senior Strategist, Rene Lichtschlag - Portfolio Manager & Mauricio Vargas – Economist (sponsor and interviewee) ■ The Pensions Trust Katie Beith - Responsible Investment Officer (contributor) INTERVIEWEES ■ BlueBay Asset Management Dominique Kobler - Head of Risk and Performance ■ Calvert Investments Cathy Roy - Senior Vice President and Chief Investment Officer, Fixed Income & Kim Nguyen-Taylor - Senior Credit Analyst and ESG Integration Lead ■ Colonial First State Global Asset Management Toni Spencer - Head of Credit Research & Yen Wong, Manager Credit, Global Credit Funds ■ Crédit Agricole Corporate and Investment Bank Tanguy Claquin - Head of Sustainable Banking ■ Danske Capital Thomas Kjaergaard - Head of RI and Corporate Governance ■ Deutsche Asset & Wealth Management Inka Winter - Director – ESG Head Office & Christoph Klein - Managing Director / Portfolio Strategist ■ Futuregrowth Asset Management Angelique Kalam - Manager: Sustainable Investment Practices ■ Local Government Super Bill Hartnett - Head of Sustainability ■ Mariner Investment Group Bracebridge Young - Chief Executive Officer & Steve Ezzes - Managing Director ■ Mirova Marc Briand - Head of Fixed Income ■ Neuberger Berman Rob Drijkoningen & Gorky Urquieta - Co-Heads, Emerging Markets Debt & Kaan Nazli - Senior Economist ■ Rathbone Investment Management Bryn Jones - Fixed Income Investment Director & Perry Rudd - Head of Ethical Research ■ Robeco Asset Management Edith Siermann - Chief Investment Officer Fixed Income & Taeke Wiersma - Head of Credit Research ■ Zurich Insurance Group Manuel Lewin - Head of Responsible Investment 3 4 PRI FIXED INCOME INVESTOR GUIDE | 2014 CONTENTS PRI FOREWORD 6 SPONSOR FOREWORD 7 MAKING THE MOST OF THIS GUIDE 8 EXECUTIVE SUMMARY 9 INTRODUCTION 10 DEMAND FOR RESPONSIBLE INVESTMENT IN FIXED INCOME 10 APPLYING RESPONSIBLE INVESTMENT IN FIXED INCOME 11 INTEGRATING ESG INTO ISSUER ANALYSIS 13 GOVERNMENT ISSUERS 13 MUNICIPAL ISSUERS 17 SUPRANATIONAL ISSUERS 18 CORPORATE (NONFINANCIAL) ISSUERS 18 FINANCIAL SECTOR ISSUERS AND ABS 23 FURTHER CONSIDERATIONS FOR ESG INTEGRATION 24 ESG SCREENING 27 PRACTICAL EXAMPLES OF SCREENING 27 ENGAGING ISSUERS ON ESG 29 PRACTICALITIES OF ENGAGING ISSUERS ON ESG 29 THEMED INVESTMENT 33 OVERVIEW OF THE THEMED FIXED INCOME MARKET 33 ENVIRONMENTAL AND SOCIAL THEMED BONDS 34 THE NEED FOR GREEN BOND STANDARDS 35 EMBEDDING RESPONSIBLE INVESTMENT WITHIN YOUR ORGANISATION 36 KEY MESSAGES & NEXT STEPS 38 KEY MESSAGES 38 NEXT STEPS FOR RESPONSIBLE INVESTMENT IN FIXED INCOME 39 APPENDICES 40 FURTHER READING 40 SHARING CASE STUDIES 41 REPORTING TO STAKEHOLDERS ON RESPONSIBLE INVESTMENT 42 5 PRI FOREWORD A WORD FROM OUR DIRECTOR The essence of investment management is the management of risks, not the management of returns. This mantra, popularised by Benjamin Graham, the father of value investing, rings especially true for fixed income investors, who are focused on minimising downside risks and preserving capital within their portfolios. Following the financial crisis, investment returns are more closely linked to a manager’s ability to protect value, and there is much greater awareness of how ESG factors can manifest themselves into material risks that undermine creditworthiness. Awareness is only a first step however. All of the PRI’s work is geared towards providing investors with practical guidance on how to implement the Principles in each asset class so they can take action, and this guidance document is no Fiona Reynolds, different. Drawing on leading practices from our global network of signatories, Managing Director, PRI we believe it is the first time comprehensive examples of investors implementing responsible investment within fixed income has been gathered in one place. We hope more examples will follow from other signatories over the coming months. I hope it will equip asset owners in particular with the information they need to make responsible investment the norm in this asset class. Each section includes a series of considerations we believe pension funds should be asking their managers to ensure they have confidence in their approach, and a new module dedicated to fixed income in the PRI’s Reporting Framework will also provide a wealth of information that investors can use. Releasing this guide has been a collaborative effort and I would like to thank all of the signatories and supporters who have contributed to its development. Fiona Reynolds
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