In addition to his position as Global Head of Multi-Asset, Michael serves as a member of the firm’s Governance Committee and Management Committee, and he chairs the firm’s Stewardship Committee.
Here he explains why corporate stewardship is so important to PineBridge’s investment philosophy and how the firm engages with investee companies on issues involving stewardship and corporate governance, including how firms are addressing climate change.
How does PineBridge approach stewardship and engagement in its portfolios?
At PineBridge, we recognize that change always drives investment performance, whether positively or negatively. Our role as active managers is both to be on the lookout for positive change, and also to nurture it through active ownership. In the equity space, that means recognizing that the vote has value and actively voting proxies in the best interests of our clients. Voting to support sustainable business practices over the medium to long term enhances value for our clients and for society at large.
Looking more broadly across the asset classes in which we invest, stewardship also embodies active ownership through engagement to enhance investment results, both by helping to ensure proper governance and by urging management of portfolio holdings to conduct business in a manner conducive to a better world – particularly on environmental and social dimensions. The UN Principles for Responsible Investment (PRI) has recognized these efforts by assigning PineBridge an A+ rating for our approach to strategy and governance, placing us in the top quartile of asset managers.1
As a globally based and well-connected team of investment professionals, we harness information on best practices from around the world and around our firm to promote targeted improvements in corporate governance. Sustainable practices lower a firm’s cost of capital, and vice versa. As a result, we see ourselves as aligned with management teams’ own interests with our focus on boosting the value of these securities, by sharing our views on best practices to make their cash flows more sustainable and in turn lowering their cost of capital. We’ve found that the most effective management teams understand this alignment and appreciate our feedback across their capital stack, where we may encourage them to continue with current good practices or at times advocate for change.
Our investment due diligence frameworks fully integrate ESG analysis into an end-to-end process. Because no company is likely to get top marks across all of the various assessment criteria, a key aspect of our due diligence framework is to identify items that we believe require improvement or better disclosure. We take special note of the materiality of various issues by referencing the Sustainability Accounting Standards Board (SASB) Materiality Map, recognizing that materiality varies greatly by industry. We do not, however, assign a set hierarchy of emphasis or prioritization of certain items in our due diligence framework. Each situation is different and can vary by industry, the regulatory context of the country, or the asset class in question. We believe an appreciation of this by our investment teams allows for the most effective engagement efforts.
What stewardship issues is the firm prioritizing?
When it comes to governance, different issues may be more or less prominent depending upon where our teams are invested in a company’s capital stack, and our governance priorities vary accordingly. With respect to environmental and social considerations, however, in most circumstances we seek to engage for certain common priorities.
Climate change is a firm-wide priority. At the corporate and asset class levels, we’ve invested in resources to help us identify portfolio holdings for which the current state of an investee’s climate practices is not at an acceptable level and where management does not appear committed to improvement, along with material disclosures that can be tracked to help us evaluate these situations. We note that this is just one example of how we make sure to actively engage with portfolio holdings that may not be measuring up to their original investment thesis. We assess the climate resilience of portfolio holdings as well as reputational risks arising from potential corporate complacency among investee companies on the matter of climate preparedness and emergency readiness (in terms of environmental risks themselves and their impact on local communities).
With respect to assessing portfolio holdings, for developed market credit exposures, as one example, we apply in-house key risk indicators (KRIs) related to climate risk (i.e., greenhouse gas emissions, renewable energy programs, fuel economy, and low-carbon transition initiatives) in alignment with the SASB's guidance on environmental dimensions by sector.
With respect to reputational risk, we conduct internal benchmarking analyses in alignment with our framework on the materiality of different portfolio risks. This process relies on data analytics to augment our due diligence of companies’ ESG practices and business conduct. These indicators, among others, provide real-time early warning signs of ESG risks, including those related to climate. Our portfolio risk management process for sustainability risks relies on both longer-term and near-term evaluation of those emerging trends. In this way, we can address both potential downside risks as well as investment opportunities in companies that are building enterprise value by improving climate resilience.
On social issues, a key common priority across asset classes is diversity. We seek to foster diversity through a focus on board representation as well as on the company’s diversity statistics relative to the country in which it does business and in comparison with peers.
Stewardship increasingly also encompasses how we run our own business. By interacting with various management teams across the globe, we bring their best ESG practices not only to portfolio companies, but also to PineBridge’s Corporate Responsibility Steering Committee.
How does the firm engage on issues concerning governance and leadership?
Consistent with our belief that ESG factors can materially affect the performance of companies in which we invest, PineBridge’s investment teams seek to engage with investee companies on governance issues we view as relevant. Given that the characteristics of different asset classes place us in varying positions within the capital stack, each asset class team engages on governance on behalf of its own clients, and the mechanisms for such engagement vary. For example, proxy voting and shareholder meetings are notable opportunities to express equity views, whereas in the credit realm, we believe engagement is most effective at the time of issuance.
However, as part of our research processes within each asset class, our investment teams frequently spend time with senior-level management of the companies we’re analyzing, often including discussions of how ESG issues could affect their businesses and potential investment performance. We believe such discussions can help draw management teams’ attention to these issues and their importance to the investment community.
When it comes to proxy voting, while Institutional Shareholder Services (ISS) advises us on how to establish our own proxy policies, we differ from the adviser most often with respect to climate change, diversity issues, and acceptable levels of equity dilution. Versus institutional peers, these are particular areas in which we take a more pronounced ESG stance.
Source: ISS. The peer average displayed reflects six large, global asset managers provided by PineBridge’s proxy voting service, ISS. Reflects activity for 2020.
How does PineBridge continue to advance its stewardship and engagement efforts?
It may be helpful to start with how we view our role as a “consultivist” investor from an equity perspective. Engaging with companies in a consultivist dialogue, with the objective of encouraging (but not necessarily mandating) change, can enhance our own understanding of the business (and that of the capital markets) while helping management better understand evolving investor expectations. We believe a consultivist dialogue may better lead to a positive outcome than the activist practice of prescribing remedies that short-term asset managers seeking quick returns often employ.
Our investment professionals treat each meeting with top management as a valuable opportunity to reinforce positive aspects of the company or provide feedback for improvement. When successful, this practice enhances the investee company’s longer-term sustainability, thereby leading to a higher valuation of its securities.
When bilateral engagement bumps against its limits and we believe escalation is necessary, we will often discuss the relevant issues in large group meetings with the company and its top shareholders. We may also write to the board of a company expressing our viewpoints. In equities, for instance, we exercise our shareholder rights on behalf of our asset-owning clients, ensuring that our investment philosophies are expressed through customized proxy voting policies on key issues.
In fixed income, we believe it’s important to maintain relationships with all issuers under active coverage. Our analysts have regular contact with company management teams and generally meet with each company one to three times per year through on-site visits, investment conferences, issuer roadshows, and other venues. We take an active approach to engaging with management teams on the ESG issues that are most relevant to the issuer's financial and operational sustainability. We’ve found that active engagement with bondholders can be effective in promoting increased awareness and responsiveness to ESG risks.
In multi-asset, not all of the asset classes we allocate to are actively managed. In these circumstances, we appreciate that the more passive our holdings are, the more active we must be in our engagement. To help evolve PineBridge’s engagement efforts, we are establishing a subcommittee of our Stewardship Committee to meet regularly to compare best practices and to map out areas where the asset classes can work together on issues we should all engage for – particularly on the firm’s environmental and social priorities.
1 For illustrative purposes only. Principles for Responsible Investment (PRI) ratings are based upon information reported by PRI signatories. For further details on PRI methodology, please visit https://www.unpri.org/signatories/reporting-and-assessment. PineBridge Investments has been a PRI signatory since 22 June 2015. Third-party rankings and recognition are no guarantee of future investment success. Working with a highly rated advisor does not ensure that a client or prospective client will experience a higher level of performance or results. Ratings should not be construed as an endorsement of the advisor by any client nor are they representative of any one client’s evaluation. Moreover, the underlying information has not been audited by the PRI or any other party acting on its behalf. While every effort has been made to produce a fair representation of performance, no representations or warranties are made by PRI as to the accuracy of the information presented, and no responsibility or liability can be accepted for damage caused by use of or reliance on the information contained within this report. Information regarding PRI methodology and grades is sourced from PRI. PineBridge Investments makes no representations, warranties, or opinions based on PRI methodology, ratings, or other data.
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