Environmental, Social and Governance Policy A Responsive Data-Driven Approach to Responsible Investing
ESG At QMA, our most abiding mission is to meet and exceed our clients long-term financial goals. Environmental, social and governance (ESG) factors are among the wide range of filters we use to identify the markets most attractive and sustainable sources of value or to identify potential sources of uncompensated risk. We are strongly committed to understanding both ESG s present and future investment implications as well as our clients particular ESG goals and priorities (which we see as being more nuanced than conventional wisdom has generally acknowledged). We are also focused on promoting ESG investment principles within the investment industry, in particular on improving the quality, quantity and consistency of the data disclosed. When it comes to ESG, we view our role as providing an objective yet flexible data-driven perspective, carefully balancing our clients growing desire to invest responsibly and our primary responsibility to maximize their long-term risk-adjusted returns. 2
Core Beliefs WIDENING THE ESG DATA LENS Clear Separation of Facts and Opinions The ESG landscape is extremely fluid. As the financial implications of issues such as climate change come into sharper focus and companies experience pressure to report relevant data, the relationship between ESG and investment returns may very well change. In the interim, we believe it is essential to keep a clear separation between conjecture about ESG s future investment potential and what the data has to say about ESG s historic impact on returns. Our own approach builds on this premise, employing thoughtfully designed systematic techniques to allow for the integration of ESG factors into our clients portfolios without any expected degradation of performance. In the instances related to ESG factors where our research has thus far identified a clear historic link with higher returns, we already incorporate those signals as part of our regular alpha generation process. Complete Transparency While many investment managers today speak of the integral role ESG plays in their investment process, it is not always entirely clear what impact that has on portfolios. One of the most important contributions a quantitative process can bring to ESG investing is the ability to detail how a portfolio reflects the different ESG factors relative to its other factors as well as to the manager s non-esg portfolios. Ideally, a client should be able to see down to the individual stock level how ESG criteria are shaping the portfolio s holdings and expected sources of return. Flexibility to Client Needs We recognize that investors today have a wide variety of goals and priorities for their ESG-related investments. These range from clients with very specific views on which companies they want excluded to those who view sub-par ESG practices as a risk factor to be weighted alongside other stock selection criteria. In our view, it is the responsibility of the manager not to try to force clients to one end of the spectrum or the other, but rather to optimize returns and ESG objectives,while catering to each client s individual preferences. The approach QMA takes to integrating ESG into portfolios takes full advantage of our ability, as a diversified quantitative multifactor manager, to substitute one stock highly rated by our models for another with minimal impact on expected return. We first consider which of the many ESG metrics reported by companies are relevant for each industry. To account for the sizeable number of companies that do not report sufficient material data (and to specifically address the issue of climate change), we use a proprietary completion technique to infer companies carbon emissions using a risk factor we developed from the stock behaviors of known emitters. Together, these scoring methodologies allow us to generate an objective, fully transparent set of ESG data scores on 2,700 companies in 47 countries across the US, global and emerging market stock universes each day. 3
Advocating for More Accountability Similar to our investment analysis of ESG, our proxy voting policy is to vote proxies in the best long-term economic interests of our clients. We believe that strong governance leads to improved management of social and environmental issues, and we consider shareholder proposals in this area carefully with a focus on adding economic value. In addition, through our work with ESG-related organizations and data providers, we advocate for greater disclosure of ESG data. In our view, such disclosures are an essential missing link in identifying potential sources of risk not yet reflected in market valuations, and in encouraging the further assimilation of ESG into mainstream investment practices. In 2017, QMA accepted an invitation to join the Investor Advisory Group for the Sustainability Accounting Standards Board (SASB). During that time, we have collaborated with the organization on research that has important implications for practitioner applications of the SASB Materiality Map. Indeed, it was this research that helped to inform our own ESG investment approach. ESG AT QMA Our ESG investment policy is consistent with the values we ascribe to in running our own firm, where operating to high ethical standards, robust risk management and a diverse and stable team-based culture have long been vital to our success. These policies complement the longstanding history of our parent, Prudential Financial, Inc., as a social purpose company and its ongoing commitment to building long-term value through sustainability. Prudential today has a $1 billion impact investing portfolio. With most of its businesses (including QMA) headquartered in downtown Newark, New Jersey, the company is a neighbor and leader working assiduously to make a positive impact on the world around us. A key part of our ESG infrastructure is QMA s ESG Steering Council. The Council, comprised of senior team members across the firm, oversees all our ESG efforts, including the added levels of self-evaluation and focus that come with being a United Nations Principles for Responsible Investment (UN PRI) signatory. 4
Notes to Disclosure Sources: QMA, Bloomberg ESG data, SASB. For professional investors only. All investments involve risk, including the possible loss of capital. Past performance is not a guarantee or a reliable indicator of future results. These materials represent the views, opinions and recommendations of the author(s) regarding economic conditions, asset classes, and strategies. Distribution of this information to any person other than the person to whom it was originally delivered is unauthorized, and any reproduction of these materials, in whole or in part, or the divulgence of any of the contents hereof, without prior consent of Quantitative Management Associates LLC ( QMA ) is prohibited. Certain information contained herein has been obtained from sources that QMA believes to be reliable as of the date presented; however, QMA cannot guarantee the accuracy of such information, assure its completeness, or warrant that such information will not be changed. These materials are not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services and should not be used as the basis for any investment decision. No liability whatsoever is accepted for any loss (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from this report. QMA and its affiliates may make investment decisions that are inconsistent with the views expressed herein, including for proprietary accounts of QMA or its affiliates. QMA is a wholly-owned subsidiary of PGIM, Inc. the principal asset management business of Prudential Financial, Inc. s (PFI) of the United States of America. QMA s investment team operated for many years within one of PFI asset management companies. QMA s predecessors began managing domestic equity accounts for U.S. tax-exempt clients in 1975. In 2004, QMA became a registered investment adviser with the SEC under the Investment Advisers Act of 1940 and the quantitative management business of PGIM, Inc. was transferred to QMA. PFI of the United States is not affiliated in any manner with Prudential plc, which is headquartered in the United Kingdom.In Europe, certain regulated activities are carried out by representatives of PGIM Limited, which is authorized and regulated by the Financial Conduct Authority (Registration Number 193418), and duly passported in various jurisdictions in the European Economic Area. Quantitative Management Associates LLC, which is an affiliate to PGIM Limited, is an SEC-registered investment adviser, and a limited liability company. PGIM Limited s Registered Office, Grand Buildings, 1-3 Strand, Trafalgar Square, London WC2N 5HR. In Japan, investment management services are made available by PGIM Japan, Co. Ltd., ( PGIM Japan ), a registered Financial Instruments Business Operator with the Financial Services Agency of Japan. In Hong Kong, information is presented by representatives of PGIM (Hong Kong) Limited, a regulated entity with the Securities and Futures Commission in Hong Kong to professional investors as defined in Part 1 of Schedule 1 of the Securities and Futures Ordinance. In Singapore, information is issued by PGIM (Singapore) Pte. Ltd. ( PGIM Singapore ), a Singapore investment manager that is licensed as a capital markets service license holder by the Monetary Authority of Singapore and an exempt financial adviser. These materials are issued by PGIM Singapore for the general information of institutional investors pursuant to Section 304 of the Securities and Futures Act, Chapter 289 of Singapore (the SFA ) and accredited investors and other relevant persons in accordance with the conditions specified in Sections 305 of the SFA. In South Korea, information is issued by QMA, which is licensed to provide discretionary investment management services directly to South Korean qualified institutional investors. These materials are for informational or educational purposes only. The information is not intended as investment advice and is not a recommendation about managing or investing assets. In providing these materials, QMA is not acting as your fiduciary. Prudential Financial, Inc. of the United States is not affiliated with Prudential plc. which is headquartered in the United Kingdom. Copyright 2018 QMA. All rights reserved. QMA-20181029-356 5