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ESG Impact RatingsESGImpactRatings

Introduction to PGIM Fixed Income's ESG Impact Ratings

  • Concept: ESG Impact Ratings reflect PGIM Fixed Income’s assessment of what is a positive and negative impact for the planet and good for society. ESG Impact Ratings are not credit ratings; they are not an assessment of a company’s ability to repay debt, which is already integrated in our internal fundamental credit ratings.
  • ESG Impact Ratings: Assess how debt issuers impact the environment and society, regardless of whether we feel those impacts are immediately credit material.
  • ESG Impact Categories: Five, clearly defined categories setting our ESG expectations for issuers.
  • Scale: The scale spans from 100 to zero in increments of five, with zero as the lowest and 100 as the highest ESG rating.

ESG Impact Categories and Definitions

Corporate ESG Impact Ratings Methodology

  • Assessed each industry for environmental and social impacts
  • Identified what we felt to be key negative impacts and positive differentiators
    • Key negative impacts and positive differentiators are specific for each GICS industry group, industry, and sub-industry and reflect our view on the most important negative and positive impacts of issuers within each grouping
  • Developed guidance for ESG Impact Ratings ranges and medians at GICS sub-industry level (including further breakdowns as appropriate)
  • Developed Guidance on the application of governance factors to ESG Impact Ratings

ESG Impact Categories and Examples of GICS Industries

ESG In Credit Research

ESG is incorporated into our credit research processes. Through issuer analysis, we are able to identify credit material ESG factors for each industry, as well as the negative and positive impacts that this industry can have on the environment and society. With this information in mind, we can better engage with issuers, developing a constructive dialogue where our assessment and analysis is provided to the issuer, pertinent issues are raised, and the economic and reputational implications are discussed.

*It is important to note that unlike equity investors, fixed income investors have a contractual relationship with a company. Whereas equity holders, as owners, have more direct influence over management.

Securitized Products ESG Impact Ratings Methodology

  • Coordinated ESG Impact Ratings evaluation with Corporate Credit Research based on the asset class, issuer, and nature of collateral
  • Identified key negative impacts and positive differentiators
    • Focused on utility and appropriateness of the financial products backing securitizations from the perspectives of the borrowers, lenders, and investors
  • Developed guidance for ESG Impact Ratings ranges and medians by asset class subsectors
  • Developed guidance on the application of governance factors to ESG Impact Ratings, including:
    • ​Competency of third-party service providers, particularly loan originators and servicers, and potential impact to borrowers, lenders, and investors from regulatory, legislative, and judicial interventions
    • Key governance constructs in securitization documents and how structural features and amendment rights are designed to protect investors, particularly in the event of collateral underperformance
  • Use engagement with issuers, third-party servicers, industry advocacy group, fellow investors, and other market participants in order to improve outcomes for investors and borrowers

ESG Impact Categories and Examples of Securitized Assets

ESG In Securitized Products

Within securitized products, consideration of social and governance ESG factors is core to PGIM’s evaluation of all consumer lenders, especially in the unsecured subprime consumer lending subsector. In our issuer engagements we focus on how the loan product design affords good utility for the borrower, the lender and the securitisation investor. In assessing responsible lending, we conduct due diligence on the lender’s consideration of a borrower’s ability to pay relative to their income, other debts and living expenses, and the lender’s servicing practices.

Source: PGIM Fixed Income. Note: An Issue may have a different ESG Impact Rating from an Issuer in the case of ESG labeled bond issuance. ESG labeled bonds are assessed under PGIM Fixed Income’s Green, Social and Sustainable Bond frameworks. For illustrative purposes only. Subject to change. Not indicative of future expectations. In the case of both credit material ESG factors and negative & positive impacts, the lists shown are illustrative. Actual topics considered will vary depending on the issuer and its circumstances and may not include all of the topics listed here and/or may include other topics not shown.

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PGIM Fixed Income operates primarily through PGIM, Inc., a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended, and a Prudential Financial, Inc. (“PFI”) company. Registration as a registered investment adviser does not imply a certain level or skill or training. PGIM Fixed Income is headquartered in Newark, New Jersey and also includes the following businesses globally: (i) the public fixed income unit within PGIM Limited, located in London; (ii) PGIM Japan Co., Ltd. (“PGIM Japan”), located in Tokyo; (iii) the public fixed income unit within PGIM (Singapore) Pte. Ltd., located in Singapore (“PGIM Singapore”); (iv) the public fixed income unit within PGIM (Hong Kong) Ltd. located in Hong Kong; and (v) PGIM Netherlands B.V., located in Amsterdam (“PGIM Netherlands”). PFI of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom, or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. Prudential, PGIM, their respective logos and the Rock symbol are service marks of PFI and its related entities, registered in many jurisdictions worldwide.

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These materials are for informational or educational purposes. The information is not intended as investment advice and is not a recommendation about managing or investing assets. In providing these materials, PGIM is not acting as your fiduciary. Clients seeking information regarding their particular investment needs should contact their financial professional.

This document may contain confidential information and the recipient hereof agrees to maintain the confidentiality of such information. Distribution of this information to any person other than the person to whom it was originally delivered and to such person’s advisers is unauthorized, and any reproduction of this document, in whole or in part, or the divulgence of any of its contents, without PGIM Fixed Income’s prior written consent, is prohibited. This document contains the current opinions of the manager and such opinions are subject to change. Certain information in this document has been obtained from sources that PGIM Fixed Income believes to be reliable as of the date presented; however, PGIM Fixed Income cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. PGIM Fixed Income has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to its completeness or accuracy. Any information presented regarding the affiliates of PGIM Fixed Income is presented purely to facilitate an organizational overview and is not a solicitation on behalf of any affiliate. 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. These materials do not constitute investment advice and should not be used as the basis for any investment decision.

This material may contain examples of the firm’s internal ESG research program and is not intended to represent any particular product’s or strategy’s performance or how any particular product or strategy will be invested or allocated at any particular time. PGIM’s ESG processes, rankings and factors may change over time. ESG investing is qualitative and subjective by nature; there is no guarantee that the criteria used or judgment exercised by PGIM Fixed Income will reflect the beliefs or values of any investor. Information regarding ESG practices is obtained through third-party reporting, which may not be accurate or complete, and PGIM Fixed Income depends on this information to evaluate a company’s commitment to, or implementation of, ESG practices. ESG norms differ by region. There is no assurance that PGIM Fixed Income’s ESG investing techniques will be successful.

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Any financial indices referenced herein as benchmarks are provided for informational purposes only. The use of benchmarks has limitations because portfolio holdings and characteristics will differ from those of the benchmark(s), and such differences may be material. You cannot make a direct investment in an index. Factors affecting portfolio performance that do not affect benchmark performance may include portfolio rebalancing, the timing of cash flows, credit quality, diversification, and differences in volatility. In addition, financial indices do not reflect the impact of fees, applicable taxes or trading costs which reduce returns. Unless otherwise noted, financial indices assume reinvestment of dividends.

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