ESG Investment Process & Strategies
ESG In Credit Analysis
Our approach to integrating ESG into our investment process aims to analyze ESG risks and opportunities with an eye toward any potential negative or positive impact(s) on the value of investments. These credit-material ESG factors are incorporated into the management of all client portfolios.
As part of the credit research process, our analysts review information related to ESG factors from a wide range of sources, including the issuer, a third-party ESG research provider, or alternative data sources. Supplemental information may be obtained through engagement with the issuer. Our analysts will incorporate the material, or potentially material, adverse risks into their fundamental credit ratings. Fundamental credit ratings are in turn a key factor in our relative value assessments, and our portfolio managers will consider material ESG risks and opportunities when assessing the overall relative attractiveness of potential investments. This means that investments with higher ESG risk may be owned within our broader portfolios if the portfolio manager/analyst together believe that other fundamental strengths of the issuer and/or wider spreads compensate for the higher ESG risk.
ESG factors that are considered to be materially positive will also be reflected in our fundamental analysis and considered in relative-value assessments. Although our views are often informed by quantitative metrics, our ultimate decision on how ESG issues should influence our investment decisions is largely qualitative, as with other types of risks and opportunities.
ESG Impact Ratings
We strive to understand the impacts our investments have on the environment and society, regardless of whether those impacts are immediately credit material. This is achieved through our proprietary ESG Impact Ratings, which are designed specifically to measure impact. Although ESG Impact Rating assessments can help inform our understanding of an issuer’s ESG-related risks and opportunities, those risks and opportunities – if credit material – would instead be reflected in our fundamental credit ratings.
Credit analysts and economists assign ESG Impact Ratings to issuers in their coverage based on methodologies and guidance approved by our internal ESG Committee1. In doing so, they rely on many of the same sources used for analyzing ESG risks and opportunities, including issuer disclosures, third party ESG research and data, NGO reports, governmental and inter-governmental studies, and others. In addition, engagement is often critical to the analysis.
ESG Impact Ratings can be used to provide additional investment criteria designed to tilt portfolios towards issuers with more positive environmental and social impacts. They are a core component of all of our ESG-labelled strategies.
Collaboration Between Credit and ESG Specialists
At PGIM Fixed Income, analysis of credit material ESG Factors and ESG Impact Ratings are the responsibility of credit analysts and economists. Concurrently, ESG research specialists advise and collaborate with these credit analysts and economists and will challenge ESG Impact Ratings and investment decisions where ESG issues are material considerations.
Helping Investors Achieve Their Goals
We believe that providing investors with an explicit choice between Traditional strategies and ESG strategies will help them express their policies, views, and beliefs through their investments.
ESG Integration—Traditional & ESG Strategies
- Enhance credit analysis by incorporating credit material ESG considerations
- Influence investment decisions by requiring a higher return/credit spread from issuers with credit material ESG risks
- Communicate our views on fundamental and ESG risks to issuers
Traditional Strategies
- Seek to outperform a market-based benchmark over the long-term
- Integrate credit-material ESG factors through credit research and relative value analysis
ESG Strategies
- Seek to outperform a market-based benchmark over the long-term while achieving an environmental and social good
- Integrate credit-material ESG factors through credit research and relative value analysis
- Use proprietary ESG impact ratings and/or client methodology to achieve the desired ESG characteristics
- Invest in issuers with stronger environmental, social, and governance characteristics
- The extent of adjustments to the eligible investment universe will determine whether this comes at a cost of increased risk or lower alpha on an expected basis
1The coverage universe for ESG Impact Ratings includes nearly all issuers where we hold a position, except for those where our position size across the firm is de minimis and certain tax-exempt munis, provided these are not held in accounts that utilise the ESG Impact Ratings. Certain new issuers may also not have an ESG Impact Rating assigned in our systems on a transitory basis due to timing constraints.
All investments involve risk, including the possible loss of capital. The value of investments can go down as well as up. For illustrative purposes only. There is no guarantee that these objectives will be met. The targeted excess returns are based on gross performance returns, unless otherwise noted, which do not reflect the deduction of investment advisory fees or other expenses. This information is delivered solely as reference material with respect to investment products that PGIM Fixed Income may offer in the future. PGIM Fixed Income is under no obligation to offer any such product. All strategy terms are subject to significant change without notice.
Benchmark Descriptions
Bloomberg U.S. Aggregate Index covers the USD-denominated, investment-grade, fixed-rate or step up, taxable bond market of SEC-registered securities and includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS sectors. Securities included in the index must have at least 1 year until final maturity and be rated investment-grade (Baa3/ BBB-/BBB-) or better using the middle rating of Moody’s, S&P, and Fitch.
Bloomberg Global Aggregate Index provides a broad-based measure of the global investment-grade fixed income markets. The three major components of this index are the U.S. Aggregate, the Pan-European Aggregate, and the Asian-Pacific Aggregate Indices. The index also includes Eurodollar and Euro-Yen corporate bonds, Canadian government, agency and corporate securities, and USD investment-grade 144A securities. Securities included in the index must have at least 1 year until final maturity and be rated investment-grade (Baa3/ BBB-/BBB) or better using the middle rating of Moody’s, S&P, and Fitch.
Bloomberg Euro Aggregate Corporate Index USD Hedged Index is a benchmark that measures the corporate component of the Bloomberg Euro Aggregate Bond Index, a broad-based flagship benchmark that measures the investment grade, euro-denominated, fixed-rate bond market, including treasuries, government-related, corporate and securitized issues. Inclusion is based on currency denomination of a bond and not country of risk of the issuer. The index is hedged to USD. As of January 1, 2020 composite benchmark was changed to the Bloomberg Euro Aggregate Corporate USD Hedged Index from the iBoxx Euro Corporate (USD Hedged) Index.
Bloomberg Global Corporate Aggregate Index is a component of the Global Aggregate Index that includes the global investment-grade, fixed-rate or step up, taxable securities sold by industrial, utility and financial issuers. The three major components of this index are the U.S. Aggregate Corporate, the Pan-European Aggregate Corporate, and the Asian-Pacific Aggregate Corporate indices. The index also includes Eurodollar and Euro-Yen corporate bonds, Canadian corporate securities, and USD investment-grade 144A securities. Securities included in the index must have at least 1 year until final maturity and be rated investment-grade (Baa3/ BBB-/BBB-) or better using the middle rating of Moody's, S&P, and Fitch.
Bloomberg US High-Yield 1% Issuer Capped Index is an issuer-constrained version of the US High-Yield Index that covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. The US HY 1% Issuer Capped Index limits issuer exposures to a maximum 1% and redistributes the excess market value index-wide on a pro-rata basis. Securities must be rated below investment-grade (Ba1/BB+/BB+ or below) using the middle rating of Moody’s, S&P, and Fitch, and have at least 1 year until final maturity. Effective October 1, 2020 the Benchmark changed to the Bloomberg US High-Yield 1% Issuer Capped Index, prior to that the Benchmark was the Bloomberg US Corporate High Yield Bond Index.
ICE BofA Developed Markets High Yield Constrained Index USD Hedged (ICE BofA Developed Markets High Yield Constrained Index (HYDC)) contains all securities in the ICE BofA Global High Yield Index from developed markets countries, but caps issuer exposure at 2%. Developed markets is defined as an FX-G10 member, a Western European nation, or a territory of the U.S. or a Western European nation. The FX-G10 includes all Euro members, the U.S., Japan, the UK, Canada, Australia, New Zealand, Switzerland, Norway, and Sweden. Index constituents are capitalization-weighted, based on their current amount outstanding, provided the total allocation to an individual issuer does not exceed 2%. Issuers that exceed the limit are reduced to 2% and the face value of each of their bonds is adjusted on a pro-rata basis. Similarly, the face values of bonds of all other issuers that fall below the 2% cap are increased on a pro-rata basis. In the event there are fewer than 50 issuers in the Index, each is equally weighted and the face values of their respective bonds are increased or decreased on a pro-rata basis. Accrued interest is calculated assuming next-day settlement. The index is rebalanced on the last calendar day of the month, based on information available up to and including the third business day before the last business day of the month. No changes are made to constituent holdings other than on month end rebalancing dates. The index is hedged to USD.
ICE BofA U.S. 3-Month Treasury Bill Index is comprised of a single issue purchased at the beginning of the month and held for a full month. At the end of the month that issue is sold and rolled into a newly selected issue. The issue selected at each month-end rebalancing is the outstanding Treasury Bill that matures closest to, but not beyond, three months from the rebalancing date. To qualify for selection, an issue must have settled on or before the month-end rebalancing date.
ICE BofAML European High Yield ex Finance 2% Constrained Index tracks the performance of EUR and GBP denominated below investment grade corporate debt publicly issued in the eurobond, sterling domestic or euro domestic markets. Qualifying securities must have a below investment grade rating and an investment grade country of risk. The index contains all non-Financial securities but caps issuer exposure at 2%. Source: ICE Data Indices, LLC, used with permission. ICE Data Indices, LLC is licensing the ICE Data Indices and related data "as is," makes no warranties regarding same, does not guarantee the suitability, quality, accuracy, timeliness, and/or completeness of the ICE Data Indices or any data included in, related to, or derived therefrom, assumes no liability in connection with their use, and does not sponsor, endorse, or recommend PGIM Fixed Income, or any of its products or services.
Emerging Markets Bond Index Global Diversified (EMBI Global) Index tracks total returns for USD-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans, and Eurobonds. It limits the weights of those index countries with larger debt stocks by only including specified portions of these countries’ eligible current face amounts of debt outstanding. To be deemed an emerging market by the EMBI Global Diversified Index, a country must be rated Baa1/BBB+ or below by Moody’s/S&P rating agencies. Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy. The Index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan's prior written approval. Copyright 2021, JPMorgan Chase & Co. All rights reserved.
JPMorgan Corporate Emerging Markets Bond Index Broad Diversified (JPM CEMBI Broad Diversified) tracks total returns of US dollar-denominated debt instruments issued by corporate entities in Emerging Markets countries. The CEMBI Broad is the most comprehensive corporate benchmark followed by the CEMBI, which consists of an investable universe of corporate bonds.
Source ICE Data Indices, LLC, used with permission. ICE Data Indices, LLC IS LICENSING THE ICE DATA INDICES AND RELATED DATA "AS IS," MAKES NO WARRANTIES REGARDING SAME, DOES NOT GUARANTEE THE SUITABILITY, QUALITY, ACCURACY, TIMELINESS, AND/OR COMPLETENESS OF THE ICE DATA INDICES OR ANY DATA INCLUDED IN, RELATED TO, OR DERIVED THEREFROM, ASSUMES NO LIABILITY IN CONNECTION WITH THEIR USE, AND DOES NOT SPONSOR, ENDORSE, OR RECOMMEND PGIM FIXED INCOME, OR ANY OF ITS PRODUCTS OR SERVICES.
Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.
Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy. The Index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan's prior written approval. Copyright 2021, J.P. Morgan Chase & Co. All rights reserved.
