Responsible Investing:

Integration and Engagement

 

ESG Integration Can Drive Investment Decisions

Proprietary tools and systems can enable ESG engagement, research and collaboration among our global team of analysts. By following an investor-driven approach, they’re positioned to do the deep fundamental research necessary to truly understand the material ESG risks and opportunities facing issuers.

The Active Engagement Advantage

As active investors, engagement is important to our responsible investment and research processes. Each year, AB analysts engage with leaders of companies and noncorporate entities, including municipalities, supranational and sovereign issuers. We also engage selectively through our proxy voting activities.

These connections allow us to assess, discuss and encourage issuers to better address material ESG risks or take advantage of ESG opportunities. We believe that engagement can drive better research and better outcomes for clients.

Process in Action

ESG Integration is about thoughtfully considering how material ESG issues may affect an issuer's investment.

Flow chart of ESG Integration cycle

Proprietary Research Collaboration Platforms

We’ve innovated platforms that power collaboration between our analysts within and across asset classes as we research and engage with issuers.

ESIGHT

ESIGHT is a one-stop online shop where AB investment teams can access and share proprietary information about corporate ESG practices.

PRISM

Our fixed-income ESG research platform, Prism, provides independent ESG assessments and scores that impact investment decisions. The goal, of course, is straightforward: better and faster information should empower better decisions and result in stronger portfolios.

Put into Practice

The World Bank

The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries to help fund capital projects. A project aimed to protect endangered black rhinos has garnered global attention. Black rhinos are a critically endangered species, and their population size reflects broader issues in biodiversity and conservation. Their endangerment is a good barometer of how these protected areas are faring.

Our objective in this engagement was to craft an ESG-labeled bond issued by the World Bank that achieves improved biodiversity in South Africa by targeting growth in the black rhino population. The challenge in this project was that the Global Environment Facility (GEF) wanted to incentivize black rhino population growth, while gamekeepers wanted certainty of cash flows to help build a rhino-protection team. We met with the World Bank and Credit Suisse numerous times throughout 2022 to arrive at a transaction that satisfied all parties.

AB ultimately helped craft a bond whose coupon would be tied to the GEF success criteria, including a Conservation Success Payment that bondholders would receive if the rhino population continued to grow in line with recent trends. This structure allowed investors to address rhino population risk while gamekeepers were assured of consistent payments. This is one of the first biodiversity outcome–based bonds in the market.

Petrobras

Petrobras is a major state-owned oil and gas producer in Brazil that has one of the largest corporate carbon footprints in Latin America. AB is an investor participant in the Petrobras CA100+ investor cohort and has held a series of engagements on the company’s climate strategy since joining the initiative.

During AB’s tenure on this engagement, Petrobras has continued to progress its climate strategy, despite persistent changes in top leadership and operating in the context of a dynamic political environment. In particular, in line with guidance provided by AB and the CA100+ investor cohort, Petrobras has recently made decisive new commitments around its climate activities. The company has now pledged to achieve net zero greenhouse gas (GHG) emissions by 2050.

In the most recent Petrobras engagement, the Environmental Defense Fund (EDF) joined AB and the investor cohort to provide perspective and expertise on managing risks related to methane emissions, which are major contributors to climate change, given that methane’s warming potential is much greater than that of CO2.

AB and the other investors encouraged Petrobras to join the Oil and Gas Methane Partnership 2.0 (OGMP). The OGMP is a multi-stakeholder initiative launched by the United Nations Environment Programme and the Climate and Clean Air Coalition, which works with major oil and gas companies to help tackle methane emissions, which pose financially material risks and opportunities to issuers that we seek to manage on behalf of our clients.

By joining OGMP, members commit to disclosing according to the OGMP reporting framework, which works to improve the transparency and accuracy of methane emissions reporting. In previous dialogues, Petrobras expressed concerns over the technical feasibility of adhering to this reporting framework, attributing this concern to particular features of the company’s offshore drilling operations. However, AB and the investors were able to leverage the expertise of EDF to help address some of these concerns. Petrobras has since indicated that the prospect of joining OGMP membership is currently progressing through its internal approval processes.

AB and the CA100+ investor cohort are encouraged by the progress made on evolving the company’s climate strategy, as well as efforts to take investor priorities seriously.

Trupanion

Trupanion is a pet insurance company based in the US. We engaged with Trupanion management and board members multiple times throughout 2022. As part of these conversations, we’ve shared examples of what AB views as best practices, including our view that we expected board declassification in coming years. While the company was not ready to immediately commit to the measure, management noted our concern and said they would discuss.

In November 2022, the CEO noted that he wanted to declassify the board during the time frame of his succession from CEO (current title) to chairman/CEO (2023–2025) to chairman (2025 and beyond), asking our advice for best practices on this process.

We will continue to engage to monitor progress on board declassification.

 

The views expressed herein do not constitute research, investment advice or traderecommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time.

 

The case study examples presented are not to be considered investment recommendations of AllianceBernstein.

How Does Engagement Make a Difference?

Engagement is an important part of our responsible investment process. Each year our active analysts engage with the leaders of public and private companies and non-corporate entities, including municipalities, and supranational and sovereign issuers.

We engage selectively through our proxy voting activities and as a core component of our research and investment processes.

  • Independent Perspectives: With direct access to management, our active equity and fixed-income analysts and responsible investment team seek to develop unbiased perspectives on ESG issues through dialogue with companies. Different teams can engage separately or jointly when appropriate.
  • Proprietary Tools: Using our in-house research and collaboration tools, AB analysts can share insights in real time and track any needed follow-ups for extended engagements.
  • Constructivist Approach: As large stewards of capital, we can facilitate constructive engagement with management teams and, where appropriate, directors, to create a forum to discuss many industry-related topics, including ESG issues.

Engagement in Action

Case Study: Energy in India

AB analysts seek to clarify how a leading energy company approaches liquefied natural gas development to position itself in the transition to a lower-carbon economy.

Case Study: Insurance in Brazil

Our team probes management to discuss discrepancies between its ESG ratings and the firm’s actual practices and disclosures for financial product safety and health-insurance access.

Case Study: Financial Services in the US

We engage with a large US consumer-financial-services firm about the creation of scopes one, two and three greenhouse gas targets and whether they’re meaningful or integrated with the firm’s business strategy.