PIMCO’s Three-E Approach to ESG

Text on screen: PIMCO

Text on screen: PIMCO’s Three-E approach to ESG

Text on screen: Lupin Rahman, Head of EM Sovereign Credit

Lupin Rahman: PIMCO has a two-pillar approach to ESG. We look to integrate ESG across our firm wide investments and also offer dedicated ESG strategies to our asset owners. For the dedicated ESG strategies, we have a three-E approach, exclusion, evaluation, and engagement.

Text on screen: TITLE – PIMCO’s ESG Investment Process “The Three Es”, LIST – Exclusion, Evaluation, Engagement

Our exclusion pillar essentially results in our exclusions committee really looking at the investable universe and reducing that investable universe.

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We have a rule based approach to exclusions, and this is really to avoid subjectivity on the part of the analyst. And essentially the approach that we’ve taken is that our core exclusions is a function of various factors such as corruption, transparency, and UN sanctions.

Now, in addition to the core exclusions, we also have what we call dynamic restrictions, and these are restrictions which we decide within the exclusions committee to implement to incorporate the fact that a lot of the data that we’re using for the core exclusions tend to actually be published with a lag.

Text on screen: TITLE – PIMCO’s ESG Investment Process “The Three Es”, LIST – Exclusion, Evaluation, Engagement

Our evaluation pillar really is formed by our proprietary scoring and assessment mechanisms, which is conducted by our very large team of credit and ESG analysts.

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I think that thinking about ESG instead in a much more holistic sense and looking at not just an average weighted scores of the

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three ESG pillars but really doing in depth analysis on what each of these pillars mean and where the subpillars of both the environmental and social and governance criteria are going becomes really important.

And you can think of it very analogously to credit ratings. So you can have a credit rating, but really, the thing that makes the difference in terms of being able to invest is that ability to see whether the credit rating will be improving over time or deteriorating over time, and what element of that rating is going to drive that change.

Text on screen: TITLE – PIMCO’s ESG Investment Process “The Three Es”, LIST – Exclusion, Evaluation, Engagement

Our third pillar, the engagement pillar, is really a way for us to work in collaboration with issuers to move them along their sustainability objectives.

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Now, this could be anything ranging from advise on how to think about green social or sustainable frameworks, focusing on particular ESG subpillars like, for example, gender outcomes or minority rights, or even thinking much more long term in terms of

Disclosure

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protection from physical and transition risk and how an issuer, whether it’s a corporate issuer or a sovereign issuer, can really safeguard some of the risks that come from climate change.

We don't simply want to ask issuers to do something which is not going to be able to be achieve, we want to be able to provide solutions that are achievable and actually result in very direct and concrete outcomes as a result of our engagement.

The discussion and content provided within this webcast is intended for informational purposes and may not be appropriate for all investors. The information included herein is not based on any particularized financial situation, or need, and is not intended to be, and should not be construed as, a forecast, research, investment advice or a recommendation for any specific PIMCO or other security, strategy, product or service. Fixed income is only one possible portion of an investor’s portfolio, which can also include equities and other products. Past performance is not a guarantee of future results. All investments contain risk and may lose value. Investors should speak to their financial advisors regarding the investment mix that may be right for them based on their financial situation and investment objective.

PIMCO is committed to the integration of Environmental, Social and Governance ("ESG") factors into our broad research process and engaging with issuers on sustainability factors and our climate change investment analysis.  At PIMCO, we define ESG integration as the consistent consideration of material ESG factors into our investment research process, which may include, but are not limited to, climate change risks, diversity, inclusion and social equality, regulatory risks, human capital management, and others.  Further information is available in PIMCO’s Environmental, Social and Governance (ESG) Investment Policy Statement.

With respect to comingled funds with sustainability objectives (“ESG-dedicated funds”), we have built on PIMCO’s 50-year core investment processes and utilize three guiding principles: Exclude, Evaluate and Engage.  In this way, PIMCO’s ESG-dedicated funds seek to deliver attractive returns while also seeking to achieve positive ESG outcomes through its investments. Please see each ESG-dedicated fund’s prospectus for more detailed information related to its investment objectives, investment strategies and approach to ESG.

ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by PIMCO or any judgment exercised by PIMCO will reflect the opinions of any particular investor, and the factors utilized by PIMCO may differ from the factors that any particular investor considers relevant in evaluating an issuer’s ESG practices. In evaluating an issuer, PIMCO is dependent upon information and data obtained through voluntary or third-party reporting that may be incomplete, inaccurate or unavailable, or present conflicting information and data with respect to an issuer, which in each case could cause PIMCO to incorrectly assess an issuer’s business practices with respect to its ESG practices. Socially responsible norms differ by region, and an issuer’s ESG practices or PIMCO’s assessment of an issuer’s ESG practices may change over time. There is no standardized industry definition or certification for certain ESG categories, for example “green bonds”; as such, the inclusion of securities in these statistics involves PIMCO’s subjectivity and discretion. There is no assurance that the ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or reliable indicator of future results.

All investments contain risk and may lose value. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets.

This webcast contains examples of the firm's internal ESG engagement and research capabilities. The data contained within the webcast may be stale and should not be relied upon as investment advice or a recommendation of any particular security, strategy or investment product. In selecting case studies, PIMCO considers multiple factors, including, but not limited to, whether the example illustrates the particular investment strategy being featured and processes applied by PIMCO to making investment decisions. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

PIMCO ESG RATINGS: PIMCO’s credit research analysts assess the Environmental, Social, and Governance (“ESG”) profile of corporate, municipal, and sovereign issuers relative to peer issuers with a goal of separating leaders from laggards.  Using industry-specific ESG frameworks, analysts review issuers’ ESG performance based on information available in public filings, recent ESG news and controversies, as well as through engagement with company management teams. Analysts assign three separate numerical scores from 1 to 5 (with 5 being the highest) to their environmental, social and governance-based business practices.  The score in each category is related to an issuer’s rank relative to industry peers, and the relative weights of the E, S, and G scores in the composite score vary based on industries, as each industry is assigned a different factor weight. For example, the environmental category has the greatest weight for issuers in extractive industries (e.g., oil, gas, and mining), the social category has the greatest weight for pharmaceutical issuers, and the governance category has the greatest weight for financial issuers. Analysts also include a forward-looking ESG trend assessment, which recognizes companies whose ESG performance is significantly improving or deteriorating. These factors are combined to create a proprietary composite ESG score. We use the MSCI and other third-party ratings for reference but make our own assessment based on our own, independent analysis of the industry and relevant ESG factors. PIMCO’s resulting assessments are proprietary and distinct from those provided by ESG rating providers.  Inclusion of a proprietary PIMCO ESG rating creates a conflict of interest because PIMCO and its affiliates benefit when PIMCO assigns a particular security a high score, or assigns a benchmark index or security a low score.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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