Sustainable Finance Disclosure Regulation (SFDR)
Integration of Sustainability Risks
Background
In accordance with the requirements of Article 3 of Regulation 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector (“SFDR”), the following information is provided for PIMCO as alternative investment fund manager to certain alternative investment vehicles marketed and sold in the European Union under the Alternative Investment Fund Manager’s Directive (“Alternative Funds”).
Consistent with PIMCO’s ESG Investment Policy Statement, this statement details PIMCO’s commitments to: the integration of ESG factors, including Sustainability Risks (as defined below), broadly into our investment research process where applicable, our engagement with issuers on sustainability factors, and the evaluation of climate change and related risks in our investment analysis. This statement is designed to apply broadly to our firm’s long-term investment process. Unless as otherwise specified in the respective governing documents, the Alternative Funds do not promote ESG characteristics within the meaning of SFDR or have specific sustainable investment objectives.
SFDR defines “Sustainability Risk” as environmental, social, or governance events or conditions that, if it occurs, could cause an actual or potential material negative impact on the value of the investment.
ESG Integration
At PIMCO, we define ESG Integration as the consistent consideration of material ESG factors into our investment research process to enhance our clients’ risk-adjusted returns. Material ESG factors may include but are not limited to: climate change risks, social inequality, shifting consumer preferences, regulatory risks, talent management or misconduct at an issuer, among others. We believe incorporating relevant ESG factors should be part of a robust investment process.
We recognize that ESG factors are increasingly essential inputs when evaluating global economies, markets, industries and business models. Material ESG factors are important considerations when evaluating longterm investment opportunities and risks for all asset classes in both public and private markets. Our commitment to ESG Integration was one of the main drivers that led PIMCO to become a signatory to the UN Principles of Responsible Investment (PRI) in September 2011.
Integrating ESG factors into the evaluation process does not mean that ESG information is the sole or primary consideration for an investment decision; instead, PIMCO’s portfolio managers and analyst teams evaluate and weigh a variety of financial and non-financial factors, which can include ESG considerations, to make investment decisions. The relevance of ESG considerations to investment decisions varies across asset classes and strategies. By increasing and diversifying the information assessed by the portfolio management team where relevant we believe that we are able to generate a more holistic view of an investment, which we believe will generate opportunities to enhance returns for our clients.
Engagement Philosophy
As one of the world’s largest bondholders on behalf of our clients, PIMCO has a large and important platform with which to engage issuers to drive meaningful change on sustainability dimensions. Engagement is an essential tool for delivering impact in ESG investing. We believe that ESG investing is not only about partnering with issuers that already demonstrate a deeply unified approach to ESG, but also about engaging with those with less advanced sustainability practices. This can be a direct way for PIMCO to influence positive changes that may benefit all stakeholders, including investors, employees, society and the environment.
We aim to have an industry leading engagement program among fixed income asset managers. By investing across a diverse asset class and group of issuers – including corporates, municipalities, sovereigns and others – we believe PIMCO is ideally positioned to drive greater change than through exclusions or evaluations alone. In our experience we have found that our collaborative engagement approach has the potential to result in tangible, positive changes in certain companies given the strength and history of our platform.
PIMCO’s credit research analysts engage regularly with the issuers that they cover, for example in the corporate space discussing topics with company management teams related to corporate strategy, leverage, and balance sheet management, as well as ESG-related topics such as climate change targets and environmental plans, human capital management, and board qualifications and composition.
Climate Change Practice
PIMCO recognizes that climate change will likely have a profound impact on the global economy, financial markets and issuers. We have developed tools and methods that seek to incorporate over time material climate risk evaluations in our investment research processes.
Details on PIMCO’s broad climate research approach:
- When evaluating climate-related risks and opportunities within specific sectors and issuers, we typically begin with two broad categories: 1) transition risks (e.g., tighter regulations on carbon emissions) and 2) physical risks (e.g., how the rising intensity and frequency of extreme weather events affects critical assets and natural resources used or relied upon by the issuer);
- The insights these tools provide are designed to provide information to portfolio managers, particularly for ESG portfolio solutions to better manage and mitigate material climate- related credit risks and assess a portfolio’s alignment with the Paris Agreement targets1;
- We explore climate change in the context of broader sustainability risk and are supportive of the SDGs as the reference framework to assess these wide-ranging risks, e.g. biodiversity, water scarcity, human and labor rights; and
- We also seek to engage with issuers on innovative debt issuance opportunities to advance the Paris Agreement and the SDGs.
In sum, we support the recommendations of the Taskforce on Climaterelated Financial Disclosures (TCFD) and engage with issuers – across corporates, sovereigns and others – to encourage enhanced disclosure on climate change, biodiversity, and the SDGs, including their efforts to advance underlying goals, such as those of the Paris Agreement. We will continue to devote PIMCO resources to build climate investment solutions for our clients globally.
Remuneration
PIMCO’s seeks to provide employees with a Total Compensation Plan and process that is driven by PIMCO’s mission and values. The Total Compensation Plan, which includes annual incentive payments, is determined based on industry, company, and individual performance for the preceding year. Individual performance is assessed against performance criteria and objectives relevant to the employee’s role. PIMCO’s ESG Investment Policy reflects PIMCO’s commitment to the integration of ESG factors into its investment research process and belief that such factors are important considerations when evaluating long-term investment opportunities and risks. Consistent with this approach, an employee’s consideration and application of relevant such policies on Sustainability Risks will, where appropriate, therefore be taken into account when determining an individual’s performance and remuneration.
Principal Adverse Impacts (“PAIs”)
With respect to the Alternative Funds, SFDR requires us to disclose information on the PAIs which have been encountered by PIMCO and to provide a description of the action which we plan to take in respect of those identified impacts. At the firm level, as part of our ESG Integration, we incorporate consistent consideration of material ESG factors into our investment research process to enhance our clients’ risk-adjusted returns, including but not limited to: climate change risks, resource efficiency, natural capital, human capital management, human rights, regulatory risks, and reputation risk at an issuer, among others. Portfolio managers and analysts have responsibility for deploying this across the in-scope strategies as applicable.
PIMCO has implemented a process to retrospectively report at the end of a reference period on the impact of our investments on various sustainability indicators and to consider the actions, if any, that we have taken during the reference period. Importantly, the availability of investment-level data necessary for compliance with Article 4(1)(a) is presently extremely limited for the Alternative Funds.
Responsible Business Codes and International Standards
Our commitment to sustainability has led PIMCO to endorse numerous codes of conduct and best practices, including through various memberships and affiliations, including:
- Becoming a signatory to the UN Principles of Responsible Investment (PRI)
- Being a participant of the United Nations Global Compact
- Supporting the standards of the Sustainability Account Standards Board (SASB)
- Becoming a signatory to the Task Force on Climate-related Financial Disclosures (TCFD)
- Being a member of the Institutional Investors Group on Climate Change (IIGCC)
- Being an investor in the Climate Action 100+
PIMCO’s PAI Statement can be viewed here.