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QMA’s goal is to meet client investment objectives by closely managing portfolio exposure to expected return and risk. When determining portfolio holdings, we evaluate the impact of many factors on meeting these objectives, including Environmental, Social and Governance (ESG) factors.
QMA’s approach to integrating ESG in our investment portfolios is intended to address the challenges facing the responsible investor, without compromising long-term risk mitigation or expected returns. We consider ESG factors in the same research process as our other investment ideas, all of which are subject to extensive research and testing prior to incorporation in our models and investment processes.
We recognize, however, that some ESG issues may represent future risks that are not present in past returns and may be more difficult to evaluate. Clients may also have individual beliefs and mission-related preferences with respect to ESG-based investments and, therefore, we offer a range of ESG options that can be adapted to varying client preferences. Our research shows that these preferences can be accommodated in a very transparent way in our quantitative investment process without meaningful performance differences from equivalent portfolios that do not include ESG-based investments.
Our ESG Governance Framework and Industry Participation
QMA’s ESG Steering Council is made up of senior firm executives, including our CEO and CIO. The Council advises on our ESG, Active Ownership and Responsible Investment policies, shapes our ESG research agenda and oversees our annual reporting as a signatory to and/or supporter of various responsible investment-related principles and codes.
Consistent with the commitment QMA made when becoming a signatory to the United Nations-supported Principles of Responsible Investment (PRI) in 2015, we are focused on improving the quality and consistency of ESG reporting and data. QMA has contractually agreed to adhere to Japan’s Stewardship Code since 2016. In 2017, we became a member of the Sustainability Accounting Standards Board (SASB) Investor Advisory Group, through which we encourage companies to disclose information on their carbon emissions and other ESG-related factors. In 2018, QMA began supporting the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), and in 2019, QMA became a signatory to the Investor Stewardship Group (ISG).
QMA also participates in various educational and collaborative events with other stewardship and governance organizations. We are members of the Council of Institutional Investors (CII) and the International Corporate Governance Network (ICGN). We also joined the Investor Network on Climate Risk (INCR)/CERES through memberships held by PGIM, the global investment management business of Prudential Financial, Inc. (PFI), as well as through PFI, our ultimate parent.
Our Proxy Voting Policy
As a responsible investor and fiduciary, QMA’s policy is to vote proxies in the best long-term economic interests of our clients (the appreciation in value of the investment over time). We consider various factors, such as the following, when voting on ballot issues that may arise: board quality, including diversity, tenure, and independence; executive compensation; industry-specific SASB materiality; controversies; carbon and other greenhouse emissions; fair pay; gender equality; and other social issues. Our research shows that board diversity, independence and experience may result in stronger, more consistent returns over time.
QMA’s Proxy Voting Overview is available in the Stewardship & Governance section of our website: qma.com/stewardship-and-governance.
Our ESG Research and Investment Approach
QMA offers varying degrees of ESG integration in all of our quantitative equity portfolios. Such differentiation allows clients to select their own levels of active ESG investment.
The majority of our quantitative equity portfolios have long included various quality signals, which we use as a proxy for governance. Our quality factors are broadly focused on companies we expect to be fundamentally stronger in the future. We evaluate quality through a wide range of approaches, including non-financial quality (board and management quality), and direct measures of financial quality including earnings quality, company financing, and operating and financial stability, among others. Our research has shown that better management and boards generally make better decisions, leading to better investing, financing and operating outcomes, and thus better financial outcomes for shareholders.
For clients who wish to invest with a more direct emphasis on ESG, we can employ a quantitative technique that identifies exposures to material ESG attributes, based on industry materiality guidelines developed by SASB. We can also score companies on their level of carbon emissions, to directly address the issue of climate change. Where emissions data is not available, our proprietary data completion technique can proxy data based on known return patterns and risk factors. Our process reduces exposures to companies with significantly low ESG ratings within permissible risk bounds and investment restrictions, and may increase exposures to companies that score well. Client-directed restrictions, which include negative screening, can also be implemented within the portfolio construction process. Our proprietary optimization algorithm can take into consideration any country, company or industry restrictions that our client may impose.
QMA will continue to research the best ways to use factors that capture ESG effects and combine them with other stock selection factors to identify attractive investment opportunities. Our firm-wide research agenda supports our commitment, with a current focus on:
- Updating the SASB materiality map
- Examination of company improvements on specific ESG measures
- Comparisons of ESG factors across sectors and countries
QMA’s ESG Policy and Social Responsibility
QMA is committed to social and corporate responsibility. To that end, we participate in a variety of corporate outreach programs. We also include social criteria that our traders may take into consideration in our Minority and Women-owned Business Enterprises (MWBE) and in our firm-wide Best Execution and Counterparty Approval policies.
Our ESG investment policy is consistent with the values we ascribe to in our own firm, where high ethical standards, robust risk management and a diverse and stable team-based culture have long been vital to our success. These policies complement the longstanding history of our ultimate parent, PFI, as a social purpose company and its ongoing commitment to building long-term value through sustainability. PFI today is building a $1 billion impact investing portfolio. With most of its businesses (including QMA) headquartered in downtown Newark, New Jersey, the company is a neighbor and leader working assiduously to make a positive impact on the world around us.
QMA’s ESG policy is available in the Stewardship & Governance section of our website: qma.com/stewardship-governance.