Legg Mason Brandywine Global Income Optimiser

At a sovereign debt level, the environmental and social characteristics of the product include but are not limited to: deforestation and land usage/conservation, climate change vulnerability, overall Green House Gas (GHG) emissions, reliance on fossil fuel exports, water usage, civil and political rights, private sector oversight and regulation, particularly with respect to safety.

At a corporate debt level, the environmental and social characteristics of the product include but are not limited to: carbon emissions and overall GHG emissions, water usage and conservation, stranded assets and other liabilities associated with physical and transition risks, potential product liabilities, and the failure for a corporate to address and amend breaches in safety and environmental standards and other controversies that would increase business risk.

Governance plays a critical role in assessing both sovereign and corporate investments in the portfolio. These are identified on both the corporate level and the sovereign level. The Manager assesses overall business environment, corruption, and the independence of crucial institutions, and also from a fundamental perspective looking at ownership structure, board composition, and other relevant metrics.

The Manager utilises a multi-faceted approach to assess the Environmental, Social and Governance (ESG) factors across its current and prospective holdings. This process entails using a proprietary system for scoring and ranking issuers along with the use of external vendor data, metrics, and analysis. These inputs are used to create ESG scoring, identify risks, candidates for engagement, track progress on corporate and sovereign interactions, and ultimately make portfolio management decisions. The results of this analysis form the basis for portfolio exclusion where the bottom decile, as defined by the environmental and social factors for both sovereign and corporate issues, the investible universe will be screened out and the second lowest decile will become automatic engagement candidates. ​Monitoring of governance of corporate and sovereign investments are standard and embedded in the investment process. ​

The Manager performs a screen of the investible universe to identify securities for exclusion (bottom decile) and candidates for engagement (second lowest decile). Eligibility is reviewed at month end for corporate investment via an automated process and quarter end for sovereign investment. Ineligible securities are automatically precluded from investment. In addition, the Manager monitors current and prospective holdings for deterioration and improvement for Environmental (E) and Social (S) factors. ​ The use of this multi-faceted approach forms the checks and balances used to monitor ESG rankings and scores. Deterioration of the combined “E” and “S” scores will place the investments into the Manager’s engagement or exclusion pool, whereas improvements might warrant review for adjustment to sizing within the portfolio:

• The Fund excludes the bottom decile securities in the investable universe as a result of the ratings methodology deployed​ in both the sovereign debt and corporate debt portions of the portfolio.
• Engagement candidates include second lowest decile​ securities.
• Up to 80% of securities tracked and monitored for “E” and “S” factor deterioration or improvements. ​
• Monitoring of governance of sovereign and corporate investments are already standard in the investment process.

A combination of internal and external sources is deployed:

• Proprietary Tools – Internal metrics, scoring and rankings​.
• External data vendors such as MSCI and Verisk Maplecroft.
• Direct Sovereign and Corporate Engagement meetings with company management and government officials. ​
• Coordinated Sovereign and Corporate Engagement via pooled interest groups.

No index has been designated as a reference benchmark for sustainability.