Legg Mason ClearBridge US Value Fund

The environmental and social characteristics of the product include the binding considerations of: Climate change preparedness, water efficiency, energy efficiency, greenhouse gas emissions (direct and indirect), non-greenhouse gas emissions (eg nitrogen oxide, sulphur oxide), local environmental impacts, environmental practices (incl. pollutants); Product reliability and quality, product safety, affordability and customer perception, employee safety and practices, labour union management, community relationships, local community impact and management  

The product is also bound to consider governance characteristics such as: regulatory landscape (risks, changes, support), minority misalignment, board quality, management quality, governance structure, management incentivisation, culture (asset maintenance & safety practices), cyber security, physical security, tax transparency, bribery & corruption.

The investment manager believes that environmental, social and governance, as well as broader sustainability factors are important to company performance.  ESG risks and opportunities are considered throughout the investment process; 1) in cash flows as a part of fundamental security valuation; 2) where an ESG factor is not easily captured in cash flows, these are assessed and rated via a proprietary ESG risks scorecard. These criteria are binding, which an analyst / portfolio manager cannot simply override.  As a result of the integrated approach to ESG, all investments are bound by the environmental or social characteristics set out above. 

The investment manager filters the investable universe via an Exposure score and a Quality score, which includes the cash flow valuation incorporating ESG risks.  These make up the RARE Infrastructure score. Only companies that have a sufficiently high overall score are accepted into the RARE 200. The investment manager does not invest in companies outside the RARE 200.

Companies are further assessed using the proprietary ESG risks scorecard system. Based on these results, companies are assigned an adjustment to the required return, or hurdle rate, of the investment.  A reward is applied for better ESG profiles, while a penalty is added to the required return for poorer ESG profiles.  Sustainability scoring and the Scorecard design is overseen by the Sustainability Committee. The Sustainability Committee meets periodically and is responsible for oversight of the sustainability process and ensuring that the process remains effective and fit for purpose.

The Fund will not invest in companies operating in the following sectors/activities: gaming, weapons, alcohol and tobacco-related companies or those with material direct exposure to the extraction of fossil fuels or mining. The Fund also excludes companies and regions that are subject to sanctions or concerns over modern slavery.

Internal scoring is deployed based on available company, sector and industry data:

• Quality score, RARE Infrastructure score
• Proprietary ESG risks scorecard, ESG penalty/reward to required rate of return
• Engagement activity and tracking – Environmental, Social or Governance topics and stages of engagement

The investment manager has previously used Sustainalytics ESG data in the past, and gradually evolved their proprietary ESG scoring framework, to accommodate the specialist nature of infrastructure asset investing.

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