Table of Contents
PGIM Quantitative Solutions' 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.
PGIM Quantitative Solutions' 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.
Organizational Structure and Resources
PGIM Quantitative Solutions' ESG Steering Council, comprised of senior firm executives, oversees all of our ESG, responsible investment and stewardship efforts. The Council advises on our ESG and Responsible Investment policies, shapes our ESG research agenda and oversees our annual reporting as a signatory to and/or supporter of various principles and codes.
PGIM Quantitative Solutions' Senior Governance Officer (SGO) works collaboratively across business lines to enhance PGIM Quantitative Solutions' capabilities to analyze the corporate governance of issuers of securities in which we invest, to monitor market and other developments relating to active ownership and to helping enhance our collective engagement approach. The SGO also maintains oversight of data received and available including, but not limited to, data analytics and ballot issues relating to ESG matters.
The SGO is also responsible for coordinating PGIM Quantitative Solutions sustainability initiatives and PGIM Quantitative Solutions adherence and reporting relating to the United Nations-supported Principles for Responsible Investment, the Task Force on Climate-Related Financial Disclosures (TCFD) and Japan’s Stewardship Code.
In addition, PGIM Quantitative Solutions has a Proxy Voting Committee that includes representatives from our Investment, Operations, Compliance, Risk and Legal teams, along with our SGO. This committee is responsible for updating and interpreting our proxy voting policy, identifying conflicts of interest, and periodically assessing the effectiveness of our policy and procedures. The committee also oversees the services provided by our third-party proxy voting facilitator by reviewing management reports and performing periodic reviews of the proxy vendor.
ESG Research and Investment Approach
As a quantitative investor, PGIM Quantitative Solutions has a disciplined investment philosophy and robust investment processes in place across our investment platform. Our processes are anchored by extensive research into the use of quantitative factors intended to capture market inefficiencies and/or capitalize on investor biases in buying behavior. We believe this will translate into consistent long-term investment performance for our clients.
PGIM Quantitative Solutions 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.
We can also implement client-directed restrictions, which may be based on minimum standards of business practice based on international norms and include negative screening within the portfolio construction process. Our proprietary optimization algorithm can take into consideration any country, company or industry restrictions that our client may impose.
PGIM Quantitative Solutions 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 to ESG, with a current focus on:
- The interaction of various ESG and financial factors to maximize the potential for alpha along with ESG improvements
- Engineering customized ESG solutions
- Continuing to evolve our ESG framework to incorporate different ESG data sources
PGIM Quantitative Solutions can implement client-directed restrictions, which may be based on minimum standards of business practice based on international norms, including UN screens, and we can include negative screening within the portfolio construction process. We can take into consideration any country, company or industry restrictions according to client preferences.
PGIM Quantitative Solutions does not invest in entities identified on the list of Specially Designated Nationals and Blocked Persons, published by the Office of Foreign Asset Control of the U.S. Department of Treasury (the “OFAC List”). We follows PFI’s Discipline and Sanction Guidelines against identified foreign countries, terrorism sponsoring organizations, international narcotics traffickers and foreign kingpin significant narcotics traffickers. OFAC acts under Presidential wartime and national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze foreign assets under US jurisdiction.
Social Responsibility at PGIM Quantitative Solutions
PGIM Quantitative Solutions is committed to social and corporate responsibility. We prioritize an equitable workplace, welcoming of new ideas. We embrace employee, client, and community differences through initiatives that support, inform, develop, and increase awareness and sensitivity. Through these efforts, we honor the power of people.
Firmwide, we strongly believe that talent comes in every color, gender, origin, religion, sexual orientation, and physical capability imaginable. We actively seek out employees, vendors, and business associates from a deep and diverse pool of accomplished professionals eager to build on PGIM Quantitative Solutions' respected name in the financial services industry. From a business perspective, we strive to ensure that our solutions actively reflect the diversity of our changing world.
Our responsible 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 operates a $1 billion impact investing portfolio. With most of its businesses (including PGIM Quantitative Solutions) 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.
To that end, we participate in a variety of corporate outreach programs, and include social criteria that our traders may take into consideration to support Minority and Women-owned Business Enterprises (MWBE) and in our firm-wide Best Execution and Counterparty Approval policies.
PGIM Quantitative Solutions leads diversity efforts at the company through multiple channels, such as Allies@QMA, Women@QMA, Black Leadership Forum@QMA and Latinx@QMA. Employees are further supported by PFI’s voluntary Business Resource Groups (BRGs), based on race/ethnicity, different abilities, gender, national origin or sexual orientation.
PGIM Quantitative Solutions' Statement on Inclusion and Diversity is available in the Stewardship & Governance section of our website: www.pgimquantitativesolutions.com.
Stewardship and Engagement
We believe that strong governance leads to improved management of social and environmental issues, and we exercise our views and monitor our influence on investee companies through the proxy voting process. As a responsible investor and fiduciary, PGIM Quantitative Solutions' 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 typically results in stronger, more consistent returns over time.
As part of our adherence to Japan’s Stewardship Code, we developed a proprietary questionnaire that covers a variety of ESG and profitability questions. This survey is used as the basis for our annual engagement with companies that we identified as having poor or deteriorating ESG scores. The engagement takes the form of emails and two-way dialogues. PGIM Quantitative Solutions then monitors and reports on the results of the questionnaire it sent to these firms identified as having poor or deteriorating ESG scores. The results of this report show various metrics in the areas of 1) corporate governance (e.g., board structure, compensation), 2) environmental (e.g., carbon emissions), 3) social (e.g., reporting, diversity) 4) vision and strategy, and 5) shareholder rights. The report also includes information on the efforts undertaken by PGIM Quantitative Solutions to engage in dialogue with selected companies. PGIM Quantitative Solutions will report on the results of this questionnaire to our clients upon their request.
We also periodically participate in in-bound calls with company management regarding various issues of concern to us relating to a current ballot. Such items can include ESG-related issues.
Prioritization of Engagements
Our current engagement efforts focus on equities, primarily companies that are unattractive based on their ESG scores, as determined by the proprietary weightings and ESG factors developed by PGIM Quantitative Solutions.
Alignment With Stewardship Principles and Codes
Our key stewardship objectives are consistent with the commitment PGIM Quantitative Solutions made when becoming a signatory to the United Nations-supported Principles of Responsible Investment (PRI) in 2015. PGIM Quantitative Solutions is focused on promoting ESG investment principles within the investment industry, in particular on improving the quality, quantity and consistency of the data disclosed. PGIM Quantitative Solutions 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, PGIM Quantitative Solutions began supporting the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), and in 2019, PGIM Quantitative Solutions became a signatory to the Investor Stewardship Group (ISG).
PGIM Quantitative Solutions 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 we maintained membership in the International Corporate Governance Network (ICGN) through 2020. We also work with 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 those held directly by PFI, our ultimate parent.
PGIM Quantitative Solutions is committed to achieving sustainability outcomes from our social and corporate responsibilities. To that end, we participate in a variety of corporate outreach programs that we intend to align with the United Nations Social Development Goals (SDGs). As we continue to evolve our ESG practices, we look to further enhance our sustainability outcomes through continued alignment with the United Nations SDGs and other globally recognized frameworks.
As stated above, PGIM Quantitative Solutions' policy is to vote proxies in the best long-term economic interests of our clients (the appreciation in value of the investment over time). Our Proxy Voting Overview and proxy voting results are available in the Stewardship & Governance section of our website: www.pgimquantitativesolutions.com.
PGIM Quantitative Solutions' voting guidelines reflect our general philosophy on corporate governance matters and our approach to governance and other issues that may commonly arise when voting ballots on the various securities held in client accounts. These guidelines are not intended to limit the analysis of individual issues at specific companies, nor do they indicate how we will vote in every instance. Rather, they express our views about corporate governance and other issues generally, and provide insight into how we typically approach issues that often appear on corporate ballots. They are applied with discretion, taking into consideration the range of issues and facts specific to the company and the individual ballot items. Because the guidelines are not absolute, context matters and may drive different outcomes for different companies.
While governance is the focus of many ballot items, our detailed, customized voting guidelines address a wide variety of matters, including:
- Boards and directors
- Audit related issues
- Executive compensation
- Capital-related issues
- Mergers, acquisitions and other financial transactions
- Environmental issues, such as climate change
- Social issues
- Corporate governance issues
From time to time, ballot issues arise that are not addressed by our policy, or circumstances may suggest a vote not in accordance with our established guidelines. In these cases, our voting decisions are made on a case-by-case basis taking into consideration the potential economic impact of the proposal.
With respect to non-US holdings, we take into account additional restrictions in some countries that might impair our ability to trade those securities or have other potentially adverse economic consequences. Further, we may be unable to vote proxies in countries where clients or their custodians do not have the ability to cast votes due to lack of documentation, operational capacity, or otherwise. We generally vote non-US securities on a best-effort basis when we determine that voting is in the best economic interest of our clients. In addition, when voting on ballots for companies in global markets, we may consider various market-specific nuances, along with applicable regional rules and practices, including codes of conduct and other guides.
We seek to actively monitor developments in the proxy voting arena based on a historical analysis of proxy issues and a continuing review of new proposals and legislative changes. Our policy and guidelines are reviewed annually and are updated as needed to address new developments.
PGIM Quantitative Solutions directs the proxy vendor, upon receipt of proxies, to vote in a manner consistent with our established proxy voting guidelines (assuming timely receipt of proxy materials from issuers and custodians). Our proxy vendor also makes available analyses of ballot issues and voting recommendations to its clients. Our voting guidelines include instructions to vote certain ballot issues consistent with recommendations made by the vendor. In these cases, we periodically assess the consistency of our view along with that of the vendor and retain ultimate responsibility for the voting decision.
Prioritization and Scope of Voting Activities
PGIM Quantitative Solutions will generally refrain from voting on foreign securities in those countries that sequester (block) shares. We will also refrain from voting in countries where a Power of Attorney (POA) is required at a cost; unless a client specifically pursues the cost and implementation of such POA in order to vote proxies in the applicable country. In addition, when proxies are received dealing with issues not clearly addressed by PGIM Quantitative Solutions' proxy voting guidelines, the responsible portfolio managers will determine if, and how, to vote on these issues on a case-by-case basis. Finally, proxies with respect to conflict issuers will be voted in accordance with the proxy advisor’s policy as outlined in the Conflicts section.
PGIM Quantitative Solutions does not perform securities lending on behalf of their clients, since we are not the legal owner of the funds which offer security lending for client accounts. Rather, our firm sub-advises certain funds that are managed, sponsored and distributed by affiliated and unaffiliated firms. Certain PGIM Quantitative Solutions clients may participate in securities lending programs in their accounts. PGIM Quantitative Solutions does not control or participate in any way in these programs and does not know when or which securities in our clients’ accounts have been loaned. PGIM Quantitative Solutions cannot vote securities that are out of our clients’ portfolios on loan or are otherwise excluded from voting privileges. If a client who was responsible for voting their own proxies asked PGIM Quantitative Solutions for advice regarding a particular ballot issue for a specific holding, we could share our analysis of the issue based on our rankings of SASB materiality, carbon emissions, and other sources of data, including the comprehensive research reports compiled by our proxy advisor.
Regional Voting practices
With respect to non-US holdings, we take into account additional restrictions in some countries that might impair our ability to trade those securities or have other potentially adverse economic consequences. Further, we may be unable to vote proxies in countries where clients or their custodians do not have the ability to cast votes due to lack of documentation or operational capacity, or otherwise. We generally vote non-US securities on a best efforts basis if we determine that voting is in the best economic interest of our clients. In addition, when voting on ballots for companies in global markets, we may consider various market specific nuances, along with applicable regional rules and practices, including codes of conduct and other guides.
Filing or Co-Filing Resolutions
Currently, PGIM Quantitative Solutions does not file or co-file ESG resolutions or vote on other investors’ ESG resolutions.
Company Dialogue Pre or Post-Vote
We have participated, and will continue to participate in, in-bound calls with company management to discuss prior votes or topics of current concern/interest. Such calls can occur either pre- or post-vote. In general, however, as a quantitative investment manager, PGIM Quantitative Solutions has not historically reached out directly to companies either pre or post-vote.
Conflicts of Interest
Like other investment advisers, PGIM Quantitative Solutions is subject to various conflicts of interest in the ordinary course of its business. PGIM Quantitative Solutions strives to identify potential risks, including conflicts of interest, that are inherent in its business, and conducts annual conflict of interest reviews. When actual or potential conflicts of interest are identified, PGIM Quantitative Solutions seeks to address such conflicts through one or more of the following methods:
- Elimination of the conflict
- Disclosure of the conflict or
- Management of the conflict through the adoption of appropriate policies, procedures or other mitigants.
PGIM Quantitative Solutions has developed policies and procedures designed to address various conflicts of interest. Additional information about conflict of interest issues may be found in Part 2A of PGIM Quantitative Solutions' Form ADV.
As a wholly-owned subsidiary, PGIM Quantitative Solutions is subject to PFI’s Code of Conduct. The Code of Conduct outlines the identification of conflicts of interest, including outside business activities.
Proxy Voting Conflicts of Interest
The Proxy Voting Committee establishes the criteria to identify any issuers as to which we believe there may be a potential conflict between the respective interests of PGIM Quantitative Solutions and those of our clients (each, a "Conflict Issuer"). Proxies with respect to Conflict Issuers, including our ultimate parent company, PFI, will be voted in accordance with the proxy vendor's policy.
Due Diligence and Monitoring Process
When we rebalance our actively managed portfolios, we calculate an ESG score for each stock. We can actively monitor any changes, positive or negative, to a company’s individual score from one period to another over relatively short and longer time periods.
We may also monitor certain criteria that might trigger more due diligence for certain holdings. These could include lack of disclosures of SASB-related issues, material SASB scores, high carbon and other greenhouse emissions, or various controversies that could affect the overall financial outlook for various securities.
PGIM Quantitative Solutions maintains a Code of Ethics as required by applicable SEC rules. Our Code of Ethics requires employees to conduct business in an honest and forthright manner in accordance with the highest of ethical standards. In addition, the Code of Ethics requires employees to put client interests ahead of our own and disclose actual and potential meaningful conflicts of interest. The Code of Ethics incorporates our information barrier and personal securities trading policies that are described in greater detail in Part 2A for our Form ADV. Employees are responsible for reporting any information that could be deemed material, non-public information, or “inside” information that may be directly or indirectly obtained from research or meetings with company representatives.
We believe that unsuccessful engagements will eventually be priced into our model. Our rationale is that better managed companies make better operating, investing, and financing decisions, which should result in stronger, more consistent returns. Companies that are subject to escalation following unsuccessful engagements are showing signs of poor operating, investing and financing decisions, which our model will capture as lower quality rankings.
Additionally, we can reduce the exposure of certain securities in our portfolios. To do so, we employ a quantitative technique that identifies exposure 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 exposure to companies with significantly low ESG ratings within permissible risk bounds and investment restrictions, and increases exposure to companies that score well.
When voting proxies, our analysis of various shareholder proposals that deal with ESG issues also provides us with an opportunity to vote for those shareholder proposals that we believe will help support better overall corporate governance, as well as better disclosures of industry-specific and systematic risks. In situations where we believe there are no negative financial implications, we have voted, and will continue to vote against management in certain circumstances, including if they continue to demonstrate an inability to correct whatever issue(s) we view as deficient.
As stated above, PGIM Quantitative Solutions monitors and reports on the results of questionnaires sent to firms identified as having poor or deteriorating ESG scores as part of our adherence to the Japan Stewardship Code. The results of the report show various metrics in the areas of 1) corporate governance (e.g., board structure, compensation), 2) environmental impact (e.g., carbon emissions), 3) social (e.g., reporting, diversity) issues, 4) vision and strategy, and 5) shareholder rights. The report also includes information on the efforts undertaken by PGIM Quantitative Solutions to engage in dialogue with selected companies. PGIM Quantitative Solutions will report on the results of this questionnaire to our clients upon their request.
In general, we provide disclosure of our proxy voting policy, guidelines and procedures to our clients who authorize us to vote proxies, generally at the time that we are negotiating our investment management agreement. Any client may obtain a copy of these items, as well as the proxy voting records for that client’s securities, by contacting the client service representative responsible for the client’s account. We also make our Proxy Voting Overview and proxy voting results publicly available in the Stewardship & Governance section of our website: www.pgimquantitativesolutions.com