Stewardship And ESG Integration
The Global Fixed Income team defines Responsible Investment as an investment process that considers environmental, social and governance indicators alongside traditional indicators of financial performance. Importantly, our process does not implement ethical screens. We consider ESG factors relative to their potential impact on financial performance.
We believe that ESG issues have a significant bearing on risk. ESG factors are incorporated into our assessment of the drivers of alpha source prices and the influence these drivers have on alpha source price. While ESG factors can be important to a variety of fixed income investments, corporate securities are where those risks are most prominent. Poor corporate and regulatory governance are recognised contributors in most corporate failures. In addition, dangerous environmental and social practices can lead to significant financial cost, as well as reputation and brand damage.
In our process, we view the comparison of ESG policies and the practices of bond issuers as a risk management exercise, making the ESG risk-assessment an integral part of our security selection process. Provided that the ESG analysis is skilful and focused on the potential for events to affect bond prices, we believe the benefits to investors will show up over time.
Because ESG risk-assessment is incorporated into our idea generation stage, all client portfolios benefit from our consideration of these factors. Because product design is done independently from idea generation, clients have the option to further shape their portfolios using ESG factors. These options include negative or positive ESG screens. We can work with clients to incorporate other ESG ideas into their product designs based on their views and requirements.
Assessment and monitoring
Analysts identify ESG risks during their bottom-up credit research. We analyse ESG risks through our own risk framework that results in a proprietary ESG ranking. Analysts consider these risks alongside their own research with reference to a variety of other drivers that frame an assessment of price-focused risk.
The analysis and assessment of ESG issues within a company helps identify sources of risk which may not be fully captured by its financial statements. These factors, along with our other relative-value focused drivers, allows us to further articulate our view of default risk than the balance sheet might otherwise imply. The result is a more articulated view of RV-return in identifying mispriced risk spreads in the market.
As part of our price-driven relative value credit process, we assign a proprietary internal credit rating (ICR) to every credit we review. The ICR is a forward looking measure of default risk and is one of the fundamental outputs of our research process. The ICR incorporates the ESG risk(s) inherent to an issuer. Our ICR is on the same scale as that assigned by the ratings agencies, but often materially different for individual issuers.
Our key engagement with companies focuses on understanding their ESG risks and their approach to managing those risks. For example, we are interested in understanding current government regulatory risk within the Healthcare sector as viewed through the lens the of Pharmacy Benefit Manger (PBM) key business outcomes – an element that we believe might have dramatic impacts on future earnings generation. A challenge for responsible credit investors has been effective ESG engagement with issuers, however our experience is that there is a growing trend with issuers addressing key ESG issuers with the investment community. We believe heightened transparency around ESG statistics and data points from companies is a critical part to making informed, value-added ESG determinations, and are advocates of this trend.
For further information please refer to our credit research process description.
"While ESG factors can be important to a variety of fixed income investments, corporate securities are where those risks are most prominent. Poor corporate and regulatory governance are recognised contributors in most corporate failures."
"Because ESG risk-assessment is incorporated into our idea generation stage, all client portfolios benefit from our consideration of these factors. Given product design is carried out independently from idea generation, clients have the option to further shape their portfolios using ESG factors."