Credit and Fixed Income Teams
Assessment and monitoring
Analysts identify ESG risks during their bottom-up credit research. We use customised ESG rankings as a starting point for assessments. Analysts consider these alongside their own research with reference to a variety of other external sources.
By analysing and assessing ESG issues within a company, we can identify sources of non-financial risk. In line with our credit philosophy of avoiding the losers, we are able to identify companies with a higher default risk than the balance sheet implies. This gives us greater insight than that offered by a rating from a traditional credit agency.
The team assigns a proprietary internal credit rating (ICR) to every bond we review. The ICR is a forward looking measure of default risk and is one of the key outputs of our research process. It reflects all risks relevant for that issuer, including ESG risk. Our ICR is on the same scale as ratings assigned by the ratings agencies but is often materially different for individual issuers.
The ICR is also used by the credit portfolio managers when making their decision to buy or sell bonds and to determine position size for the funds that we manage. The Head of Credit Research is responsible for ensuring the consistency and quality of the ESG inputs.
Assessment and monitoring
ESG issues are identified and considered in the course of the Team’s investment analysis. At the core of the process is the KFM which is comprised of six factors, from which we approach the analysis of the issues in our investment universe.
One of the key factors in our country analysis is politics. In emerging countries, where democracies are relatively fragile and young, it is not uncommon for elections to be highly polarised. The political spectrum can be quite broad, and so is the range of possible outcomes when key elections are held. In this context, we try to gauge social cohesion, to ensure that whatever the election outcome, the government will enjoy a broad and diverse base of support it. To the extent that it may not be the case, the willingness to service their debt by the incoming government could be challenged or questioned.
ESG issues are complex and while the issues of fiscal policy, politics and structural reform are systematically assessed through the KFM, the approach to incorporating ESG actors is still evolving. Areas where we recognise the relevance and are working to incorporate ESG into our investment process include managing natural resources, social issues and structural reform.
The World Bank produces the Worldwide Governance Indicators (see country exposure table above). Of the six indices (Voice and Accountability, Political Stability and Absence of Violence, Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption) we found that the Government Effectiveness is statistically significant in explaining the level of country spreads. Although the indices are computed on an annual basis, it still provides us with a range of reference for what the spreads should be for each country.