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Colonial First State Global Asset Management (including First State Investments)

PRI reporting framework 2016

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You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income » (C) Implementation: Integration

(C) Implementation: Integration

FI 14. Integration overview

14.1. Describe your approach to integrating ESG into traditional financial analysis.

We have four fixed income and credit teams:

  • Global Fixed Income and Credit
  • Emerging market Debt,
  • Asian Fixed Income and Credit and
  • USA Fixed Income and Credit

Like our equity teams our fixed income teams are developing their own approaches to ESG integration which complements their investment processes. The Asian and USA FI&C teams share significant elements of their investment process with the Global team, including analyst resources.

The approach to integrating ESG into traditional financial analysis is different for different issuer types and investment teams as described in the relevant sections below. 

14.2. Describe how your ESG integration approach is adapted to each of the different types of fixed income you invest in.

SSA

ESG issues can impact on a sovereign's ability to generate sustainable revenues or potentially increase its future costs, affecting its ability to repay bond holders.

For the Fixed Income and Credit teams ESG factors are incorporated in the following way:

The team is still at an initial stage of incorporating ESG issues into our assessment for sovereign issuers. Many of the indicators and data the team use to arrive at their assessment of ESG risks do not apply for certain sovereign issuers. For instance, country or corporate criteria for assessing ESG risks do not apply for supranationals. These issuers have a social or sustainable policy objective but there is limited reporting on ESG performance to enable bond investors to assess and monitor these risks. The challenge is to find the appropriate data in order to assess the risks for a range of sovereign issuers and to understand how ESG risks impact the risk of default for these issuers.

For the emerging market debt team ESG factors are incorporated in the following way.

Issues are identified and considered in the course of the team's investment analysis. At the core of their process is the Key Factor Model (KFM). The KFM is comprised of six factors, or angles, from which we approach the analysis of the issuers in the team's investment universe. Three of these factors are intimately related to RI and stewardship: fiscal policy, politics, and structural reform.

The team seeks to monitor the investment restrictions put in place by the national and supranational entities relevant to their universe including: national foreign policy measures, United Nations sanctions, European investment restrictions, among others.

The majority of information the team needs in order to analyse sovereign issuers is publicly available through National Statistics Offices. However, it is important for the analysts to spend time on the ground and observe country conditions first-hand to verify whether the statistics or the news is giving the full picture. This time spent on the ground can include meetings with government officials, but a great deal can also be gauged simply by observing the surrounding environment.

Corporate (financial)

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.

Integration

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. 

EMD Team

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.

Integration

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.

Corporate (non-financial)

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.

Integration

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. 

EMD Team

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.

Integration

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.

Securitised

We do not  integrate ESG factors for securitised investments. 

14.3. Additional information [OPTIONAL]


FI 15. Integration - ESG information in investment processes

15.1. Indicate how ESG information is typically used as part of your investment process.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
ESG analysis is integrated into fundamental analysis
ESG analysis is integrated into security weighting decisions
ESG analysis is integrated into portfolio construction decisions
ESG analysis is a standard part of internal credit ratings or assessment
ESG analysis for issuers is a standard agenda item at investment committee meetings
ESG analysis is regularly featured in internal research notes or similar
ESG analysis is a standard feature of ongoing portfolio monitoring
ESG analysis features in all internal issuer summaries or similar documents
Other, specify

15.2. Additional information [OPTIONAL]

The investment team responses for each item were:

ESG analysis is integrated into fundamental analysis -  All teams answered yes for corporate issuers, one team answered yes for SSA

ESG analysis is integrated into security weighting decisions - One team answered yes for corporate issuers

ESG analysis is integrated into portfolio construction decisions - One team answered yes for SAA, another two teams maximunm portfolio weights are function of the internal credit rating for corporate issuers which incorporate ESG analysis. 

ESG analysis is a standard part of internal credit ratings or assessment - All teams answered yes for corporate issuers

ESG analysis for issuers is a standard agenda item at investment committee meetings - One team answered yes for SAA

ESG analysis is regularly featured in internal research notes or similar - All teams answered yes for corporate issuers, one team answered yes for SSA

ESG analysis is a standard feature of ongoing portfolio monitoring - All teams answered yes for corporate issuers

ESG analysis features in all internal issuer summaries or similar documents - All teams answered yes for corporate issuers,  one team answered yes for SSA


FI 16. Integration - E,S and G issues reviewed

16.1. Indicate the extent to which ESG issues are reviewed in your integration process.

Environment
Social
Governance
SSA

Environmental

Social

Governance

Corporate (financial)

Environmental

Social

Governance

Corporate (non-financial)

Environmental

Social

Governance

Securitised

Environmental

Social

Governance

16.2. Please provide more detail on how you review E, S and G factors in your integration process.

EMD Team

In the particular context of EMD, ESG considerations
have always been part of our country research. We do not look at ESG factors as an “add-on” or an additional step in the investment analysis. ESG considerations are an integral part of our forward-looking analysis of politics, structural reform and fiscal policy in each country. The main tool we utilise when analysing the countries we invest in is our Key Factor Model. The Key Factor Model is comprised of six factors that have proven to have the ability to explain the trends that over time, determine country spreads. ESG considerations are deeply embedded in the model. An integral part of our investment process is to conduct research trips to the countries we invest in. We seek to gain a deeper understanding of the relevant trends and to benefit from a first hand, on the ground experience to complement our analysis of macro financial conditions. Typically these trips include meetings with government officials and this has enabled us to raise, when appropriate, ESG concerns. The team has developed an internal database that offers a comprehensive coverage of ESG metrics for the vast majority of the countries researched based on six indicators. The database is updated as and when new information becomes available. Corruption Perception Index (Transparency International) Human Development Index (United Nations Development Program) Ease of Doing Business (World Bank) Fragile State Index (Fund For Peace) Government Effectiveness Index (World Bank) Energy Sustainability Index (World Energy Council)

Fixed Income and Credit Teams

Given the sustainability mission for most supranationals, the focus of assessment is on performance on these
issues to understand what checks and balances there are, how the supras mitigate these risks or rectify their
processes to ensure they meet their policies.

Fixed Income and Credit Teams

The environmental and social risks we would like to understand are the indirect risks and not the bank's own risks, ie. direct environmental and social footprint. To date, the information is very thin with no research providers
performing this analysis.

Fixed Income and Credit Teams

We use data and analysis by external research providers, as well as brokers and other sources, to form an
assessment on the risk for issuers.

Fixed Income and Credit Teams

This assessment is more challenging as the risks hinges on the contract and parties to the contract. We assess the risks in its component to form an overall view.

16.3. Additional information.[OPTIONAL]

In response to the question on securitised bonds only the Global Fixed Income and Credit team responded 'systematically' and so we have selected 'occasionally' as our response. 


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