ESG within fixed income is fundamentally a risk management consideration. Within the Emerging Markets fixed income space, the “Governance” aspect of ESG is best reflected in the political landscape. Ashmore’s investment committee meetings start off with a macro discussion and then moves to the individual countries. This review of individual emerging countries starts with a focus on what the likely effects of the external macro factors are on market behaviour and in turn, asset prices. The team analyses and discusses the ability (the financial position of a country) and the willingness (more qualitative focusing on the incentives of the policy-makers in-country) of countries to service their sovereign debt.
Ability to pay is analysed looking at classic indicators of credit-worthiness and debt sustainability analysis. This involves analysis of the local fiscal position, currency, interest rates and trade data. Currency and interest rate exposures within individual countries are explicitly evaluated and fundamentals such as growth prospects, balance of payments dynamics, credit-worthiness, the likely effect of commodity price movements, local politics, economic data and local and external investor sentiment are analysed thoroughly. A great deal of thought goes into how the different scenarios can impact the portfolios and Ashmore takes credit analysis extremely seriously. Willingness to pay is more subjective and can change quickly subject to the vagaries of the political cycle and the political response to economic events. Ashmore places emphasis on the factors that affect a government’s willingness to pay and relies on scenario-analysis to determine the risks and opportunities presented by these governments’ assets. Finally, the technical factors affecting asset prices in various markets are important considerations leading to investment decisions. Ashmore speaks regularly with appointed policy makers to glean their views on significant events, such as local elections, as well as try to gauge their bias towards populist agendas which may impact ESG factors.
Ashmore formalises EM country credit and ESG considerations at least quarterly, in conversations between various members of the Investment team and the Head of Research. In addition, the Investment Committee will consider the assessment for each country on an ad-hoc basis as it discusses country visit reports from Portfolio Managers returning from research trips, or when discussing significant events such as elections. Therefore, credit and ESG analysis are an integral part of Ashmore’s investment process for publicly traded fixed income securities.
Ashmore’s quantitative scorecard is a derivation of its Risk models and assesses 10 economic and ESG risk factors for Impact (low, moderate, high, or 1, 2, 3) and Probability (low, moderate, high or 1, 2, 3). The score of each factors would be Impact x Probability, with six possible outcomes: 1, 2, 3, 4, 6, 9. Adding the scores of all ten factors gives a country risk score that incorporates both credit risk and ESG risk. The theoretical minimum and maximum risk scores are thus 10 and 90 respectively, while the median is 30 and the average is 40. These metrics are reviewed against yields and spreads to determine if an appropriate risk premium has been built into Ashmore’s scenario analyses.
Within Emerging Markets Debt segregated accounts, Ashmore also offers clients the flexibility to implement their ESG constraints related to specific countries, sectors and securities (for example, restricted lists, concentration limits etc.).