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. Where external ESG ratings are often not available there is a greater reliance on the analysts assessments.
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.
We annually review and rate our counterparties on a number of factors including ESG. The counterparty review relies on external ESG service providers, commentary from our analysis, and in 2017 will also include a survey of our counterparties where they are not adequately covered by our external providers.
The counterparty review is provided to the counterparties and has been the source of engagement with some counterparties on their ESG performance. The reviews also determine how much and whether we will trade with different counterparties. All other things being equal, a low ESG rating will make it less likely that we will trade with a particular counterparty.