By constantly optimising its SRI expertise, Edmond de Rothschild Asset Management (France) seeks to offer its clients new, complementary analysis and management tools on top of those already developed by the management company.
Integrating ESG in traditional financial analysis gives managers of credit debt and sovereign debt an additional appreciation perspective, enabling them to fine-tune their assessment and, ultimately, their level of confidence in issuers' levels of exposure to a default risk.
Integrating ESG in corporate debt
Since 2015, the ESG analysis has been systematically integrated in one of the euro zone SRI credit funds, Edmond de Rothschild Euro Sustainable Credit, totalling €103 million in assets under management at 31 December 2017. This fund is a sort of Trojan horse used to incorporate ESG analysis concretely and gradually within credit management as a whole by contributing, initially, to disseminating the codes of ESG analysis throughout the credit management team. This integration results in informal exchanges between the credit management team and the RI manager, as well as with the internal extra-financial analysts through day-to-day email discussions with RI asset managers regarding an issuer's material ESG risks (risk mitigation). This also takes the form of more formal exchanges with the reporting of current issues discussed in weekly equity and fixed-income management meetings regarding ESG convictions (alerts regarding controversies or sensitive issues, highly material events, investment opportunities on sustainability-related stocks)
It is being strengthened with the integration of ESG data related to corporate debt issuers within our in-house tools that is an ongoing project opened in 2017 and an access to Sustainalytics’ ratings for all EDRAM asset managers. The RI credit fund manager is the link between the credit management team and the RI analysis team, integrated in all Edmond de Rothschild Asset Management (France)'s management strategies in a cross-cutting way, guaranteeing the ESG analysis process.
. We also invested in green bonds issues by corporates (Toyota, Westpac…)
Besides, all equity and bond management teams are contributing to and co-operating with ten ESG integration projects in 2017-2020. These innovative projects, chosen by asset management teams, are giving concrete, traceable results, and are focusing on precise subjects identified as highly material in financial terms.
For illustrative purpose, the RI team worked closely with the Credit management team on one primary ESG integration project with strong financial materiality and related to “Valuation impact of ESG research for equities and corporate credit”. In this context, the impact of ESG ratings on the valuation of bonds has been assessed using an internal methodology and validated by the corporate credit management team involved in the project. The positive or negative impact of ESG ratings is shown by the improvement or deterioration in financial ratings (number of notches) in the case of bonds. This impact is now systematically recorded in all new issuer analyses and their updates, and the analysis results are provided to all bond managers.
Integrating ESG in sovereign debt
Edmond de Rothschild Asset Management (France) has also implemented an ESG analysis approach for euro zone sovereign debt issuers formally launched in 2017.
This analysis approach, which for the time being covers only the category of Sovereign issuers within the meaning of the PRI's SSA classification, has been developed by one of our sovereign debt manager-analyst, with regular interaction with the internal RI team as part of the search for and selection of sustainability indicators based on publicly-available sources, such as Eurostat. It has been updated in 2017 with the alignment of the methodology on the Sustainable development goals and the inclusion of a new criteria to attain this alignment.
The combination of ESG indicators short-listed for the ESG integration process aims to identify a favourable trend in terms of solvency of states in the medium to long term by combining the financial and extra-financial approach. Consequently, this analysis model enables us to see more clearly which ESG factors have a material impact on the economic performance of issuer countries in Europe. Our in-depth review of all possible indicators resulted in around 33 being selected which we consider the most relevant across the 3 ESG pillars. We have prioritized to use raw data for the countries' ESG criteria and minimise the use of indices aggregating several data/indicators, so that we can interpret more precisely the strengths and weaknesses of each country:
The Environmental pillar includes waste recycling systems, the surface area of organic farming and of course CO2 emissions and renewable energy generation. For financial reasons, we favoured issuers of green bond, which accounted for 1.5% of all the sovereign and agencies debt AUM
In the Social pillar, the use of multi-dimensional indicators proved very revealing. For example, the merging of the rate of employment of men and women with the birth rate per family has shown that, despite its economic strength and its very good Governance score, Germany lost some points, notably due to the absence of policies to balance work and family. On the contrary, the strength of France's score on the Social and Environmental pillars supports it in continuing to receive an AA rating from the main agencies (compared with Germany's AAA).
This holistic view of each country's approach has helped us to identify, for example, Ireland's ability to resist and bounce back after the financial crisis (it has one of the highest ESG scores) and to identify Portugal as a country where a good ESG score points to a strong sustainable growth potential. By contrast, Greece and Italy's low score on the Governance and Social pillars partially explained why their overall rating was lower than that of other countries.