As described in section 11, Integration of ESG into SSA is done at a top-down and bottom-up level.
At the top-down level, this means allocation to regions and countries is based on the evaluation of economic, governance and socio-political risks by our in-house economists, credit strategists, credit analysts and portfolio managers. Country-specific ESG criteria captures the performance of previous and current governments and also address the transparency, fairness and consistency of the political, legal and administrative framework as a whole. Major political parties' prevailing attitudes with respect to ESG issues, including corruption and the respect for private investors' property rights, are also taken into account. As part of this assessment we monitor the role that technology is playing in adjusting political and societal processes, and its subsequent impact to the governance environment. Exposure and resilience of the economy to environmental phenomenon, such as El Nino/La Nina are also considered.
From the bottom up, our analysts covering investment grade sovereign related and sub-sovereign issuers conduct a desktop review of the governance framework applicable to the issuer, its compliance historically with these frameworks and the political risks inherent in the governance framework. The analysts also review the Social and Environmental disclosure of the issuer, including a consideration of its social/environmental mandate where applicable, since many government related entities have specific mandates to invest in local development. This assessment is largely qualitative, and always informed by the economic and political backdrop in the relevant country or countries, and the perceived willingness and ability of the issuer to adhere to its stated policies
Examples of how these considerations pass through into the Investment Grade team decision-making process include: our assessment of Temasek, where the closer relationship between the entity and government has prompted us to re-evaluate the governance assessment and view it as less of an arm's length entity; and NWB - where we are trying to understand the environmental impact of its lending policies and those of its customers, the domestic water boards, in order to determine how critical its function is to the economy and therefore how long dated we want our exposure to be.
The emerging market sovereign team also draws upon his proprietary ESG-linked scoring tool in assessment of country-credit risk. The tool incorporates assessment of multiple ESG-related factors, such as country education levels, access to internet, corruption indices, and income inequality.
Examples of how ESG considerations pass through into the emerging markets investment team decision-making process include: 1) a structural underweight position in Mozambique that defaulted on its debt in 2016 and has still failed to reach an agreement with investors, 2) a cautious positioning re Turkish credit, given the political and geopolitical concerns surrounding the country, 3) a return to an overweight position in South African external bonds as it became clear that a government change for the better was upcoming (this included pre-empting ratings stabilisation action), and 4) a tactical increase in exposure to Angolan sovereign debt in anticipation of government reforms to tackle corruption and economic disparities.
In addition, our ESG thematic working groups provide the opportunity to link ESG themes to both corporate and sovereign credit implications. Analysts and PM’s from across asset classes and investment strategies sit on the working groups, and outputs are shared across the business through our Thought Leadership webpages and internal updates.