Rationale for ESG incorporation
AMP Capital aims to deliver globally-competitive outcomes for the assets and products we manage. ESG analysis contributes to those outcomes. We believe there are links between an organisation's environmental and social impacts, the quality of its corporate governance, and its long-term business success. Considering those ESG factors provides us with greater insight into areas of risk and opportunity that impact the value, performance and reputation of investments we make on behalf of clients. AMP Capital's ESG and Responsible Investment philosophy applies across the business and can be viewed at www.ampcapital.com.au/esg.
Recognising the characteristics and addressing challenges within Fixed Income
We note there are some general characteristics and challenges associated with considering ESG issues within Fixed Income investments:
Engaging issuers on ESG issues
Bondholders typically do not have the voting rights or access to management that institutional shareholders do. Bonds can also be issued by unlisted entities or corporate subsidiaries, or be project- rather than entity-specific, so that management and accounting quality issues are often less transparent.
As a mainstream investment manager, AMP Capital recognises scenarios where the interests of bondholders and equity holders may also diverge. Where companies or issuers are under financial stress, for example, bondholders may take a more risk averse position than an equity investor.
Pricing ESG risks
Determining how ESG risks can be systematically priced into particular fixed income instruments - for example fixed income derivatives (synthetics) - is also challenging. Other key considerations include the time frame (duration) for fixed income investments and the horizon over which some ESG issues might potentially play out.
Integration of ESG into the investment process
AMP Capital's approach to ESG integration in Fixed Income is explicitly referenced in our Credit Research Philosophy and systematically considered within our bottom-up Credit process. AMP Capital integrates ESG considerations for bond issuers in a similar way to equity issuers, noting the differences and challenges described above. In particular, the focus in fixed income is on the issuer's credit rating, rather than on its longer-term market value. AMP Capital makes its own assessments of an issuer's credit rating.
Our approach within Fixed Income also has a strong directional focus on corporate governance issues which are closely linked to overall management and credit quality. The overall investment focus in Fixed Income is more on operating profits and cash flows as a measure of an issuer's ability to service debt obligations. These are not generally as sensitive to environment and social issues as assessments of equity value. Establishing the materiality of environmental and social issues to credit quality can be more complex and difficult, as is demonstrating how analysis of ESG issues reduces the probability of, or the losses from, a default. Materiality can also vary significantly between industry sectors, between companies and between host countries or economies.
Our recent objectives have included further developing our systematic approaches to incorporate ESG considerations into fixed income investment decisions, particularly on corporate bonds, and also fostering further collaboration between our Equities, Fixed Income and ESG Research teams. To that end, the ESG Research team analyses individual companies and industry sectors from proprietary data and that sourced from external third parties (in particular for international issuers). Their ESG analysis is included in the credit quality assessments of our Credit team.
The ESG team also researches companies, sectors or themes on request from the Global Fixed Income team; for example, an analysis of climate change policy and its potential impacts on debt instruments within the Australian power sector. Members of our ESG, and Global Equities and Global Fixed Income investment teams also regularly attend the same meetings with companies and issuers, providing unique insights on investment and ESG performance that incorporate each of these perspectives.
Future objectives, opportunities and actions
AMP Capital aims to continue to improve our Global Fixed Income teams' understanding of ESG issues to meaningfully enhance their investment analyses. This includes further work on materiality, and how ESG analysis can increase the understanding of bond pricing and of the risks of default-driven losses.
AMP Capital also continues to play an active role in helping address these issues in the broader investment community, through participation in the Principles for Responsible Investment (PRI) Fixed Income Steering Committee and supporting the ESG in Credit Ratings Initiative - sharing our own experiences and insights and collaborating with other institutional investors to explore the issues, challenges and investment impact of ESG issues within fixed income. Examples of this collaborative work is available via the PRI website or below:
Corporate Bonds: Spotlight on ESG Risks: https://www.unpri.org/download?ac=35
Sovereign Bonds: Spotlight on ESG Risks: https://www.unpri.org/download?ac=34
Fixed Income Investor Guide: https://www.unpri.org/download?ac=32