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RBC Global Asset Management

PRI reporting framework 2019

Export Public Responses

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Outputs and outcomes

FI 17. Financial/ESG performance

17.1. Indicate whether your organisation measures how your incorporation of ESG analysis in fixed income has affected investment outcomes and/or performance.

Select all that apply
CorporateĀ (financial)
Corporate (non-financial)
We measure whether incorporating ESG impacts portfolio risk.
We measure whether incorporating ESG impacts portfolio returns.
We measure the ESG performance/profile of portfolios (relative to the benchmark).
None of the above

17.2. Describe how your organisation measures how your incorporation of ESG analysis in fixed income has affected investment outcomes and/or ESG performance. [OPTIONAL]

BlueBay applies both quantitative and qualitative approaches to measure the impact of ESG. For instance, BlueBay monitors strategy-level and individual issuer ESG scores and ESG controversy exposures. Qualitatively, BlueBay monitors the impact of ESG analysis in terms of impact on investment views and outcomes for specific issuers or sectors.

Overall, BlueBay has found that, in the majority of instances, there has not been a change to investment views or allocation decisions based on the ESG data, but the data has contributed to the overall investment process.

In addition, we measure the ESG performance of fixed income corporate holdings as compared to the benchmark at the request of clients.

17.3. Additional information.[OPTIONAL]

FI 18. Examples - ESG incorporation or engagement

18.1. Provide examples of how your incorporation of ESG analysis and/or your engagement of issuers has affected your fixed income investment outcomes during the reporting year.

ESG issue and explanation

In 2018, our Global Sovereign Bond team launched its Global Sovereign Bond strategy into incubation. The strategy is differentiated from other fixed income sovereign strategies through its consideration of a country's relative ranking on the United Nations Human Development Index.

Impact on investment decision or performance

The Human Development Index evaluates and scores a country on three key dimensions of human development: a long and healthy life, being knowledgeable and having a decent standard of living. The team believes that a nation that values its human capital has a strong relationship with economic management and societal development. Ultimately, this will translate into investment returns commensurate with the riskiness of the investment. Consequently, the strategy's final country allocation is adjusted by a country's relative ranking on the Human Development Index.

ESG issue and explanation

The European Credit team includes an assessment of ESG in quantitative screens for European companies, using the ESG data from third-party research providers alongside other factors to help rank companies in their respective sectors. This allows the team to identify companies with strong or improving credit fundamentals.

As part of its due diligence, the team performs a more detailed evaluation on ESG factors for each company. This is where the team generally engages with management of its investee companies to form a view on the quality of its management and governance and any environmental or social risks or opportunities.

For example, the team engaged with a French utility company that had recently been impacted by several forced shut-downs and repairs on its plants, leading to its reporting of lower than expected earnings and a revision to its full year guidance.

Impact on investment decision or performance

The team engaged with management of the utility company on a number of occasions to gain more clarity into these adverse developments and on any resulting changes to its corporate strategy. However, engagement led the team to conclude that the lack of adequate disclosure and transparency had reduced its confidence in the ability of the management team to deliver on its strategy and its financial guidance going forward. The team determined that the credit spread on the issuer's bonds was not sufficient to compensate for the higher risk exposure and the team decided to sell its bond holdings in the issuer.

ESG issue and explanation

Our Corporate Credit team in Toronto evaluates ESG factors when conducting fundamental credit research and includes an ESG section on credit reports.

The team uses a variety of resources in its analysis, including the research of third-party vendors, engagement with the board and management, and analyst research. The team also looks to embed ESG factors into any quantitative analytical tools developed.

If an issuer is particularly affected by an ESG-related issue, it prompts additional analysis resulting in a dedicated report disseminated internally. For example, in 2018, our team identified significant ESG risks surrounding corporate governance and accounting at a special purpose entity set up under the provincial government.

Impact on investment decision or performance

Participation in a wider meeting held by the issuer raised questions regarding the impacts of ESG concerns on liquidity. The government was publicly criticized for the complexity and transparency of the program being financed as well as the accounting treatment of the program at the governmental level. The team determined that these risks and the risk of a liability clause that would force the government to assume liability could affect the province's credit rating and could negatively impact liquidity as well.

ESG issue and explanation

Our Investment Grade Corporate Credit team in Vancouver believes that, due to the impact of ESG factors on investment risks and opportunities, the implications of ESG factors should be evaluated in the same manner as other credit factors within the applicable context of fixed income investing and the idiosyncrasies of each issuer. The team uses a robust approach to integrate ESG factors into the investment process, focusing on material ESG risks that can affect the credit quality of issuers. Thorough research, team discussions, internal credit ratings informed by ESG factors and engagement all play key roles in the investment decision.

Accordingly, when reviewing a multinational convenience store and gas station operator, the team identified several material ESG factors. For instance, at the industry level, the company's operating environment is susceptible to a number of ESG-related tail risks due to shifting consumer trends and evolving regulations. This includes a weakening tobacco industry, the expanding market share of fuel-efficient vehicles, and more stringent environmental regulations on carbon emissions.

Impact on investment decision or performance

The ESG factors deemed material underwent further research and analysis. In terms of the tobacco industry, it is the team's view that the sector as a whole is facing a secular decline in the long run, and the issuer relies heavily on tobacco products for revenues. Further, many institutional investors may exclude investments in retailer sellers of tobacco, potentially increasing the cost of capital. Combined, this could pose earnings and ESG risks for the company. In regard to electric vehicles, the company is exposed to this potentially disruptive product as a gas station operator. With the majority of revenues coming from fuel, the company will need to adapt to changing consumer behaviour - potentially resulting in significant capital investments. In the team's view, management has not adequately planned for this risk. Similarly, changing fuel efficiency standards and environmental regulations could impact the company and its consumers as well. Lastly, despite an alignment between management and shareholder interests due to executive share ownership, the company's founders have engaged in concerning governance practices that present meaningful downside risks for bondholders. Consequently, the team assigned a lower internal credit rating than the prominent rating agencies.

ESG issue and explanation

BlueBay engaged with the governments of Spain and Catalonia encouraging greater dialogue to negotiate and look for compromise to resolve social and political unrest related to the ongoing independence movement.

Impact on investment decision or performance

BlueBay has been managing its exposure based on the insights gained from the dialogue with both parties, in terms of the likely market impact of full independence as opposed to increased regional autonomy, and the Spanish government's position on honouring debts of autonomous regions.

18.2. Additional information.