Our fixed income teams believe ESG generally fits well with an active management approach as many ESG risks are currently not adequately priced in by the market. As a result, ESG integration enables investors to explicitly, proactively and systematically take these often-ignored factors into account, complementing existing financial credit analysis.
The ESG integration strategy differs by investment team as each has organically developed its own process. For instance, our Canadian Investment Grade Corporate Credit team hones in on ESG factors deemed to be material to an issuer’s debt servicing capabilities, which in turn influence the final internal credit rating and investment decision. ESG factors are integrated throughout the investment process, including the use of third-party ESG data, engaging with management on ESG factors, and embedding ESG factors naturally into internal reporting, rather than as a specific section, in order to arrive at an internal credit rating that informs the investment decision.
As another example, our Global High Yield Bond team incorporates an analysis of ESG factors into its security selection due diligence investment process and the monitoring of the strategies' investments. Consideration of ESG factors is a subset of multiple factors assessed in its rigorous process which can influence the investment worthiness of a company or industry. Resources used to assess ESG factors may include company meetings and presentations, company filings with the SEC and press releases, credit rating agency and sell-side analyst reports, third-party research and ESG scoring and analysis by third-party ESG research providers.
In this particular asset class, our investment teams tend to focus on governance factors, which include assessing a board's effectiveness and independence, management's risk management systems and policies, and any impact of ESG factors on the credit cycle. ESG engagement is still advantageous for fixed income strategies even though it is more difficult than for equity strategies. Issuers need to come to the debt market to access new capital as issuing equity is not always the most cost effective or efficient option and, as a result, fixed income investors have a degree of influence, especially at the primary issuance stage, and this should be utilised responsibly and constructively. Accordingly, engagement with management on ESG issues, particularly governance, occurs on a regular basis, especially before the issue comes to market.