When it comes to corporate bonds, we have developed a two-stage research and analysis process in recognition of the immediate and material risks poor business practices can present for a company's creditworthiness. This approach allows us to identify and mitigate these increasingly acute risks.
We start our assessment with a disciplined analysis of business practices taking into account:
1. ESG/CAR scoring: As described above, we use our own methodology to score companies based on 115 distinct, identifiable and credible data points to analyse whether they are aligned with best practices in terms of ESG, and whether they are making progress in transitioning to more sustainable business practices. Our portfolio management and research teams can then use this non-financial information alongside their financial analysis to assess the investment case of the company.
2. Controversies: A company's exposure to controversies in the short term is a strong signal that it is not focused on best business practices over the long term. We therefore look at companies' exposure to controversies, and the severity of those issues, as a means of managing portfolio risk.
3. Impact metrics: The transition to a low-carbon global economy has reached a tipping point, therefore, we believe it is essential to assess climate risks and decarbonize our portfolios. To that end, we want to increase the resilience of our portfolios by favouring companies with demonstrably lower carbon intensity than their peers to reduce carbon exposure. In addition, whenever possible, we also want to favour companies issuing climate-aligned bonds. This best in class approach is applied to the companies' respective sectors.
This analysis provides an outline for a quality-based portfolio tilted towards companies with better ESG/CAR scores, lower carbon intensity and with fewer controversies.
Next, our credit analysts carry out an in-depth forward-looking fundamental analysis into the sustainability of companies' business practices and business models / activities. This is a critical step, in our view, as it means our analysts can better understand the relevance of these factors for companies, identify any inconsistencies and challenge issuers directly. Our active strategies use common tools that enable the diffusion of extra-financial information provided by the ESG solutions team, for example. The team also benefits from our dedicated SIRSS team, which helps monitor and inform investment teams on top-down global issues associated with sustainability dynamics and their potential impact on sectors/industries.
We believe green, social and sustainability bonds play an important role in enabling capital-raising and investment for projects designed to increase the resilience of the global economy to climate change, and to mitigate climate risk by avoiding carbon emissions. In turn, they increase the resilience of portfolios to climate risk and help drive the investment opportunity associated with the transition to a net-zero emissions economy. As a result, we believe green, social and sustianability bonds enable us to better position portfolios for the climate transition while also creating a positive social and environmental impact.
We also believe green, social and sustainability bonds are an important financial articulation of a company’s sustainability strategy, and companies that issue these bonds are therefore likely to be better positioned as the transition to a sustainable economy continues to accelerate.