GFICC manages holdings in developed and emerging market sovereign bonds, agencies and supranational agencies, and municipal debt. The teams perform fundamental research which is supplemented with access to MSCI ESG data and research reports where available. Based on the team's holistic review of the issuer and market conditions, fundamental, quantitative and technical factors in the marketplace are considered to arrive at an investment decision. These teams are all fully ESG integrated.
In developed market sovereigns, we incorporate ESG factors as part of our regular analysis of sovereign creditworthiness. We believe that sovereign credit risk, including risk from ESG factors, is most pronounced for sovereigns issuing without the support of a domestic central bank. We consider governance issues to be the most material ESG drivers for developed market government bonds at present, followed by social and environmental issues. Our investment decisions are based on our assessment of sovereign creditworthiness, which incorporates both quantitative analysis and qualitative factors such as the impact of political developments on the fiscal and economic outlook. Our quantitative analysis consists of a scorecard process, in combination with a wide range of other factors including valuation and the balance of bond market supply and demand. The scorecard process involves assessing and ranking each country’s standing on a variety of factors, including those specifically related to environmental, social and governance topics such as unemployment rate, government deficit, government debt, control of corruption, World Governance Indicator, demographics, education levels, energy intensity of GDP, renewable energy, energy imports, competitiveness and ease of doing business. We draw from a wide range of data tools and indicators to capture these ESG dynamics, including the World Bank's World Governance Indicators and survey measures of the quality of governance such as that conducted by Transparency International.
Our analysis of EM sovereign debt consists of several proprietary tools to assess a country’s ability and willingness to repay its debt, including our Country Fundamental Index (CFI) and Country ESG Index (CESGI). The CFI model provides an independent, objective measure of creditworthiness (by incorporating a number of fundamental indicators spanning solvency, liquidity and structural factors) that is used to calculate fair value spreads. The CESGI model provides a holistic quantitative assessment of ESG factors that is used to calculate an ESG-adjusted fair value spread. The CESGI is constructed by considering over 30 ESG indicators and focusing on those which have more significance in explaining the difference between country spreads and CFI-implied fair value. These factors include: carbon emissions, vulnerability to environmental risks, poverty, gender equality, ease of doing business, corruption and short-term political risks. The output of these quantitative models is supplemented with qualitative comments, informed by analyst research and regular country visits to meet with central bankers, government officials and local analysts.
We integrate ESG analysis into our municipal debt investment process, based on materiality, relevance, and the availability of information, to identify potential idiosyncratic ESG risks or opportunities. Securities are selected based on relative value and internal credit risk assessment, which incorporates our ESG factor analysis. Analysts communicate the credit assessment to portfolio managers, who then consider noted ESG factors into relative value decisions. More specifically, analysts evaluate relevant and material ESG factors in credit research process based on available information, keeping in mind factors that are unique to municipal obligors. ESG factors for municipal obligors are articulated in a materiality matrix for each sector and have both commonality and differences when compared to corporate obligors. In certain circumstances, the analyst also evaluates the use of proceeds where use of proceeds are deemed by the advisor to provide positive social or environmental benefits. This assessment is made for portfolios that have mandated a preference for positive ESG impact. Similarly, analysts identify securities where the ESG risk is determined to create material, negative credit risk, so that the firm can measure such risk in portfolios. Please see section 12 for more detail on the types of ESG risk factors we consider throughout our investment process.