This report shows public data only. Is this your organisation? If so, login here to view your full report.

First Sentier Investors (including First State Investments)

PRI reporting framework 2020

Export Public Responses

You are in Direct - Fixed Income » Outputs and outcomes

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
Corporate (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]

Credit Team comment: We measure the impact of incorporating ESG analysis through comparing the default rate on our Global credit Income Fund to the global company default rates of the major credit rating agencies Moody’s and S&P.

Between 2001 and 2019, our default rate was significantly lower, and our cumulative losses to our clients significantly lower than had they invested according to ratings from the credit rating agencies. This is true when distressed sales are included.

Our flagship Global Credit product has an average security rating of BBB, but delivers below AA default outcomes since inception in 2000.

EM Debt comment: Our ESG assessment for sovereign issuers contributes to investment outcomes via two channels - as a driver of active investment positions (where there is an ESG related catalyst for a change in valuations) and as a contributing factor to our position sizing discipline. For each country, we carefully review the potential for event risks and set appropriate limits on positions accordingly. With regard to the specific contribution of ESG factors to investment performance, this is reviewed on an ex-post qualitative basis, alongside quantitative performance measures of the success of the investment process as a whole.

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

Sovereign example: Jamaica:

This year we’ve had several discussions with the representatives from the International Monetary Fund (IMF) as a way to indirectly engage with the sovereign and encourage progress on a number of ESG related reforms that we believe will benefit our clients. In doing so, we were also able to get an update on a number of specific environmental and social programmes that the Jamaican government is implementing with the help of the IMF, the World Bank and other global institutions. Such programmes have been made possible following a remarkable multi-year effort by the Jamaicans to pay down government debt.

Our assessment is that there is broad political consensus and commitment to implement these programmes. 

With the support of the IMF, the government has also recently set aside a larger portion of the national budget that will act as a fiscal buffer against the cost of future weather events. And it’s working with global multinationals to develop innovative and affordable insurance solutions to reduce the ex-ante cost of such events and to speed up time to recovery. 

Impact on investment decision or performance

Jamaica’s progress in reducing its climate vulnerability supports our overweight position and in time will enable us to make larger risk allocations to Jamaica in client portfolios. We continue to maintain a dialogue with the global organisations involved to help us keep track of progress.

ESG issue and explanation

Peking University Founder Group:

Founded in 1986 by its 70% parent, Peking University (wholly-owned by the Ministry of Finance), following various innovations Peking University has evolved to become the Peking University Founder Group; a diversified conglomerate with strategic business segments in IT, healthcare and pharmaceuticals, finance and securities, bulk commodities trading and other businesses, such as education and training.

Peking University had never previously explored an external rating from the major rating agencies.  When the issuer first came to market in 2017, we assigned an investment grade rating and initiated holdings in Global and Asian credit portfolios. We believed there was a high probability of indirect support from the Government of China, through the Ministry of Finance. The issue was also attractively valued relative to other state-owned Chinese industrial/education credits at the time.

However, the group’s total debt surged approximately 50% during FY18 and five additional US dollar bonds (totalling US$1 billion) were issued between January 2019 and July 2019.

Impact on investment decision or performance

We met with management as part of the international bond roadshows, trying to understand the firm’s heightened funding appetite. After several interactions with management during 2019, and after analysing the latest financials, exposure to the name was lowered and subsequently sold completely. Our ESG risk rating had been increased to ‘Very High’ and the internal credit rating had been downgraded into the high yield category. These moves primarily reflected intensifying governance issues relating to ongoing shareholder disputes and various related negative headline risks. Further, an aggressive management appetite was resulting in the rapid expansion into non-strategic mandates as the firm sought to become a more commercialised conglomerate.

Since the disposal, the bonds have depreciated sharply. The major reason for the sell-off has been continuous private bank and real money selling amid concerns surrounding the company’s onshore/offshore refinancing capability.

ESG issue and explanation


In early 2019, Swedbank was drawn into a growing money-laundering scandal in Europe. According to reports by Swedish broadcaster SVT, some 50 customers transferred at least SEK40 billion (~EUR4 billion) between Swedbank and Danske Bank accounts between 2007 and 2015.

Swedbank’s share price fell 7.5% following the SVT report. Interestingly, the report was released on the same day as the announcement that Danske Bank was being forced to close all of its operations in Russia and the Baltic region due to its ongoing EUR200 billion money laundering scandal. Previously, Swedbank had denied any links to the Danske Bank investigations.

The development was a definite negative from a credit perspective. Swedbank is the biggest bank operating in the Baltics and earnings from the region account for ~20% of the firm’s total. Initially, the allegations were relatively modest (‘only’ EUR$4 billion vs Danske Bank’s EUR200 billion) and might have resulted in modest fines. Nonetheless, we believed support for the name could be eroded. Reputational damage was difficult to quantify and there was a potential tail risk in case Swedbank's involvement in the scandal was materially larger than initially reported. 

Impact on investment decision or performance

Exposure to the issuer in our global credit portfolios was lowered. The outlook on our internal credit rating had been downgraded to negative from stable and the internal rating was already 1-2 notches below the major ratings agencies.

In the period since, investigations into Swedbank's exposure to money laundering have continued. Allegations of the firm’s involvement in money laundering in the Baltic region currently stands at around EUR135 billion; a substantial increase from the initial EUR4 billion estimate. Potential financial penalties may yet prove manageable given the firm’s strong capital position and profitability. The bank has also responded positively, planning to boost its capital position by lowering dividends. Even with these pre-emptive measures, the issuer remains exposed to material downgrade risk from reputation damage affecting its core Nordic business, or regulatory intervention into its operations in the Baltics

ESG issue and explanation

First Quantum (High Yield):

While domiciled in Canada, First Quantum’s mines are mostly located in the developing world (79% of production is in Zambia and a greenfield asset in Panama is being developed). First Quantum’s dependence on its operations in Zambia to complete its investment program at the Cobre Panama asset exposes the company to unique governance considerations that extend beyond its own shareholders and board. 

In 2018, the Zambia Revenue Authority issued a letter to First Quantum assessing $7.9 billion for import duties, penalties and interest on consumables and spare parts. While apparently ludicrous in its size, the assessment underscored our concern that the Zambia government’s deteriorating financial profile could cause it to aggressively seek to extract value from foreign companies, particularly those with immobile dollar-denominated assets such as First Quantum. 

More recently, environmental considerations have become increasingly relevant, even more so than is typical for a mining company. Drought conditions in Zambia have resulted in lower hydropower generation and have elevated the probability of punitive power allocations. Limiting power allocations could negatively impact the cost profile of the Zambia assets, but also put First Quantum’s electricity needs at odds with those of citizens and local businesses.

Impact on investment decision or performance

While we are constructive longer term on copper fundamentals, we struggled to reconcile First Quantum’s bond trading levels with those of Zambia sovereign debt given the latter’s meaningfully weaker credit profile and higher bond yields. In our view, First Quantum’s dependence on cash flows generated from its Zambia assets and the inherent immobility of those assets exposed the company to the potential for opposing motivations of the Zambia sovereign. Consequently, we sold our position in the unsecured bonds due 2021. This reduced the ESG risk profile of funds

ESG issue and explanation

Mortgage originators owned by private equity. From research, engagement and analysis, the following characteristics appear to dominate.

Tendency to originate large volume for relatively larger and more frequent securitization product. This could result in lower quality underlying assets, insufficient staff to assess each underlying asset, and increased risk of non-compliance with regulatory requirements.

Short ownership by private equity before either stock market listing or sale to another owner. Often the ownership by private equity is shorter than the maturity of the securitized product.

Potential for lower development of systems and staff; often resulting in a higher turnover of staff. Risk of poorly trained and insufficient staff, potential for outdated systems, lack of consistent communication from staff to investors in securitized products, and increased risk of non-compliance with regulatory requirements.

All these characteristics have the ability to result in a lower quality/higher risk securitized product. These products may price to give a higher return, however the additional return may not compensate for the higher risk.

Impact on investment decision or performance

Reduced ESG risk profile of funds

18.2. Additional information.

Counterparty Reviews

We annually review and rate our counterparties on a number of factors including ESG. The counterparty review relies on external ESG service providers, analysis from our analysts, and also included a survey of our counterparties where they are not adequately covered by our external providers.

The reviews also determine how much and whether we will trade with different counterparties. All other things being equal, a low ESG rating will make it less likely that we will trade with a particular counterparty.

The counterparty review is provided to the counterparties and has been the source of engagement with some counterparties on their ESG performance, as it includes our analysis of areas which can be improved.