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First Sentier Investors (including First State Investments)

PRI reporting framework 2020

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ESG incorporation in passively managed fixed income

FI 13. ESG incorporation in passive funds

13.1. Describe your RI approach for passively managed fixed income assets.

Maximum portfolio weights are a function of the internal credit rating for corporate issuers which incorporate ESG analysis as described under question 12.

Our Short Term Investments and Global Credit, and our Credit analysis teams note:

Our passively managed bond portfolios seek to replicate benchmark indices as closely as possible. Nonetheless, we consider and monitor ESG risks associated with all benchmark constituents. Our flagship Wholesale Indexed Australian Bond Fund is managed against the Bloomberg AusBond Composite 0+ Year Index, for example, which incorporates both corporate and sovereign issues.


ESG considerations have been embedded in our corporate credit research process for more than a decade and have a significant influence on internal credit ratings that are assigned to individual issuers. Corporate collapses usually occur as a direct result of poor corporate governance. In order to mitigate default risks, we have therefore incorporated corporate governance risks within the research process. Our credit analysts also assess environmental and social risks, which can point to weaknesses in standards of governance and highlight potential issues with risk management. To help inform our views, we access ESG research through providers such as Sustainalytics, MSCI Governance research and RepRisk.


The research process for sovereign issuers is typically more macroeconomic focused. ESG-related risks can, however, still have an important influence on yields and prices and are therefore considered in the assessment of sovereign and government-related debt. The differing risk profile of sovereign and government-related issuers compared to corporates requires a more nuanced research approach to quantify ESG-related risks. The specific risks associated with each individual issuer are captured in the analyst’s overall risk assessment process, which forms an important component of issuer selection and ongoing portfolio positioning.

In both cases, we have the discretion not to invest in issuers where ESG risks are deemed significant. For example, all issuers on our ‘uninvestable list’ as described in FI 10.3 are not held in passive funds. We can also choose to liquidate or reduce exposure to existing holdings where ESG risks escalate during the holding period.