Fixed income analysts at Capital are industry specialists with many years' experience following industry sectors. They consider ESG risks in the same way as any other factors which may affect the ability and willingness of an issuer to make payments on its debt. Our bottom-up research process relies on in-depth analysis helping us to avoid risks which may not have been recognized by other investors. An example of this is our consideration of transparency of information related to bribery controls. The lack of controls can be seen as an indicator with the potential to affect the risk profile of an investment, similarly the level of socio-economic stability can indicate if there is a risk to the incumbent regime. Our fixed income analysts work closely with their equity counterparts which enhances their access and contact with senior and operational management of companies.
For sovereign bond investors the aim is to assess and understand credit risk and identify securities issued by a government whose risk profile is improving. In our experience ESG issues are relevant for country analysis and can affect our evaluation of the risk premium for sovereign bonds. Valuing the risk premium requires an understanding of the extent to which ESG factors can impact a country and is particularly the case in emerging markets.
A true understanding of the ESG-related risk does not necessarily mean we will not invest in a particular country, but it helps us price the risk accordingly.
Our approach relies on our investment analysts identifying attractive investment opportunities such as countries on a trend of credit improvement and securities which may have a superior yield due to mispricing of risk. For example, the health and education spending by governments can be leading indicators of economic stability over the long-term and improving regulation of banking systems and anti-money laundering procedures can lower the risk profile.
Greater transparency generally translates to less risk. Therefore we also consider transparency around a company’s or country’s internal controls, processes, policies and procedures when making investment decisions.
As a global investor, we believe the impacts of climate change are broad and relevant, creating risks and opportunities across different sectors. With ESG integration, we embed our understanding of climate change into our investment decision making. This enables us to focus on the investment decisions where we see climate change and related issues as material financial factors.