As part of their investment research process, Jupiter’s team of credit analysts identify relevant and material ESG risk factors to each issuer when assessing potential investment ideas. Their assessment covers a broad range of ESG factors using categorisations based on their investment experience and developed with the input of Jupiter’s in-house Governance and Sustainability specialists. Details of material issues identified are included in the research note prepared by the analysts and assessed by the fund manager. In addition, any engagement with management undertaken by the analyst where ESG matters are discussed is flagged and communicated to the GS Team.
The current methodology for the team’s identification and analysis of material ESG factors in corporate credit was designed in 2019 by the Head of Credit Research with the input of Jupiter’s GS Team. It draws on a range of ESG sources of best practice, such as the SASB materiality matrix.
For each prospective corporate credit investment, the credit analysts complete an initial ESG checklist to identify material ESG risk factors pertaining to an issuer. ESG factors identified via the team’s categorisation include:
- Environmental factors (e.g. water stress, toxic emissions and waste, carbon emissions)
- Social factors (e.g. labour practices, health and safety issues, sales practices)
- Governance factors: (e.g. Corporate behaviour, corporate structure and shareholders, management integrity / track record)
The above categorisation is the starting point of ESG analysis and is attached to corporate credit memos prepared by the analysts for consideration by fund managers. These categorisations are used to indicate areas relevant for further discussion within the team, company engagement or additional research to deepen the team’s understanding of how these issues may affect the investment.
As a next step, the fund manager and the team of credit analysts carefully consider ESG risk factors pertaining to an issuer prior to making an investment decision. This process considers potential investee companies on a case-by-case basis, with due regard to the sectors in which they operate. In addition to traditional bottom-up security selection techniques, such as valuation, competitive position and industry dynamics, the assessment considers relevant ESG factors including the following where applicable:
- The strategic track record of the management team and prevalent corporate culture with regard to risk appetite, conduct, safety and regulation.
- The track record and credibility of the issue sponsor with regards to respecting bondholder rights.
- Assessment of remuneration disclosures, where these are available, to consider executive alignment.
- Ownership structures, such as the reputation of the controlling shareholder and their degree of control over a company’s board, the level of employee ownership and other factors which may indicate the level of alignment with bondholders.
- Controversies, jurisdictional risks and the management of social and environmental risk factors which may affect the evolution of a company’s credit risk over time.
ESG risks relating to any of the areas above may lead to the fund manager choosing not to invest in a given issuer, and this is determined on a case by case basis. In relation to governance, we tend to focus on how effectively and efficiently a business is run with the aim of helping to preserve and enhance value in the long run. Environmental and social matters are typically assessed as part of a wider effort to understand the sustainability of an investee company’s business model, and we will engage as appropriate to help reinforce or potentially improve this sustainability.
Where potential risks are identified, we will consider whether the company has the capacity for ‘self-help’ in relation to improving its ESG profile, or if the issues are fundamental to the business. ESG factors are not viewed in isolation, rather the fund manager concentrates on trying to understand how these factors impact potential medium- and long-term investment performance, with reference to a company’s valuation, and identify which, in our view, are relevant and material to investment decisions.
Once invested – portfolio construction, monitoring and engagement
Once investments have been selected, ESG factors pertaining to each issuer inform position sizing and the process of portfolio review, underpinning our views on whether our confidence in an investment decision grows or reduces over time. As bondholders, we can also use duration management as a tool to express views on ESG risk factors, investing in bonds with longer or shorter term maturities depending on our views on possible downside risk or the time horizon over which we think identified ESG risk factors may materialise. This is in keeping with our unconstrained active management approach to seeking out the best opportunities for clients.
The team regularly engages with the management teams of investee companies as part of their investment process. This may include reviewing material relevant ESG risk factors and assessing how the company is managing these risks. The analysts and fund manager can also draw on the experience of the GS Team and other fund management team members when seeking to identify material ESG risks or when engaging with companies, both prior to investment and in relation to existing holdings.
An important consideration in global bond markets is the political cycle in the different economies in which we invest and the extent to which this can drive policy changes affecting sovereign and corporate issuers in the portfolio. The fund manager pays close attention to these developments which can incorporate economic factors, such as fiscal and monetary policy, but also a wide and varied range of ESG considerations. The latter may include transition risk relating to future changes in energy policy, social factors which may underpin political support for a political administration, or demographic trends which may influence monetary or fiscal policy, and thus impact bond prices. These broader themes can play a role in portfolio construction at any given time and the fund manager integrates this analysis into the continuous process of economic research and monitoring over time.