Analysts and portfolio managers continually monitor and evaluate ESG-related information from various third-party sources, including issuer disclosures, independent research providers and consultants. Given the increasing availability of ESG-related information, the growing complexity of the issues and the increasing importance clients place on these topics, AAM has continued to invest in our fundamental research teams to ensure that we have the capacity and capability to incorporate these factors into our investment process. This enables our teams to more effectively analyze and integrate these factors in to their view of an industry, country, or individual issuer.
When identifying and integrating ESG factors, we focus on the potential economic impact ESG issues may have on the issuer’s ability and willingness to meet debt obligations. One of our primary areas of research is, and always has been, related to governance risks, such as organizational structure. In the case of corporate issuers, this manifests in management’s historical aggressiveness towards bondholders. In the case of sovereign issuers, we evaluate the strength of governmental institutions. We also assess environmental risks, such as potential costs a corporation may incur for environmental compliance or remediation of damages. For sovereign issuers, we consider topics like how droughts in agriculturally-sensitive regions may affect GDP and potentially cause civil strife. With respect to social risks, we monitor labor practices and how companies interact with and treat their employees, in order to identify risks of prolonged strikes. And at the country level, we discern how wars may affect consumption and fixed asset investment, which are inputs to our sovereign economic forecasts.
While we utilize a number of third-party sources of information to help identify areas requiring additional scrutiny, we do not believe that explicitly following third party ratings is appropriate. Simply put, if our integrated assessment implies that the market misunderstands ESG factors, we adjust our view of the risk premium required when considering the investment for client portfolios.