Describe how you incorporate ESG
When assessing credit strategies, in addition to our overarching principles outlined in the section covering manager selection, we consider the following:
ESG integration - expected
ESG related risks have long been a part of the overall risk assessment credit analysts perform when analysing the credit worthiness of an issuer and a specific bond. However, over the last few years explicit ESG scoring frameworks have been implemented at many investment managers.
Broadly managers agree that ESG considerations can impact a business’ profitability, earnings sustainability and financially material risks of bonds owned in their portfolios. We expect managers to place a high level of importance on ESG related risks in their fundamental credit research process.
Beyond corporate credit integration is less advanced in other credit asset classes such as structured credit and sovereign debt but continue to improve. We expect asset manager to be able to describe their process for identifying material ESG risks even if it is still developing.
Lenders have the ability engage with senior management on ESG related topics especially if they believe said topics pose a material threat to the creditworthiness of the entity. Additionally, with respect to corporate credit, in periods where a company is stressed and perhaps on the brink of default, managers who have a large holding in the bonds that are likely to command a large chunk of post restructuring equity will likely, too, have an ability to influence ESG related decisions at the firm. The overall power of a manager in this asset class in terms of influencing ESG related outcomes within an investment grade market is largely constrained mainly by size of potential demand for bonds. In other words, size of investible assets under management.
ESG reporting: preferred, dependent on the strategy
Coverage of ESG scores across the investable universe has increased over the last couple of years however, reporting is only feasible using a blend of internal and external ratings (not comparable across the board). Regarding engagement reporting, managers are in position to report annually the number of interactions with issuers. However, there is a certain level of ambiguity in terms of reporting interactions with companies’ management firm the extent to which said interaction was a) ESG related and b) had a material impact on management’s decision making with respect to ESG.