Stewardship and ESG integration
Our approach to investing is driven by a commitment to providing the best possible outcomes over the long term for our clients. By ensuring that portfolios are built in a balanced and diversified manner – where one particular view does not dominate – we increase the likelihood of accomplishing portfolio and client objectives.
Our analysis of countries focuses on six factors, which, in our experience, have the ability to explain changes in country spreads. These are: politics, structural reform, fiscal policy, monetary policy, the external sector and technicals. Three of these factors are intimately related to responsible investment and stewardship: fiscal policy, politics, and structural reform.
ESG issues also have a significant bearing on risk for corporate issuers. As a result, they are incorporated into the Credit Research process that supports our entire Fixed Income business globally.
Because ESG risk assessments are incorporated into the idea generation stage of our portfolio construction processes, all clients benefit from our consideration of these factors. Product design is carried out independently from idea generation and clients therefore have the option to further shape their portfolios using ESG factors, if desired. These options include negative or positive ESG screens. We can work with clients to incorporate other ESG ideas into their product designs, based on their individual views and requirements.
For sovereigns, ESG considerations are embedded in the Key Factor Model, alongside macroeconomic data, political developments, policy-making assessment (fiscal and monetary) and market technical aspects. As such, they are sources of risk and drivers of return that we take into account when conducting our research efforts.
For corporates, ESG risk factors are an important consideration in the assignment of credit ratings on individual issuers. This process is described in more detail in the Fixed Income Overview page which describes the Credit Research process that supports our entire Fixed Income business globally.
Assessment and monitoring
ESG issues are identified and considered in the course of our everyday analysis of securities. In order to support our monitoring and assessment efforts we have compiled a database with a number of relevant indices for ESG. The database gives us an overview of how countries compare with each other and how they track over time. This information helps us monitor the countries in which we invest in a systematic fashion and also contributes in our assessment of ESG considerations.
Six variables are monitored for every country in which we invest: human development, corruption, business environment, institutional strength, government effectiveness and energy dependence. We utilise indices provided by reputable sources including the World Bank, the United Nations Development Program, Transparency International, the Fund for Peace and the World Energy Council. For these indices we analyse levels, rankings and trends over time, providing us with objective measures to support our research.
ESG trends, concerns and controversies are also logged and stored within our Investment Opinion Network. This proprietary system is utilised by the entire Fixed Income team globally, enabling all investment professionals to be aware of issues affecting individual issuers and industry sectors more broadly.
Ongoing engagement with both sovereign and corporate issuers forms a critical part of our research process. We seek to influence issuers in which we invest and use meetings as an opportunity to reassess ESG risks. As well as attending investor days and roadshows, we proactively try and meet key decision-makers where possible. These sessions typically present opportunities to engage and to raise pertinent ESG-related issues that we deem relevant and important. In the overwhelming majority of cases, issuers are receptive and constructive engagements continue to take place.
In order to develop our own understanding, as well as to contribute to improvements in industry practice, we have been involved in the United Nations Environmental Program Finance Initiatives E-RISC project phase 2. One of the goals of this project is to develop methods for investors to better incorporate environmental factors into the risk assessment of sovereign issuers.
"In order to develop our own understanding, as well as to contribute to improvements in industry practice, we have been involved in the United Nations Environmental Program Finance Initiatives E-RISC project phase 2"
We believe that a strong commitment to stewardship is an essential component of a strong approach to responsible investment (RI), and that embedding RI into the core of our investment activities is in the best long-term interests of our clients. For more than a decade we have systematically and progressively improved our practices and processes across our investment capabilities globally.
The section below provides addition, team specific, information on climate change. Further information on our approach to climate change can be found in our climate change statement.
Team Climate Change Statement
Climate change considerations are integrated into both our sovereign and corporate research process. By way of example, within our bottom-up country research process, we consider the vulnerability of sovereigns to extreme weather events such as tropical storms. Here we examine the extent to which each sovereign’s income sources are impacted by adverse weather and the existence of policies or multilateral support that is able to provide economic buffers during such times.
Extreme weather events (such as the Caribbean hurricanes in 2017) have the ability to materially impact valuations. As a result, we pay particular attention to this risk in sizing positions during the portfolio construction process. Likewise, our country research process considers the relative reliance that each country in our universe has on natural resource revenues. All other things being equal, we believe countries with more diversified sources of revenue should trade at a premium to those that are vulnerable to extreme swings in commodity prices.
In the corporate research process, we overlay a consideration of how proactive environmental government policies might affect particular sectors or companies financially. For example, in analysing the financial sustainability of an issuer that produces renewable energy relative to a fossil fuel producer, we would consider the latter to be more vulnerable to unfavourable regulation.
We also consider secular trends driven by climate change demands. This includes consideration of impacts from changes in supply and demand for commodities, for example in copper, lithium or cobalt for electric vehicle production or the reduction of palm oil use in biofuels.