How do you differentiate sustainable investing from ESG integration?
In talking about the differences between ESG integration and sustainable investing, there’s clearly an overlap when we talk about environmental and social factors. But with ESG integration, what we look at is how these non-fundamental factors affect a company’s cash flows for enterprise value and credit risk. With sustainable investing, however, we turn that around and ask, ‘well, how is the company affecting environmental and social factors?’ That’s sustainable investing.
What are the core principles of sustainable investing?
At the basic level, for sustainable investing to be credible you need to show that the sustainable considerations affect portfolio construction and investment decisions. To achieve that, your sustainable investment approach must be built on three core principles. The first is a proprietary approach. You have to own the intellectual property that goes into that assessment, and we’ve got decades of experience in that area. The second is that the assessment of company’s sustainability credentials must be independent of other factors. You have to own that in the absence of, say, valuations. Of course, all those factors go into the final investment decisions, but it must not influence the credibility assessment. And the third key factor is that the assessment of sustainability is forward looking, ex-ante. So we invest in companies from a sustainability perspective, the same way we do from a financial perspective. One caveat is that is necessarily a qualitative process, which is why we have built a sustainable fixed income team on a global basis to assess the sustainability credentials of companies that we invest in.
Companies tilting toward structural change will be the resilient companies of the future. And those are the companies that we want to invest in - doing good and doing well.
Why does sustainable fixed income investing make sense?
The reality ist we are witnessing a structural change in the economy. This change is being driven, from a top-down perspective, by regulators on a global basis – whether it’s carrot, or stick, or ‘disclose your initiatives’. On a global basis, regulation is going in one direction. And from a bottom-up basis, we see changes in value chains because companies at the end are shifting to sustainability which is affecting the whole value chain and, also, consumer preferences are evolving. The companies that have the governance and the vision to see this are the companies that are tilting toward that structural change and will be the resilient companies of the future. And those are the companies that we want to invest in – doing good and doing well.
What is the impact of fixed income investor engagement?
First of all, as financial stakeholders in a company, creditors have the right, if not the obligation, to engage with the company because engagement can reinforce the resilience of a company which affects valuations, and that bodes well for credit investments.
In addition to that, companies are in the markets on a recurring basis, refinancing their debt (in many cases) on an annual basis. This is the oxygen of a company and so the fact that these companies are constantly reappearing in capital markets implies a level of dependency that gives creditors a voice that equity holders may not have.
For further insights on sustainable fixed income, please click here.
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