12 Feb 2021
Martin Foden – Head of Credit Research
The separate articulation of Environmental, Social and Governance (ESG) investing started as an equity construct and much of the data and analysis used today is still centred in equities. Discussion around ESG integration in fixed income is less established and perceived best practice is continually evolving. What is clear to us, however, is that simply replicating the approach taken by equity investors, while convenient for the manager, is sub‑optimal.
On the one hand, it ignores the fact that in credit markets we can lend to the same company in many different ways, such as lending to a ring-fenced part of the company or its subsidiaries or secured over assets. This idiosyncrasy is one of the most exciting attributes of corporate bonds for active investors and should be embraced, rather than ignored as an unhelpful inconvenience. On the other hand, third-party data coverage is constrained, as only around 40% of the bonds in the sterling credit index have a public equity profile. Not only does a focus on companies with a public equity listing greatly reduce the opportunity set, it is also the very area of the market where information dissemination is already most efficient.
Our response to this is straightforward. Based around an understanding that, unlike with equities, credit risk and return is asymmetric, and it is the impact rather than the origin of risk that matters, there is, arguably, no asset class to which sustainability is more important than credit. We address poor quality third-party data provision by having an in-house Responsible Investing team, and embrace idiosyncrasy through bespoke and bottom-up credit and ESG analysis. A common ethos and complementary experience across the teams ensures risk identification is never territorial and is effectively enhanced through collaboration.
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The views expressed are the author’s own and do not constitute investment advice.
Read in full: The evolution of responsible investing
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All information is correct at November 2020 unless otherwise stated. Issued in February 2021 by Royal London Asset Management Limited, 55 Gracechurch Street, London EC3V 0RL. Authorised and regulated by the Financial Conduct Authority, firm reference 141665. A subsidiary of The Royal London Mutual Insurance Society Limited.