Partner Insight: Can ESG light the way to recovery?

clock • 6 min read

The BlueBay team explain why the precise way ESG is integrated into fixed income is so critical

In a dark post-pandemic landscape, one intense bright spot is the growing popularity of fixed income investing that incorporates Environmental, Social and Governance (ESG) factors.

BlueBay's My-Linh Ngo, Head of ESG Investment, says the crisis has accelerated ESG in ways encapsulated by the European Covid recovery fund's green deal. "The hashtag coming out of this is ‘build back better' - a socially just transition to a greener low carbon economy that addresses social inequalities and workplace safety," she says.

That should strengthen the link between positive credit outcomes and strong ESG profiles. But Ngo says the precise way in which fixed income investors integrate ESG may be critical to whether it helps investment performance.

Permanent pillar

BlueBay adopted ESG as a strategic priority in 2018 and then as a permanent strategic pillar in 2019, "signalling our intent to make ESG standard in everything that we do," says Ngo. But the firm has been formalising its ESG approach since 2013, so Ngo - who joined in 2014 - has had the time and resources to build a fixed-income friendly approach.

"We're quite unique in that our analysts now create two explicit data points - a fundamental ESG risk rating at the issuer level and an investment ESG score at the security decision level - that include hands-on quality control by the ESG function," she says

Maturity matters  

The reason BlueBay separates the two data points is to make the issuer's fundamental ESG risk exposure transparent, and then to highlight the extent to which this is material to the investment.

"Say you have a mining company and their key ESG risk is climate change regulation, which you argue is a medium to long-term risk issue," Ngo explains. "A short-dated bond and a longer-dated bond for that same issuer might therefore have different investment ESG scores because the materiality of climate change regulation would be different. But if the overwhelming ESG risk for that issuer is health and safety, that may be important irrespective of the bond's maturity," she says.

Unlike equity, fixed income may offer 10 or 15 potential instruments for the same issuer with various maturities, all affected by particular ESG exposures in different ways. "So if you combine the issuer risk and investment risk into a single score, you generalise too much for fixed income and it becomes very unhelpful," says Lucy Byrne, Senior ESG Analyst

 

Professional Investors only

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No part of this document may be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, in whole or in part, for any purpose in any manner without the prior written permission of BlueBay. Copyright 2020 © BlueBay, is a wholly-owned subsidiary of RBC and BBAM LLP may be considered to be related and/or connected to RBC and its other affiliates. ® Registered trademark of RBC. RBC GAM is a trademark of RBC. BlueBay Asset Management LLP, registered office 77 Grosvenor Street, London W1K 3JR, partnership registered in England and Wales number OC370085. The term partner refers to a member of the LLP or a BlueBay employee with equivalent standing. Details of members of the BlueBay Group and further important terms which this message is subject to can be obtained at www.bluebay.com. BlueBay Funds Management Company S.A., registered office 4, Boulevard Royal L-2449 Luxembourg, company registered in Luxembourg number B88445. All rights reserved.

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