BlueBay’s Justin Jewell and Andrzej Skiba explain how they take environmental, social and governance issues into account in their global high yield ESG strategy
Two powerful phenomena - the search for yield, and the growth of responsible investing - are helping to shape post-pandemic investment markets. They are also both sparking interest in a relatively novel investment approach: high yield strategies designed to take better account of Environmental, Social, and Governance (ESG) risk factors.
These strategies invest in riskier credit assets with the goal of offering higher yields to investors as part of a diversified investment strategy, while channelling capital in more socially responsible ways through, for example, restricting investment in areas such as coal extraction.
Justin Jewell and Andrzej Skiba are the managers of BlueBay's Global High Yield ESG Strategy. With the strategy now past its three-year anniversary, the team believe they are well-positioned to explain its distinctive characteristics.
Jewell says that BlueBay takes ESG risks into consideration across all its investing, including conventional strategies, but that "our global high yield ESG strategy sets a much higher bar, beyond investment materiality, on how we integrate ESG into the decision making."
The investment process begins with a special set of enhanced screens based on both product type and corporate conduct, says Jewell, which leverage exclusions used by the Norwegian Government Pension Fund and the UN Global Compact. The strategy also uses thresholds to screen out firms involved in tobacco, coal mining, and power generation heavily dependent on thermal coal power, he says, as well as applying screens with regard to certain controversial weapons.
"We launched the strategy in partnership with a consultant and investor in the Nordic region," explains Jewell, "who wanted to ensure there was a greater level of ESG in the investment process by starting with negative screens."But the strategy's true differentiator, he says, is that the team also leverage BlueBay's years of investment in its firmwide ESG process "to remove any company we see as having very high ESG risks."
BlueBay, a fixed income specialist, has been tailoring its ESG approach to the nuances of credit investing since around 2013. Whereas many asset managers rely on third-party data providers, Skiba says that "BlueBay conducts proprietary ESG assessment alongside external data to assess credits, which often yields different outcomes."
That analysis, conducted by credit analysts working hand in hand with BlueBay's specialist ESG team, is unusual in creating two separate data points: a fundamental issuer ESG risk rating; and an ESG score at the security level.
The granularity helps because the team think that, unlike equity investing, fixed income ESG risks can be strongly influenced by the maturity and credit structure of each instrument. So the high yield investment team can quickly "highlight the aspects of ESG that might impact the valuations of particular high-yield securities," says Skiba.
The team's close dialogue with the ESG team is helped by BlueBay's work since 2018 to make key ESG data points easily accessible within its proprietary platforms. That transparency also helps the team track divergences between external scores and BlueBay's proprietary internal scores.
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