Some investors in the fast-evolving sustainable credit market try to short-circuit fundamental research by relying on third-party ESG ratings or bonds labelled as environmentally green or socially positive. But Mike Fox, Royal London Asset Management's Head of Sustainable Investments, and Rachid Semaoune, Senior Fund Manager, have doubts.
"There's lots of jargon within sustainable investing and especially on the global credit side," says Semaoune. "It seems there's hardly a day now where you don't have some labelled bond issued in the market. But what those labels mean can be quite confusing." In particular, companies can issue a green bond to fund a green project while their global business may have an overall negative environmental impact, he says.
Across the ESG world, there is still little consistency of disclosure, says Fox. "Every single credit, every single equity, discloses on ESG differently so you have to analyse them entity by entity. We also think you largely have to do that through your own lens because everybody's definition of sustainability is a bit different," he says. RLAM established its sustainability range before third-party ratings gained ground, so the team is used to doing its own legwork.
Global bond issuance often comes very fast, says Fox, so the knowledge bank RLAM has already amassed on companies' sustainability helps the team pounce on opportunities. But credit decisions demand special care regarding governance and credit structures.
"Bonds are a lot more complex than equities," says Semaoune. "You can lend money to a company either on a secured or unsecured basis; to different parts of the capital structure; or to a ring-fenced entity or bankruptcy-remote SPV. That has to be taken into account in your ESG analysis as well as your credit selection."
He says RLAM's long track record of closely analysing bond documentation and covenants packages helps the team. "For example, some US utility companies issue bonds secured on their assets, so we take that into account when we do our ESG analysis. Likewise, UK social housing bonds may be secured on the properties themselves."
"Sustainable credit will become an increasingly crowded market but we think there will continue to be a place for fundamental due diligence," says Fox, "including going back to source information by a group of people who have executed sustainable investing for perhaps 17 or 18 years: it might sound intangible but it's the most critical part of what we do."
Click here to read more of the RLAM team's views on sustainable credit including the benefits of taking a global approach
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The Royal London Global Sustainable Credit Fund is a sub-fund of Royal London Asset Management Bond Funds plc, an open-ended investment company with variable capital and segregated liability between sub-funds. Incorporated with limited liability under the laws of Ireland and authorised by the Central Bank of Ireland as a UCITS Fund. It is a recognised scheme under section 264 of the Financial Services and Markets Act 2000. The Investment Manager is Royal London Asset Management Limited. Most of the protections provided by the UK regulatory system, and the compensation under the Financial Services Compensation Scheme, will not be available.
Royal London Sustainable Managed Income Trust, Royal London Sustainable Managed Growth Trust, Royal London Sustainable Diversified Trust, Royal London Sustainable Word Trust and Royal London Sustainable Leaders Trust are held within RLUM Limited Unit Trusts, which is an authorised unit trust scheme. The Manager is RLUM Limited, authorised and regulated by the Financial Conduct Authority, with firm reference number 144032.
The Royal London Global Sustainable Equity Fund is a sub-fund of Royal London Equity Funds ICVC, an open ended investment company with variable capital with segregated liability between sub-funds, incorporated in England and Wales under registered number IC000807. The Authorised Corporate Director (ACD) is Royal London Unit Trust Managers Limited, authorised and regulated by the Financial Conduct Authority, with firm reference number 144037.
For more information on the funds or trusts or the risks of investing, please refer to the Prospectus or Key Investor Information Document (KIID), available via the relevant Fund Information page on www.rlam.co.uk.
Issued in June 2021 by Royal London Asset Management Limited, 55 Gracechurch Street, London, EC3V 0RL. Authorised and regulated by the Financial Conduct Authority, firm reference number 141665. A subsidiary of The Royal London Mutual Insurance Society Limited.