BlueBay’s My-Linh Ngo, and Tom Moulds explain how they defined their new ‘impact aligned’ debt strategy around global challenges and the ‘sunrise’ industries tackling them
"The first filter for our new impact-aligned strategy is whether a company is providing a product or service that addresses a specific environmental or social problem as defined by seven critical sustainability themes," says My-Linh Ngo, BlueBay's Head of ESG Investment.
The seven themes include environmental themes, such as enabling a circular economy and promoting clean and safe energy, as well as social themes such as building knowledge and skills.
"We didn't create the seven themes with the credit market specifically in mind," says Moulds, a senior portfolio manager at BlueBay. "Instead, we brainstormed what we thought were the most important and critical problems facing the world and then built the themes around those."
"If the issuer does fit within the themes," says Ngo, "we next ask, are they involved in any other business activities that breach our ethical exclusions? Then there's a third hurdle of whether they run their business in a socially responsible and environmentally sustainable way." The survivors are then put through BlueBay's rigorous credit selection process to assess their financial attractions.
She argues that companies helping to solve her seven challenges are part of the world's new ‘sunrise' industries, as opposed to existing carbon-intensive or socially negative ‘sunset' industries.
"We try to quantify the extent to which each business is solving a sustainability problem using a combination of absolute and relative ‘positive materiality' indicators like the percentage of revenues they get from the qualifying product and service - e.g., ideally it needs to be more than 50% of revenues - or the percentage of their profit it contributes, or what global or market share it commands," she says. The more criteria an issuer fulfils, the stronger their case for inclusion.
She prefers a pragmatic, composite approach over one that insists all firms meet all thresholds. "Consider the instance where a company gets 40% of revenues from a qualifying healthcare product, failing the 50% threshold, but that 40% represents 60% of profits," she says. Likewise, a fledgling sustainable firm that spends all its R&D on a qualifying product but has little in the way of revenues might fail a revenue test, but still be a legitimate agent of change.
The world is in a race against time, and Ngo thinks that adopting this kind of impact-aligned stance could help sustainable debt investors scale up their ambitions. "We're looking to fund mass market activities that have positive impact," she says.
"By targeting sunrise rather than sunset industries we are hoping we can generate positive returns as well as promoting low-carbon transition and a more socially responsible society - a real win/win situation."
Click here to learn more about the team's approach to impact-aligned debt investing and why it may prove so important to sustainability
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