Environmental, social and governance (ESG) is coming to fixed income. At least at Aberdeen Asset Management it is.
ESG factors, when incorporated into an investment strategy, can provide deeper insight into the quality of a company’s management, culture and risk profile than pure financial analysis alone. This can be indispensable for bottom-up managers because it helps in identifying companies with superior business models that are positioned to become industry leaders over the long term.
While ESG has gained popularity amongst equity investors over the past few years, it is only recently gaining traction in fixed income investment.
At first, the engagement aspect of equity investing makes ESG a more natural fit with the equity asset class. But ignoring ESG in fixed income because its application is less clear could be a missed opportunity. We want to move away from pure financial analysis and assessment of ESG risk as two separate silos, preferring instead to see them as closely integrated in a holistic risk assessment.
It isn’t about labels and whether or not risk factors are considered “ESG.” We believe it is important for portfolio teams to consider any and all factors that could have an impact on an investment beyond the more obvious traditional ones.
But we don’t believe in grouping all ESG issues together simply because they fall under the ESG label. Managers need to identify and assess the impact on the investment proposition of those that are material to the underlying issuer.
For the most part, integrating ESG into fixed income is still uncharted territory. But if you take a step back and think, it’s as relevant to the equity ownership of companies as it is to the correct pricing of risk in fixed income securities.
For the most part, integrating ESG into fixed income is still uncharted territory.
Any investor should care that a company takes into consideration holistic risk assessment because management needs to manage all risks involved in their business. This includes reputational risk, cybersecurity risk and environmental impact risk such as climate change. These are only a handful of risks that could impact a company and managing them well is just as important to the long-term success of a company as its financial position.
In today’s dynamic marketplace, it isn’t enough to look at the surface. You have to dig deeper, much deeper.
Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).
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