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investment that are not available to equity investors, such as green financing, universities, development agencies and social housing. Debt investors can also invest in private companies – one of the most powerful engagement areas for fixed income. When engag- ing with issuers that have weaker credit ratings and/or are private (especially in the high-yield sector where bondholders often provide a company’s only access to capital), we find that our ques- tions, views and recommendations on ESG issues are increasingly being heard, which affords us the greatest chance of effecting pos- itive change. Companies are having to answer more bondholder questions relating to ESG strategy and investors are taking an increasingly dim view of those that are ill-prepared.
This perspective (and the powerful role bondholders can have in driving better corporate behaviour) was underlined by Knut Kjaer, founding chief executive of Norway’s sovereign wealth fund, who said at a recent conference in London that debt investors could have a more meaningful impact on the world’s biggest carbon emitters than equity investors. “If you take the 100 most fossil fuel intensive companies, it’s only 40 or 41 of them that have listed equities. All of them are in the debt markets,” he said.
Opportunities Credit investing with an ESG lens is about more than simply risk mitigation; it is about seeking out opportunities. Identifying
issuers that we expect to receive an improved ESG assessment over time, often through engagement, can result in capital appre- ciation as the transition is reflected in rating upgrades and a lower cost of capital over time.
We have for many years worked with our in-house equity and responsible investment analysts when analysing and engaging with companies from a fixed-income perspective. In situations where we hold the equity and debt of an issuer, it can provide a powerful tool with which to focus a management team on enhanc- ing its ESG credentials. Those companies that do engage success- fully can find themselves upgraded by ratings companies and some are now using their improving ESG rating to their advantage by securing more attractive bank loan terms.
Finally, this is not just about returns to investors, it is also about responsible investment. Asset managers and asset owners can no longer afford to focus solely on maximising short-term returns if doing so comes at the expense of other stakeholders, as the associ- ated bad publicity and longer-term negative consequences can testify. At this point, we cannot say for sure whether ESG factors are properly factored into credit pricing, but it seems highly likely that, as ESG concerns rise up the agenda for society, governments and investors, we will start to see growing pricing bifurcation between the strong and the weak ESG performers.
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Important information This is a financial promotion. This article is for professional investors only. These opinions should not be construed as investment or any other advice and are subject to change. This document is for information purposes only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those countries or sectors. Issued in the UK by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management is authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN .
February 2020 portfolio institutional roundtable: ESG and fixed income
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