Stewardship and ESG Integration

The Global Fixed Income team defines Responsible Investment as an investment process that considers environmental, social and governance indicators alongside traditional indicators of financial performance. Importantly, our process does not implement ethical screens. We consider ESG factors relative to their potential impact on financial performance.

At First State Investments, we maintain that comprehensive credit evaluation extends beyond traditional financial analysis and is the result of a confluence of factors and drivers. We integrate ESG factors into our bottom-up credit analysis process in an effort to better evaluate downside risk and relative value to the market and peer group, and assign an ESG Risk Assessment to all names within our coverage. Using industry-leading quantitative tools such as Sustainlytics, MSCI, and Reprisk, we are able to deeply analyze important sector and idiosyncratic dynamics and risks, to augment our own expertise.  

In our process, we view the comparison of ESG policies and the practices of bond issuers as a risk management exercise, making the ESG risk-assessment an integral part of our security selection process. Provided that the ESG analysis is skilful and focused on the potential for events to affect bond prices, we believe the benefits to investors will show up over time.

Because ESG risk-assessment is incorporated into our idea generation stage, all client portfolios benefit from our consideration of these factors. Because product design is done independently from idea generation, clients have the option to further shape their portfolios using ESG factors. These options include negative or positive ESG screens. We can work with clients to incorporate other ESG ideas into their product designs based on their views and requirements.

Assessment and monitoring 

Analysts identify ESG risks during their bottom-up credit research. We analyse ESG risks through our own risk framework that results in a proprietary ESG ranking. Analysts consider these risks alongside their own research with reference to a variety of other drivers that frame an assessment of price-focused risk.

The analysis and assessment of ESG issues within a company helps identify sources of risk which may not be fully captured by its financial statements. These factors, along with our other relative-value focused drivers, allows us to further articulate our view of default risk than the balance sheet might otherwise imply. The result is a more articulated view of RV-return in identifying mispriced risk spreads in the market.

"ESG issues are fundamental to infrastructure companies, given they have significant service obligations and moral accountability to the communities in which they operate."

"Because ESG risk-assessment is incorporated into our idea generation stage, all client portfolios benefit from our consideration of these factors. Given product design is carried out independently from idea generation, clients have the option to further shape their portfolios using ESG factors."

Engagement 

We attempt to engage with issuers’ senior management teams to better understand ESG factors and how they will manifest in the company’s position within the market, with a focus on identifying additional tail risk not readily identifiable by conventional ESG tools. While this is not always possible, we make every effort to engage with companies regarding ESG issues to better understand the risks from their perspective; in doing so, we are able to formulate the most comprehensive and informed overlay of the ESG risks in our relative value credit framework. This information not only affects our ultimate assignment of the internal credit rating, but ultimately feeds into our assessment of drivers that affect risk positioning in any credit we cover.

Case Studies

We believe that a strong commitment to stewardship is an essential component of a strong approach to responsible investment (RI), and that embedding RI into the core of our investment activities is in the best long-term interests of our clients. For more than a decade we have systematically and progressively improved our practices and processes across our investment capabilities globally.

Learn more through our interactive case studies map.

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