This article is part of a monthly series contributed by The ESG Group at Silver Leaf Partners, courtesy of Managing Partner, Michael J. Scanlon.
ESG Integration for Credit Investors
ESG integration is well underway in equities, but it is in early innings for credit investors. But the trend is clear: credit investors and ratings agencies will increasingly embrace ESG factors in assessing the creditworthiness of fixed income investments. In May 2016, 120 investors representing US$19 trillion of assets signed the ESG Credit Ratings Statement launched by the UN PRI. These investors are committed to incorporating ESG factors into credit risk analysis (notwithstanding that elements of ESG have always been intrinsically part of fundamental analysis). ESG integration and sophistication on the credit side will only continue to grow in the future.
ESG in credit matters beyond just doing the right thing. Recent corporate scandals have led to widening credit default swaps and lower bond prices for investors. The impact of these scandals can be painful for investors and suggests that value can be added by avoiding companies with low ESG scores. A recent study by Barclays concluded that “high ESG” corporate bond portfolios tended to outperform “low ESG” portfolios by as much as 200 basis points. Recent scandals including Volkswagen, Wells Fargo, and Equifax resulted in very real investor losses. These are all investment-grade credits and the average bond price correction after the scandals went public was 8-10%. The reputational damage suffered by these companies has very real implications for the future financial profile due to customer losses, fines/lawsuits, higher cost of capital, and loss of market share.
Firms with robust access to data like Bloomberg, MSCI, and Sustainalytics may be best positioned to deliver a credit ESG methodology that works on a large scale across different issuers (corporates, municipalities & sovereigns) and issues (bonds, project financing, green bonds, etc.). Submitted by Kuni Chen, CFA, Director, Impact Investments at NatureVest.
Stepping Up and Calling Out
There are many ways to get involved in the growing desire to add Alpha and Mitigate risks from ESG factors like divesting of Fossil stocks. One example includes Legal and General Investment Management (LGIM), one of Europe’s biggest investment managers with almost £1 trillion in assets. The firm has initiated efforts to nudge the companies in which it invests in a more climate friendly direction by “naming and shaming” firms that do not create and adhere to a “climate change pledge.” Others like the largest American firms; BlackRock, NY State Common Fund and many others are to sue for damages. In January 2018, New York City announced that it filed a multibillion dollar lawsuit against five top oil companies – BP Plc, Chevron Corp, ConocoPhillips, Exxon Mobil Corp and Royal Dutch Shell Plc, citing their “contributions to global warming.”
“ESG Series: A Revolution Rising – From low chatter to Loud Roar”!
In April 2018, Goldman Sachs Equity Research published “ESG Series: A Revolution Rising – From low chatter to loud roar.” This report introduces new tools to track the development of the ESG/Sustainable Finance market and gather additional supporting anecdotes and data points. It looks at activities in four constituencies: 1) Society at large, 2) Public corporations, 3) Asset managers and 4) Governments and regulators. The key takeaways from this report on the ESG/Sustainable Finance market are:
1) Social media platforms accelerate the society’s awareness of ESG: the speed and scale at which news now spreads expose companies to new reputational risks and in effect holds them more accountable to internal and external ESG issues.
2) ESG finally arriving on the quarterly earnings call: the number of S&P 500 companies discussing key E&S terms on their earnings calls has increased by 75% since 2010. The report includes several sample corporate quotes from 4Q 2017 earnings as references.
3) Investment giants awaken to the potential benefits of ESG: the influence of ESG on the investment community is growing. Some key recent developments include
- Accelerating growth of ESG AUM
- More ETFs and green bonds in the markets
- Cost of capital directly tied to ESG performance in some cases
- ESG directly impacts credit ratings
4) Government organizations are driving incremental regulation and recommending policy or giving guidance on ESG integration:
- 38 of the top 50 economies have or are developing some sort of government-led ESG disclosure guidelines for corporations
- 193 countries agreed upon the 17 Sustainable Development Goals (SDGS) set for by the UN on September 25, 2015
- The world’s largest pension fund – Japan’s Government Pension Investment Fund (GPIF) with US$1.4tn of AUM takes a strong stance on ESG.
Thanks to our institutional investors for supporting our commitment to this low carbon, sustainable and resource responsible world.
The ESG Group at Silver Leaf Partners – Michael J. Scanlon
212-632-8429 ( office ) mjscanlon@silverleafpartners.com; Member / FINRA
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Securities are offered through Silver Leaf Partners, a member of FINRA, NFA and SIPC. This communication is for informational purposes only and considered privileged and confidential. Neither the information above nor any attachments are guaranteed as to their accuracy or completeness. If such information is related to a security or product, then you are further advised that we do not provide investment counsel, nor do we certify that this information is complete or accurate. To determine suitability, you must secure, read and understand all relevant information, conduct a thorough due diligence and seek expert independent counsel, if necessary, prior to investing. We further caution that past performance is not indicative of future results.
This communication is confidential and may not be disclosed without permission. If you are not the intended recipient, then you have received it in error and you may not distribute or copy it. If you have received this transmission in error, please notify the sender by reply email and delete this message and all of its attachments. Every effort is made to keep our network virus free. However, we assume no liability for any damage caused by this transmission.
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