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Five common ESG investment myths debunked

From value destruction to EM impasses, what unfounded fears are investors blindly following?

1. ESG does not sacrifice value for investors

Following the launch of the BlueBay Global High Yield ESG Bond fund, Justin Jewell, co-head of global leveraged finance at BlueBay Asset Management, dispels some myths around environmental, social and governance (ESG) investing.

Jewell, who runs the new fund with Thomas Kreuzer, said ESG investment strategies can have a positive impact on performance by minimising downside, making it suited to fixed income strategies.

‘Applying an explicit ESG filter into an investment process can help identify issues that are not sufficiently highlighted in investment screening, for example governance or ethical malpractice issues.

‘These are matters that can turn into performance issues for a company. Such risks are particularly pertinent in high yield as companies tend to be smaller, private or less transparent about their corporate practices.’

Jewell said these companies are often considered higher risk given their higher leverage therefore. He added that ESG analysis can add more value and greater insight.

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2. ESG is only exclusion of ‘sin’ investments

Jewell said negative screening is one approach to ESG investing - which can be employed by the fund in terms of producers of controversial weapons, tobacco and coal, and conduct-based regarding compliance with the UN Global Compact,- but it is not the only approach and, even then, it is not confined to avoiding unethical companies.

‘There is no single definition of ESG investing as different investors have their own preferences, depending on their criteria and objectives,' said Jewell. ‘As such, different ESG strategies are available and some are more suited to one asset class than others.'

'For instance, we believe integrating ESG risks into the credit selection process, works well for bond investing, given the multiple credit risk profiles of a single issuer.’

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3. It is not a fad

ESG has become increasingly popular and even led passive products and ETFs to jump on the bandwagon with ‘green bond index’ funds and strategies being launched. Jewell said, while the popularity of ESG investment approaches has gained momentum, it does not mean it is a fad but a trend which is here to stay.

‘ESG investing has moved from the niche category to mainstream investment. We believe investors increasingly understand the commercial and economic benefits of adopting an ESG investment approach, which considers governance and ethical factors in the investment process.

‘The growth can be evidenced in the UN-supported Principles for Responsible Investment’s growing list of investor signatories. It is clear there is increasing demand for ESG in fixed income.

‘There has been marked increase in the number of socially responsible investment asset allocation strategies, particularly in fixed income and corporate bonds. The BlueBay High Yield ESG fund is also an example of this increasing trend, the fund was established to fulfill client and consultant demand.’

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4. ESG can be assessed and quantification is possible

Jewell said the view that ESG is not investible due to a lack of data, or that it is difficult to quantify ESG risks as they are subjective or intangible, is outdated.

‘Many of the world’s leading companies - either voluntarily or mandated to - publicly report on their ESG efforts. Some ESG risks can be modelled easily others are less so. Nonetheless, ESG risks can still be recognised as being credit relevant e.g. reputational impact on customer churn due to poor cyber security measures.

‘Many investment processes routinely combine qualitative and quantitative factors therefore ESG risks are no different,’ added Jewell.

Jewell said in high yield, where commodity-linked sectors represent a material part of the benchmark, it is possible to begin evaluating the impact of a company’s exposure to carbon regulation by changes in the price of oil linked to demand.

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5. ESG investing is not just relevant to DMs

When buying the debt of a company or a sovereign in emerging markets, Jewell said assessing governance strength and a company’s long term ability to repay the debt and maintain the quality of the debt is crucial.

‘Particularly given that ESG-related standards tend to be less well developed and/or not effectively enforced in these markets. In the BlueBay High Yield ESG fund, emerging markets issuers represent 7-8% of the fund’s benchmark, the Global High Yield Developed Countries Index (HWIC).

‘The fund itself has more indirect non-developed market exposure than the benchmark as a result of the global nature of the sectors and companies being invested in and the geographical diversification of their supply chains.’

In general, Jewell said ESG investment considerations are important in emerging markets and higher yielding sectors, which can represent current and future demand from international investors.

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Related Fund Managers

Thomas Kreuzer
Thomas Kreuzer
76/91 in Bonds - Floating Rate Notes (Performance over 3 years) Average Total Return: 7.88%
Justin Jewell
Justin Jewell
40/49 in Bonds - Europe High Yield (Performance over 3 years) Average Total Return: 8.76%
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