Approach to responsible investment

At First Sentier Investors, 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 analyse 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."