Australian Fixed Income - Responsible Investment

In the Australian fixed income space, the Environmental, Social and Governance (ESG) assessment most often comes through its impact on the internal rating provided by the Credit Analysts via our Credit Research process. The portfolio management team then use this to assess relative value when compared to other similarly rated issuers. For example, ESG considerations in the automotive industry have led to our internal rating for some issuers being lower than that of the external rating agencies. As a result, the risk-reward assessment has often been decided such that we are underweight that sector in our active Australian fixed income portfolios.

Outside of this channel, ESG considerations are also positively incorporated in our investment decision for bonds that have been issued for Socially Responsible purposes. We have recently been actively involved in Green Bond issuance from Queensland Treasury Corporation and the Commonwealth Bank of Australia, as well as the Gender Equality bonds issued by National Australia Bank.

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

In these instances, the ESG benefits act as an important offset to the lower liquidity that these typically smaller bond lines can encounter. These benefits result in increased demand in the secondary markets, thereby boosting prices and lowering yields, ceteris paribus. Without this consideration, we would not look to actively overweight Socially Responsible focused investments as we have in the recent past, which demonstrates the opportunity for fixed income investors to use ESG factors to broaden the set of investment opportunities.

Team Climate Change Statement

Long-term climate change considerations are particularly pertinent for Australia, at both the sovereign and state level. The increasing frequency of extreme weather events, for example, can have serious implications on federal and state expenditure and, in turn, funding requirements. A long-term requirement to replace fossil fuel-based power generation stations with facilities powered by renewable energy sources also looms large on the budget horizon.

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On 16 September 2019, Colonial First State Global Asset Management (CFSGAM) rebranded to First Sentier Investors. Any content produced prior to this date that references CFSGAM or Colonial First State Asset Management (Australia) Limited should be read as references to First Sentier Investors or First Sentier Investors (Australia) IM Ltd.

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