The M&G Global High Yield ESG Bond Fund will invest at least 80% of its portfolio in global high yield bonds. It will be managed by London-based James Tomlins and Stefan Isaacs, both of whom manage the firm’s European and global high yield bond funds.
The fund managers will integrate ESG (environmental, social and corporate governance) factors into its investment process through three-stage negative screening of candidate companies, according to a statement from the firm.
The first stage will exclude companies in breach of the United Nations Global Compact principles. The ten principles, established by the UN in 2000, are guidelines for businesses in the areas of human rights, labour practices, environment and anti-corruption.
The second stage will filter companies that derive a substantial portion of their revenues from tobacco, alcohol, adult entertainment, gambling, thermal coal, defence and weapons. While companies will be excluded if they derive more than 5% of revenues from “sin industries” as producers or more than 10% as distributors, filtering of those that derive revenue from defence and weapons will be done on a best efforts basis as the material information is not readily available.
The third stage will assess companies based on their MSCI ratings. MSCI, one of the world’s top three index providers, launched its ESG ratings tool in 2015. The ratings, on a scale from “AAA” to “CCC”, today cover close to 12,000 issuers.
The process is expected to filter out roughly one-third of the global high yield universe, a spokesperson at M&G told FSA. While it may lead to differences in portfolio positioning compared to a conventional high yield fund, the firm does not expect the differences to be significant. “We are comfortable that the managers will still be able to express their core investment views and key convictions,” the spokesperson said.
In addition to the screening process, the fund managers will use their own research to exclude companies they consider ESG laggards within their industries. This assessment of companies relative to their industry peers is meant to ensure that the portfolio is not skewed to a few individual sectors, the spokesperson added.
The fund’s comparative index is the BofA Merrill Lynch Global High Yield Index USD Hedged.
While rigid negative screening is a low-cost, simple way to incorporate ESG into passive or smart-beta products, it has been increasingly considered outdated for active funds, in favour of a more flexible approach involving engagement with companies to help them improve their ESG practices, Chris Durack, CEO of Schroders in Hong Kong, told FSA in an earlier interview.
The ESG theme is growing in popularity among investors. However, some wealth managers are not convinced that ESG funds are the best fit for clients. In particular claims of ESG fund outperformance versus the broader market are questionable.