Posted inFixed Income

Three steps to make ESG matter in Asian credit

Effective ESG integration in credit investing will come from a blend of fundamental analysis, issuer engagement and portfolio construction, according to T. Rowe Price.
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Incorporating ESG factors into credit strategies in a structured way will help investors drive positive change plus capitalise on emerging opportunities from the expanding scope of sustainable investing.

“We believe that ESG integration can help identify high-quality, forward-thinking businesses for investment and manage downside risks in credit portfolios,” Sheldon Chan, portfolio manager of the T. Rowe Price Asia Credit Bond Strategy, told FSA.

To achieve this requires careful monitoring of the latest developments within the region, along with a robust ESG research platform. But this is increasingly on investors’ radars given efforts by regional governments to step up disclosure requirements amid the political will to drive a low-carbon future,

The key focus in making ESG a central pillar throughout the process, Chan suggested, is a three-step process that involves the core principles of fundamental analysis, issuer engagement and portfolio construction.

Ultimately, given the asymmetry in bond returns, the main focus is to limit exposure to issuers that may be vulnerable to headline risk, he said.

Scrutiny in sustainability

A variety of research studies indicate that sustainable issuance will continue to increase rapidly in Asia as ESG investing becomes an increasingly important priority for asset managers and owners alike.

At the same time, there will be divergence in countries promoting ESG awareness and increasing company disclosure requirements.

For instance, ESG disclosure requirements are now mandatory for publicly listed companies in Hong Kong, Singapore, Thailand and the Philippines. In China, listed companies already face certain reporting requirements, while the China Securities Regulatory Commission is expected to announce mandatory ESG disclosure guidelines later this year. Elsewhere, India and South Korea have updated voluntary recommendations to enhance ESG reporting.

This creates opportunities for strategic investors to capitalise on any price dislocations, which can come through increased issuer engagement, said Chan.

“In a similar vein, bondholders who are able to collaborate jointly across the asset classes should be able to improve their access to corporate management and possibly gain more influence when discussing ESG factors.”

The nature of ESG investing is also likely to evolve as future issues cast current ESG factors in a new light, Chan added. “We believe maintaining a regular dialogue with the management teams of companies represented in our portfolios is the best way of staying ahead of any changes that may affect their businesses.”

Aside from the ESG-labelled bond universe, as more and more issuers become aware of how investors are viewing sustainability, the way a company tells its story will evolve as another string to the sustainability bow.

Breeding greater diversity

Currently, the fixed income investment universe is skewed towards capital- and commodity-intensive industries, while the technology and consumer sectors make up a far smaller weighting when compared with the regional equity market, where they represent more than a combined third of the benchmark.

T. Rowe Price’s perspective is that this is likely to change, in turn offering a possibility for investors to access a broader opportunity set through fundamental, bottom-up research.

“This reaffirms the importance of a robust, dedicated ESG research platform that can keep pace with new developments,” Chan said.

Part of the Mark Allen Group.