Norwegian Fixed Income and ESG Integration. Theory and practice

Transcription

1 Norwegian Fixed Income and ESG Integration Theory and practice

2 Agenda 1. Background for the report 2. Literature review 3. The Norwegian fixed income market 4. ESG investment practices in Norwegian corporate fixed income 5. Conclusion Slide 2

3 1 Background for the report How do we integrate ESG in Norwegian fixed income investment? What can we learn from our colleagues? From the academic literature?

4 2 Literature review Professor Bruno Gerard What can we learn from the academic literature on ESG in fixed income investing?

5 3 The Norwegian fixed income market What are the unique characteristics of the Norwegian fixed income market?

6 The Norwegian fixed income market Small market Repeat players HY vs. IG Slide 6

7 The Norwegian fixed income market Small market Repeat players HY vs. IG Duration Slide 7

8 The Norwegian fixed income market Small market Repeat players HY vs. IG Duration Documentation and regulation Credit ratings Source: Stamdata Source: SSB Slide 8

9 4 ESG investment practices in Norwegian corporate fixed income How do investors in the Norwegian fixed income market currently address ESG?

10 What s different about fixed income? Downside risk Limited upside focus on risk of negative events Duration Does the time horizon matter? Lack of ownership rights How much influence and corporate access do bond investors have? Loan agreement Unlisted companies with minimal reporting Slide 10

11 ESG issuer analysis why? Focus pre-investment Why ESG? Compliance with fund/institution guidelines Better assess credit risk Contribute to positive impact More extensive analysis for HY than IG Higher ESG risk industry, geography, regulatory exposure More vulnerable to negative events Generally less comprehensive reporting Often new to the capital markets Slide 11

12 ESG issuer analysis how? Sources Company disclosures Second opinions External ratings In-house ESG scores Media Sell-side analysts Cooperation with equity teams Stamdata Slide 12

13 ESG issuer analysis who? Who conducts ESG analysis? External service providers In-house credit analysts In-house ESG staff Portfolio managers Hybrid model collaboration among above Slide 13

14 ESG issuer analysis what, and so what? Goal: identify risk exposure and ability to handle negative events Topics for analysis? Governance management, board, main shareholders, creditor protection Industry-level risks, e.g. shipbreaking, antibiotic resistance Geographic exposure Impact on investment decision? (Rarely) divest Engage Shorter duration Impact targets, e.g. for green bonds Slide 14

15 Bondholder engagement Engagement (dialogue) with companies is a common part of the investment process for bond investors including focusing on ESG topics Focus on the primary market engagement with companies ahead of new debt issuances Engagement with whom? Alone or in collaboration with other investors? Often with management only, in connection with sell-side corporate access Some of largest Norwegian fixed income investors also have extensive ongoing contact with large issuers, even IG. Often have dedicated ESG staff (and/or ethical committees ) For incident-based (reactive) engagement, several investors also liaise with equity teams Most engagement done alone or in loose/informal cooperation with other investors could one utilize existing arrangements for more formalized ESG engagement? Slide 15

16 Bondholder engagement Engagement topics (including covenant terms)? Substantial variation on topics for engagement and types of engagement Most have minimum ESG criteria (for negative screening/exclusion lists) at a minimum, use engagement to tick the boxes Engagement pre-issuance useful to give insight into issuer ESG profile particularly for issuers with no or low ESG ratings Pre-issuance engagement often discussion on pricing and general covenant terms. If standard ESG elements in the covenants, will often be related to governance Including additional ESG criteria in loan agreements perceived to be difficult (exception: green bonds) Incident-based engagements often post-investment, more reactive (e.g. corruption) Slide 16

17 Special situations - restructuring Norwegian bankruptcy laws appear inadequate to ensure an efficient restructuring processes Bankruptcy regulations in Norway fairly general in comparison to, e.g. US Chapter 11 restructuring processes less efficient The importance of the governance aspect of ESG in restructuring situations in Norway Possibly due to general Norwegian bankruptcy laws, main owners and banks perceived to often have significant advantage focus on governance, including main owners and board Norwegian portfolio managers have limited experience with restructuring situations Many IG issuers, and more than 20 years since the Norwegian banking crises One exception: recent restructuring of Seadrill Ltd. Took place under the US Chapter 11 legal framework Slide 17

18 4 Conclusion What do investors perceive to be the effect of ESG integration in Norwegian fixed income?

19 Effect of ESG integration in fixed income practitioners perception Systematic integration of ESG in fixed income portfolio management is fairly new in Norway > many interviewees uncertain about financial effect At any rate, growing customer demand for ESG integration and ESG requirements in fund mandates Effects on risk-adjusted return perceived to be uncertain, but consensus that governance aspect of ESG was most important Two of interviewees pointed to Barclay s study on ESG from 2017 Strong theme in interviews: most important financial motivation for ESG integration is to limit downside risk Example: goal of avoiding tail risks seeking lower risk and the same yield, e.g. Deepwater Horizon Slide 19

20 SUMMARY The financial effect of ESG integration in fixed income is unclear, both based on practitioners perceptions and the systematic literature review by Professor Bruno Gerard Nevertheless, practitioners still see increased levels of ESG integration as important in bond portfolio management Our intent with this report is to inspire the various actors in the Norwegian fixed income community to move this discussion forward Slide 20