ESG Viewpoint: BlueBay Asset Management

# RepRisk interviews Lucy Byrne, Senior ESG Analyst at BlueBay Asset Management

Lucy Byrne: My role is Senior ESG Analyst within BlueBay’s ESG Investment Team. Primarily, our team is responsible for designing and implementing our ESG investment strategy across the firm, working to empower our investment teams in further developing their understanding and use of ESG knowledge in the investment decision-making process.

LB: We use RepRisk data as an input into our issuer ESG analysis, combining it with insights we receive from a variety of other external vendors. Taken together, the external vendors result in complimentary ESG insights to inform our views.

LB: Firstly, because the business case for integrating ESG has grown. Incorporating ESG risks into credit analysis can lead to better investment decisions, as it provides for a more holistic understanding of an issuer. At BlueBay, we view ESG analysis both as a key part of our investment risk management framework, so that we have holistic oversight of risks, and also as a potential alpha source within the investment decision-making process.

Furthermore, investors are telling us that ESG is important for them, and they want us to help them address global environmental and social challenges, and avoid investing in issuers which do not take appropriate account of ESG matters.

LB: Our primary emphasis on managing downside risk comes from our position as a focused fixed income manager. With our upsides capped, but downside risks unlimited, a focus on capital preservation is integral to our approach. We believe ESG factors can potentially have a material impact on an issuer’s long-term financial performance. Our analysis considers an issuers ESG risk exposure as a function of a number of factors including the nature of its operations, its geographic footprint, and its size, balanced against the quality of its management practices given its risk profile. RepRisk data gives us performance information on the latter.

LB: Not a challenge as such, but rather it is important to recognize and understand that the investment materiality of ESG risks might play out differently within the fixed income space when compared with equity. This is true not only for diffferent issuer types, but even for the different debt instruments issued by the same issuer.

Investment materiality is measured in terms of the potential impact on creditworthiness, which will depend on an issuer’s financial strength. This means that while an issuer might exhibit a fundamental ESG risk profile, how investment-material these are may vary depending on the yield, maturity of the bond, or how this relates to the nature and timeframe of impact of the ESG risk itself. Our in-house proprietary issuer ESG analysis framework has been purposefully designed to distinctly separate the fundamental ESG risk exposure from the investment materiality as a result.

Additionally, we need to consider challenges related to areas such as issuer and data coverage – especially when it comes to sub-investment grade issuers and nuances between asset classes.

However, despite such challenges, we believe fixed income has a unique and significant role to play in directing capital towards a more sustainable future, while maximising the potential for superior long-term risk adjusted returns.

LB: When we reflect on 2020, it was certainly a year that fundamentally changed how society and the economy operate. While it inevitably caused some disruption in terms of ESG themes for the year, we also saw a rapid increase in ESG awareness and the accelation of pre-existing trends.

Going forward to 2021, there are some key areas we expect to play out. These include the continued momentum generated in 2020 of the rebalancing of social issues, both in terms of employers and flexible working patterns, but also broader social equality and human rights issues. One theme that is already taking hold is the continued rise of ESG policy and regulation, we expect an increased lens on ‘greenifying’ the financial system from regulators and additional scrutiny as a result of this. Linked with that is the need for increased data transparency, particularly for those that collect and disclose such data, which then in turn impacts things like ESG ratings and scores.

A final one to mention is an increased focus on stewardship and the role investors play in helping to enable a sustainable future, which has gained significant momentum over the last year and we expect this to continue.