For the Australian Fixed Income team, credit is a key pillar of alpha generation across all portfolios that we manage. Our process focuses on using credit to add stable income to portfolios, which means we endeavour to avoid shocks by avoiding “losers” in the credit markets. ESG is an important consideration in this respect as weak ESG practices lead to heightened risks, due to poor business practices, consumer blowback, and weak governance. As a result, ESG is essential to determining our investable universe with respect to credit.
We implement ESG across our portfolios by first using a negative screen, removing issuers that we believe do not exhibit robust ESG practices. In order to do this, we assess each company across environmental, social and governance factors, predominantly focusing on the issue that is most relevant to the industry the company operates in. A score is set for each issuer for all three ESG factors, and this is based on MSCI’s ESG ratings data, industry-wide risks, rating reports, issuer/management meetings, and additional analysis conducted by the credit team. Each company is assigned a rating from 1 to 5, with 5 representing best-in-class ESG practices and 1 meaning avoid.
Those securities that score a 1 in the ranking process will be excluded from portfolios based solely on ESG considerations. Historically, we have also excluded any issuer rated CCC by MSCI. We believe this process works as credit makes up less than 10% of the Australian composite investment universe, meaning we screen out only a small percentage (less than 0.5%) while also ensuring the exposures that make it into the fund are responsible ESG investments.