We believe environmental, social and governance (ESG) analysis has the potential to generate differentiated insights that can lead to investment outperformance. In this publication, we outline key elements that inform our approach to ESG investing across fixed income markets.
The Three E’s of ESG Investing
Our fixed income investment process is enriched by ESG analysis which can identify factors that may create material financial risks. Robust ESG integration is an evolution and we continually seek to advance our application to fixed income markets and specific investment objectives. ESG investing is firmly entrenched within GSAM; it is the responsibility of fixed income investment professionals, not just those with ESG in their title.
ESG as a Core Investment Competency
This past year we have deepened our ESG toolkit by assigning proprietary ESG ratings1 to more than 90% of the corporate and sovereign bond issuers under our research coverage. These ratings are derived through fundamental research carried out by our corporate sector analysts and sovereign economists, in partnership with ESG investment professionals. Our ratings include a forward-looking momentum element through which we assess if ESG performance of a bond issuer is deteriorating, stable or improving.
Our ESG investment research framework is built around the concept of materiality – the view that ESG factors can affect investment value differently depending on the sector and asset class. Active management is critical given ESG materiality is sector-specific and can include a time horizon element. Key events can also create inflection points. For example, the 2020 US election outcome presents new implications for sectors exposed to the energy transition.
Bondholders have a Voice in ESG Engagement
Engagement with corporate management is an important input into our credit research process and can guide our investment views. Dialogue with company management teams also provides us with an opportunity to encourage issuers to strengthen their ESG performance on factors that may present credit risk. Additionally, we can engage with issuers to drive positive outcomes. For example, GSAM recently launched an initiative through which we intend to engage with over 340 companies to promote greater climate data disclosure.
A Digitized Sustainable Investment World
We believe technology can provide a dynamic investment edge with potential to enhance all aspects of our investment process, including ESG analysis. Our Fixed Income team benefits from a close partnership with GSAM engineers who are responsible for building and deploying innovative technical and quantitative solutions for our clients and our firm. Their expertise enables us to leverage ESG data, investment insights and knowledge-sharing across our digitized platform, from credit analysis to portfolio construction and client reporting to investment solutions. We also collaborate with the Fundamental Equity and Quantitative Investment Strategies teams to share ESG views and investment process approaches across GSAM. The outcome of this is what we view as the litmus test for successful ESG integration: sustainable investment solutions for our clients.
¹ GSAM may invest in an asset prior to completion of the proprietary ESG rating. Instances in which proprietary ESG ratings may not be completed for a specific asset prior to investment include but are not limited to new issuance, in-kind transfers, corporate actions, and/or certain short-term holdings.