Credit analysts should heed ESG warning flags

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The latest Spectrum note from Hermes Credit looks at the theme of ESG (environmental, social and governance) factors and suggests that even investors without a vote – such as fixed income investors – should take note of the average 30bps of monthly underperformance that poorly governed companies offer.

Instead, argues Hermes, those investing in credit can do better by considering ESG and the factors that can effect a more comprehensive view of risk.

Good ESG scores are not a panacea – as the recent example of UK supermarket Tesco revealed, when it was forced to reveal it has overstated its profits – but it can act as a signal to investors buying bonds, not just those buying shares.

“As credit fund managers, we should not be dogmatic in judging corporate behaviour. Rather, we must assess and price-in ESG risks in the context of the overall strengths and weaknesses of underlying businesses and the broader sectors in which they operate. By integrating this in their investment processes, credit managers gain an even better chance to outperform the market and their competitors,” Hermes notes.

To read the full research click here: 1411_Hermes_Credit_Spectrum_Newsletter

Jonathan Boyd
Editorial Director of Open Door Media Publishing Ltd, and Editor of InvestmentEurope. Jonathan has over two decades of media experience in Japan, Australia, Canada and the UK. Over the past 17 years he has been based in London writing about funds and investments. From editing the newsletter of the Swedish Chamber of Commerce in Japan in the 1990s he now focuses on Nordic markets for InvestmentEurope. Jonathan was awarded Editor of the Year at the Professional Publishers Association (PPA) Independent Publisher Awards 2017. Shortlisted for the same in 2016, he was also shortlisted in 2017 and 2015 for the broader PPA Awards category Editor of the Year (Business Media).

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