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

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