ODDO BHF Asset Management has decided to include ESG aspects in its investment grade corporate bond portfolios. It starts with the Luxembourg fund ODDO BHF Euro Corporate bond. It will be the first pension fund to include ESG factors in its investment process. So far, this has only been the case with equity strategies. In the future, investments totalling €7.5bn will be managed by ODDO BHF AM according to ESG criteria (environmental, social and corporate governance standards). This corresponds to around 12% of the assets under management.
The ESG integration forms an additional component in an established fundamental-based investment process, in which it has been successfully implemented in equity portfolios for more than 6 years. The ESG process for Euro Investment Grade corporate bond portfolios initially involves negative screening and the exclusion of issuers with very high ESG risks. In a second step, the ESG assessment complements the fundamental credit analysis that serves as the basis for portfolio construction. The ESG rating affects the valuation of equities. In contrast, with corporate bond issuers, it affects the weight of the respective issuer in the portfolio. In both cases, fund management aims to limit ESG-specific risks and contribute to sustainability goals.
“ESG bond indices have largely developed in much the same way as broader corporate bond indices. However, the inclusion of ESG aspects enhances portfolio quality in the longer term by further reducing company-specific default risks. This means that ESG improves the risk-return profile of the funds. We are convinced that the integration of ESG factors will further optimise our established investment process and lead to even more robust investment results in the future,” said Bastian Gries, head of Credit Investment Grade at ODDO BHF AM GmbH.
The ESG integration approach of ODDO BHF AM is based on two pillars: The first pillar of the characteristic approach is a “best-in-universe” concept. Each company is valued in relation to the entire investment universe, not just other securities in the sector. The portfolio manager assesses sector-specific risks and opportunities from an ESG perspective, but then scales the entire investment universe. This qualitative analysis provides a significant contribution to ODDO BHF AM’s internal ESG platform – a model that includes 42 different criteria. On the basis of this analysis, each issuer in the investment universe receives an ESG rating, which has an influence on the issuer weights in the portfolio construction.
The second pillar is active dialogue with companies: In their regular exchanges with companies, fund managers stress the importance of ESG risks and thus have a positive ESG momentum.