From influencing company behavior to seeking better data disclosure, high yield managers are pushing the envelope when it comes to ESG.
The integration and thinking around environmental, social and governance (ESG) factors is ever-evolving. While ESG unquestionably plays a pivotal role in investment decisions across the markets—from equities and fixed income to alternatives and real estate—each industry and asset class is characterized by its own nuances and unique challenges.
High yield is no exception. While the industry has made tremendous strides in recent years, there is progress still to be made—particularly given the growing interest in, and attention on, ESG and sustainability around the globe. Encouragingly, investors and managers are facing up to these ESG challenges in a variety of ways, from focused engagement with companies to collaboration with industry players to the development of innovative analytical models. In this piece, we focus on three ESG challenges high yield managers are trying to solve, and shed light on how we are tackling them and where we think the industry is headed.
1. Influencing ESG Practices (as Debt vs. Equity Holders)
High yield issuers carry a heightened risk of default, a strong consideration when factoring in any potential risks, including ESG. Whether looking at a company’s safety and labor standards or its CEO succession plan, any one risk has the potential to generate negative headlines and impact the price of a bond or loan. One challenge for high yield investors, as debt rather than equity holders, is that by definition they do not own shares, or sit on the boards, of companies, and therefore cannot directly influence company behavior. But investors and managers are increasingly pushing the envelope. For many investors, for instance, it’s not enough for managers to claim ESG analysis is part of the investment process—most want tangible examples of how managers are making an impact despite their position in the capital structure.