The environment, social and governance (ESG) practice in debt markets should include engagement with issuers on top of assessment and integration of ESG factors into the investment process, according to Frontier Advisors.
According to the company’s Frontier Line October 2017 issue titled ‘ESG Integration in Debt Markets’, the lack of voting power of fixed income investors meant that engaging with issuers historically was less common practice.
“We believe that engagement from a fixed income perspective has the potential to be beneficial to investors as it can build on relationships through time creating more effective dialogue going forward,” the report said.
“It allows investors to gain insight into how a company is positioned to mitigate risks or leverage opportunities.”
The report also said the engagement would be an essential part of sourcing relevant ESG data for research purposes, which would not be otherwise available.
In particular, better insight and research would play an important role when it came to the sovereign side, where a country’s ESG strengths and weaknesses were not as readily covered by rating agencies compared to equity ESG analysis.
“On the corporate side, engaging with issuers is arguably a more effective exercise,” Frontier Advisors said.
“In the case of high yield and unlisted debt, which tend to be more prone to ESG risks, and where external research may not be available, engaging with issuers is considered necessary and provides greater opportunities to promote and influence change.”
