ESG In Credit Analysis
Our approach to integrating ESG into our investment process aims to analyze ESG risks and opportunities with an eye toward any potential negative or positive impact(s) on the value of investments. These credit-material ESG factors are incorporated into the management of all client portfolios.
As part of the credit research process, our analysts review information related to ESG factors, which may be provided by the issuer, obtained from third-party ESG research providers or alternative data sources (e.g., NGO analyses, governmental and inter-governmental studies, etc.). Analysts may supplement this information through engagement with the issuer. To the extent an ESG factor is considered by the analyst to have a material or a potentially material adverse impact on the financial value of the issuer, our analysts will incorporate such risks into their fundamental credit ratings. Fundamental credit ratings are a key factor in our relative value assessments and the primary means through which our portfolio managers consider material sustainability risks when assessing the overall relative attractiveness of potential investments.
ESG factors considered to be materially positive will also be reflected in our fundamental analysis and therefore considered in relative value assessments. Although our views are often informed by quantitative metrics, our ultimate assessment on how ESG considerations should influence our investment decisions is largely qualitative, as with other types of idiosyncratic risks and opportunities.
ESG Impact Ratings
We strive to understand the impacts our investments have on the environment and society. This is generally achieved by assessing investments against negative and positive ESG impacts relevant to the industry and/or issuer. This ESG impact assessment is distinct from our assessment of the effects that ESG events could impact the financial/economic value of our clients’ investments.
Credit analysts and economists assign ESG Impact Ratings to issuers in their coverage based on methodologies and guidance approved by our internal ESG Committee1. In doing so, they rely on many of the same sources used for analyzing ESG risks and opportunities, including issuer disclosures, third party ESG research and data, NGO reports, governmental and inter-governmental studies, and others. Analysts may supplement this information through engagement with the issuer.
ESG Impact Ratings can be used to provide additional investment criteria designed to tilt portfolios towards issuers with more positive environmental and social impacts. They are a core component of all of our ESG-labelled strategies.
Collaboration Between Credit and ESG Specialists
At PGIM Fixed Income, analysis of credit material ESG Factors and ESG Impact Ratings are the responsibility of credit analysts and economists. Concurrently, ESG research specialists advise and collaborate with these credit analysts and economists and will challenge ESG Impact Ratings and investment decisions where ESG issues are material considerations.
Helping Investors Achieve Their Goals
We believe that providing investors with an explicit choice between Traditional strategies and ESG strategies will help them express their policies, views, and beliefs through their investments.
ESG Integration—Traditional & ESG Strategies
Enhance credit analysis by incorporating credit material ESG considerations
Influence investment decisions by requiring a higher return/credit spread from issuers with credit material ESG risks
Communicate our views on fundamental and ESG risks to issuers
Traditional Strategies
- Seek to outperform a market-based benchmark over the long-term
- Integrate credit-material ESG factors through credit research and relative value analysis
ESG Strategies
- Seek to outperform a market-based benchmark over the long-term while achieving an environmental and social good
- Integrate credit-material ESG factors through credit research and relative value analysis
- Use proprietary ESG impact ratings and/or client methodology to achieve the desired ESG characteristics
- Invest in issuers with stronger environmental, social, and governance characteristics
- The extent of adjustments to the eligible investment universe will determine whether this comes at a cost of increased risk or lower alpha on an expected basis
- Important Information
- Benchmark Descriptions
1The coverage universe for ESG Impact Ratings includes nearly all issuers where we hold a position, except for those where our position size across the firm is de minimis and certain tax-exempt munis, provided these are not held in accounts that utilise the ESG Impact Ratings. Certain new issuers may also not have an ESG Impact Rating assigned in our systems on a transitory basis due to timing constraints.
All investments involve risk, including the possible loss of capital. The value of investments can go down as well as up. For illustrative purposes only. There is no guarantee that these objectives will be met. The targeted excess returns are based on gross performance returns, unless otherwise noted, which do not reflect the deduction of investment advisory fees or other expenses. This information is delivered solely as reference material with respect to investment products that PGIM Fixed Income may offer in the future. PGIM Fixed Income is under no obligation to offer any such product. All strategy terms are subject to significant change without notice.
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