The Need for Better ESG Disclosures in Leveraged Finance
PGIM Fixed Income discusses how a standardised framework can help guide the ESG disclosures that investors in the high yield and leveraged loan market require.
• We believe that ESG factors impact the performance of investment portfolios, and we have integrated them into our investment analysis and decision-making processes for all traditional and ESG strategies
• We assess ESG factors for all issuers that we cover, across all asset classes
• We believe that fully analysing credit-material ESG factors leads to higher risk adjusted excess returns. We consider this critical to our fiduciary duty for all traditional and ESG strategies
• We believe our 100+ fundamental research analysts and ESG specialists are best placed to analyse an issuer’s ESG characteristics, and as such we conduct our own ESG research and risks assessment as part of credit analysis, and have developed ESG impact ratings as a proprietary tool to help our clients invest in line with their ESG/sustainability preferences
• Our Credit Ratings incorporate analysis of credit material risks and opportunities arising from ESG factors and reflect our overall fundamental credit view of the Issuer
• Our ESG impact ratings assess negative and positive impacts of the Issuers on the environment and society, and serve to determine the eligibility of the Issuer/Issue for investment by our ESG strategies
• We use issuer engagement to communicate our views on fundamental and ESG issues, in addition to informing our ratings of the issuers. We believe in disclosing our ESG impact ratings to Issuers, pointing out the potential increased funding cost for Issuers who lag peers on ESG and noting the potential impact on future market demand for their new issue bonds
• As a signatory to the Principles of Responsible Investment (PRI) since February 2015, we are committed to implementing the Principles, where consistent with our fiduciary responsibilities
The effect that ESG factors have on credit fundamentals underscores that comprehensive ESG disclosures are no longer a “nice to have.” Rather, they are an investment imperative, as we explain in our blog post titled "A Five-Part Framework for ESG Disclosures in Global Leveraged Finance." While the global investment-grade universe has made notable progress on disclosures, companies in the global leveraged finance universe remain conspicuously behind. Given this delay and the need for standardization, we introduce a five-part framework of tangible steps that leveraged finance companies might reference when attempting to meet investors’ heightened disclosure demands.