Dodging the Industry Potholes Across EM High Yield Corporates
The ability to capitalize on opportunities within Emerging Markets Corporates depends on the ability to dodge value-trap potholes that may be lying in wait.
ESG Investing
Environmental, social, and governance (ESG) factors are embedded in PGIM Fixed Income's investment process.
ESG Overview
- 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 analyzing credit-material ESG factors leads to higher risk adjusted excess returns. We consider this critical to our fiduciary duty
- 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. We believe in disclosing our ESG impact ratings / rankings 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
- Debt investors are a critical stakeholder for corporate and sovereign issuers reliant on debt financing markets; however, unlike equity investors, debt investors have no ownership rights.
- As an active Fixed Income only manager, PGIM Fixed Income’s experienced Credit analysts and ESG specialists have deep knowledge and insights on fundamental and ESG factors that, we believe, can benefit issuers offering them a creditor perspective
- Our ESG engagement activities are focused on issuers that have credit material ESG risks, generate significant adverse impacts on the environment or society, or lag their peers in ESG practices
- Credit analysts and ESG specialists point out to issuers our assessment of credit-material ESG risks as well as the impacts that their policies, practices or products have on the environment and society, and discuss the implications these may have for their funding costs and future market demand for their new issue bonds
- As a large investor in securitized assets, we actively engage with issuing banks to address ESG considerations in the origination process and in deal terms, with loan servicers to ensure their management of the underlying loans aligns with our social and governance policies, and with policymakers to guide appropriate governance in specific areas (e.g. student loan market)
- Being one of the largest active fixed income managers in the world, we feel that issuers take our views and concerns seriously and value the insights they gain through dialogue with our analysts. This allows us to engage constructively with management and elevate ESG issues to their attention
- Feedback from these meetings is used to inform our fundamental Credit Ratings and ESG Impact Ratings
Our Commitment to ESG is Continuously Evolving
Helping Investors Achieve Their Goals
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
We believe that providing investors with an explicit choice between Traditional and ESG strategies will help them express their policies, views and beliefs through their investments.
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
We believe that providing investors with an explicit choice between Traditional and ESG strategies will help them express their policies, views and beliefs through their investments.
ESG Strategies
- Seek to outperform a market-based benchmark over the long-term while achieving an environmental and social good
- Direct capital to issuers with stronger environmental, social and governance characteristics and practices
- Constructed using proprietary ESG impact ratings to constrain the eligible investment universe, which comes at a cost of increased risk or lower alpha on an expected basis
- Separate account clients can customize the investment universe using our proprietary ESG impact ratings to align with their specific preferences
We believe that providing investors with an explicit choice between Traditional and ESG strategies will help them express their policies, views and beliefs through their investments.
PGIM Fixed Income's Proprietary ESG Rating Scale
- PGIM Fixed Income maintains a proprietary ESG ratings framework, where every issuer across all fixed income sectors is given an ESG rating in addition to a fundamental credit rating.
- More than 100 analysts assign ESG ratings based on a 100-point scale in five-point increments, with zero as the lowest and 100 as the highest. Ratings are assigned to all issuers (Corporate, Muni, Securitized, Sovereigns) in which we invest.
- PGIM Fixed Income’s ESG Committee provides guidance to the analysts on the relative ESG ratings ranges for each industry. Analysts rank issuers based on the materiality of the ESG issues and assign an ESG rating.
- A comprehensive set of ESG variables tailored specifically to corporate industries, sovereigns, and securitized products are considered; some carrying higher weights than others. Analysts rely on both proprietary and third-party vendors to derive an ESG rating.
- Each sub-sector on our ESG ratings scale has a range. Within these ranges all ratings are disseminated across the range in varying percentages based on the fundamental assessment.
A Collaboration Between Credit and ESG Specialists
- Governance and guidance are provided by ESG Research team and the ESG Committee
- The ESG Research specialists and credit analysts collaborate, with the ESG Research specialists advising the credit analysts
- The ESG Impact Rating is the responsibility of the credit analyst
- The ESG Research team will challenge ESG Impact Ratings and investment decisions where ESG issues are material considerations
- The ESG committee can overrule the credit analysts
PGIM Fixed Income's 2020 PRI Report Card
Related Insights
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In episode nine, Host and Senior Portfolio Manager Mike Collins welcomes Eugenia Unanyants-Jackson, PGIM Fixed Income's new Head of ESG Research.
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