Diving-deep into High Yield ESG Integration

Last year, we launched the ESG Next program at Aegon Asset Management. The aim of the program was to organize ‘deep-dive’ sessions –where RI specialists work intensively with individual investment teams, getting to know investment processes from the inside out. ESG Next began with the High Yield team in the US. For the Responsible Investment Report that we published earlier this year we spoke with Jennifer Moore, director of US Credit Research, and James Rich, a portfolio manager and the Head of US Restructuring about the program and how to set up ESG Next for the US High Yield team.

How is ESG incorporated in the investment process at Aegon Asset Management US?

James: To us, ESG is just good credit research. We look at things like new environmental regulations or union disputes and how they might impact business fundamentals. We’ve been doing that for years and don’t believe that we need specific ESG analysts to address these issues. We just need traditional credit analysts who understand ESG.

Tell us about ESG Next. How did it add to what you were already doing?

Jennifer: ESG Next was really about formalizing the ESG integration process and making sure everything is happening in detail at the portfolio level. The project allowed us to focus on a specific asset class, to work through case studies and live examples together, and extend the knowledge we have to other parts of the organization.

"ESG Next allowed us to really analyze that new information and make it digestible for our research analysts and portfolio managers." -James Rich

James: We are a research-based organization, so our research teams spend a lot of time digging into the detail. Over the past several years, there has been a tremendous amount of new data and research on ESG. ESG Next allowed us to really analyze that new information and make it digestible for our research analysts and portfolio managers.

What asset class did you focus on, and who was involved in the project?

Jennifer: We looked at high yield corporate debt investments. We brought in people from across the investment team: research analysts, portfolio managers, and the RI team. Bringing in the marketing and risk management teams was also important to get broader organizational awareness and build our overall knowledge on the topic.

Which case studies did you look at, and what did you learn from them?

Jennifer: We looked at a number of case studies. We went through the ESG reports for these companies – and separated out what was material and what was just “noise”. Not all ESG factors are equal. You need to understand what’s really fundamental to the issuer’s industry. Some industries, of course, carry more ESG risks than others. For example, we analyzed ESG issues at an airline that initially looked quite concerning. However, after sifting through the issues and comparing the airline with companies in other industries, we realized that much of the risk just comes with investing in that particular industry.

James: It was good to see our analysts were already familiar with ESG issues and had a good understanding of the dynamics, even if sometimes it wasn’t labeled an “ESG” issue. A big value-add of these sessions was that portfolio managers got better insight into the methodology of our ESG data provider. Portfolio managers are more removed from the detailed research process. They don’t normally log on to the ESG platform – they rely on information provided by the analyst. We had some interesting discussions about the impact of ESG issues. And analysts learned what kind of information portfolio managers are really looking for and how they use this in investment decisions.

"In ESG discussions, there’s a lot of focus on the E and S factors, but we find that often G is often more important." - Jennifer Moore

How do you think ESG Next has further honed the team’s ESG expertise?

Jennifer: The project hasn’t really changed how we look at these issues, but it has strengthened our understanding, and made us realize that what we’re doing is important. We just need to communicate that more clearly to clients and other stakeholders. Also, in ESG discussions, there’s a lot of focus on the E and S factors, but we find that often G is often more important. Governance factors tell us more about items such as the underlying legal structures at a company, management representation and the potential for fraud. These are all key to understanding a company’s profile. We have a lot of experience in assessing companies’ governance, however it can also be challenging to quantify E and S issues in financial terms. That doesn’t mean they’re less important to a company, but from an ESG integration point of view these issues can be very gray in nature and difficult to define.

So, what will come next from ESG Next?

James: We have a number of follow-up items we’re currently working on. First, we need to communicate our views on ESG integration better – both to current and prospective clients. In addition, we’re also improving upon our efforts in 2015 and are updating the format of our credit tear-sheets to better reflect what we are doing to integrate ESG factors into our research process. In the new format, for example, analysts will indicate their agreement with the assessment of the data provider and if they do not agree, provide their thoughts behind the difference in opinion. They will also note the magnitude to which ESG factors impact the creditworthiness of the company as well as if they feel engagement with the company would be beneficial. This will also allow the research and RI teams to work more closely together.

More information on our Responsible Investment activities in our RI Report 2017