As the development of an ESG framework applicable to structured credit continues apace, one thing has become very clear – this is way more than a tick box, flash in the pan!
Our own approach to ESG has its roots in an intensive due diligence process developed over many years of investing and one which always included a focus on areas which now fall firmly into the “G” category. From lending standards to recovery processes, to corporate risk management, alignment of interest with investors, to succession planning, all have been topics of conversation with new and repeat issuers over the years.
What is now considered the “E” and “S” in the equation was also part of the due diligence process to a greater or lesser extent, but reflected the more qualitative part of the question; “what makes this issuer stand out ahead of peers?”. As an example, a stable underwriting team needs less on-going training and builds up more experience understanding the nature of the borrower, potentially reducing collateral performance risk versus a peer with greater turnover. Whilst ESG has taken adoption and disclosure of staff welfare and retention policies further, fundamentally we are still looking to see who in a cohort are actively trying to do more than the (admittedly improving) “industry standard” to motivate their staff.
As highlighted in the recent S&P Virtual Conference, “The Future of Sustainability in the European Securitisation Markets” in which our senior PM, Andrew Burgess, was a panellist, there are many strands to the ESG conversation. Where and how our internal policies fit when compared to the gradually coalescing industry framework remains, for us, an on-going process.
What is clear though is that keeping our “ESG” process relevant means retaining that element of positive originator differentiation in the process. What a company voluntarily does to take the “E” and “S” story forward seems, at least to us, more relevant than just looking merely at what is the minimum they have to do to meet the “G” required by regulation.
By Andy Burgess.
Sr. Portfolio Manager