- Multi-sector credit strategies offer potential for appealing income and returns, but the next step for many investors is to incorporate a responsible approach
- Challenges for such an approach include the mixed availability of ESG data, the breadth of analysis and engagement required across credit markets, and the need to pursue both financial and non-financial objectives
- There are clear ways to resolve these challenges through a systematic and engaged approach to ESG analysis, access to a deep pool of fixed income expertise, and a clearly defined approach to sustainable goals
We believe multi-sector credit strategies – also known as multi-asset credit – are appealing in the current climate because they have the potential for attractive income and returns, without exposure to much interest rate duration.
By allocating dynamically across credit asset classes, such as investment grade and high yield corporate bonds, emerging market debt and asset-backed securities, they have access to the entire credit spectrum and can capitalise on different market conditions.
The next step for many investors is a multi-sector credit strategy that also incorporates a focus on responsible investment and sustainability characteristics. In fact, we believe existing strategies will need to evolve to reflect such factors to remain relevant.
The breadth and approach of such strategies presents unique challenges for a responsible approach – but we believe it is possible for such a strategy to pursue both financial return targets and non-financial sustainability goals.
Challenges facing a responsible multi-sector credit approach
There are several challenges facing a responsible investor seeking to pursue such a strategy.
- Availability and relevance of ESG data is mixed: There is extensive ESG data available for larger publicly listed companies, but the lack of standardised ESG disclosures in many areas mean gaps exist and comparability can be a problem. For many smaller issuers, particularly emerging market or high-yield companies, the availability of relevant non-financial data lags information from larger issuers – investors must make a judgement call as to how to fill such gaps.
- The breadth of the investment universe for multi-sector credit strategies means extensive and broad-ranging expertise is needed: Alongside issues regarding ESG data, the need for effective analysis and engagement regarding ESG issues can present challenges for a multi-sector credit strategy. An investment manager will need relevant expertise covering the different credit asset classes covered by the strategy, as well as knowledge of pertinent ESG issues.
- Balancing financial and sustainability targets is difficult: Achieving sustainability targets may mean excluding some issuers, and placing a greater emphasis on others; a commitment to investigate non-financial characteristics of potential investments; and direct engagement with stakeholders on sustainability issues, such as carbon emissions. Fulfilling such requirements may mean an investment manager has to look elsewhere for returns, or adjust their approach, relative to a strategy pursuing the same return target but without sustainability objectives.
These are meaningful challenges, but we believe they can be addressed constructively.
The best of both worlds: how a responsible multi-sector credit strategy is possible
The mixed availability of ESG data, the breadth of the multi-sector credit approach, and the need to balance financial with non-financial goals may be daunting. But we believe there are clear solutions to each challenge.
- A systematic approach to ESG data can unearth relevant and material information: ESG ratings, which aim to flag companies exposed to prominent and material risks, can play a clear role in investment research. No single ESG data provider aligns with our house opinion on ESG credit risk, so we developed our own methodology using data from multiple inputs, which also incorporates our own analysts’ qualitative judgement on the materiality of ESG risk factors for specific industries and sectors. This sits alongside our direct engagement and proprietary questionnaires to support analysis of for the originators of asset-backed securities, and smaller private or non-listed issuers, that may not be covered by major ESG ratings providers.
As a result, our awareness of the ESG risks and factors affecting issuers across credit sectors is extensive and continues to grow.
- The role of expertise incorporating experience of ESG risk analysis: Insight’s Fixed Income Group is comprised of specialists with many years of experience both within and allocating across different credit markets. Crucially, we have sought to integrate ESG risk factors within our credit analysis for many years. In 2020, 90% of 1,210 engagements with debt issuers by Insight covered ESG matters.
We believe this should mean that even a multi-asset credit strategy with a broad investment universe should be able to fully reflect relevant and material risk factors.
- Pursuing financial returns need not conflict with sustainability: We believe aiming for both attractive financial returns and concrete sustainable goals is possible, but that it requires a specific approach.
Many investment strategies that focus on ESG factors are typically exclusion-led due to a drive for transparency, which has established a 'punish' rather than 'promote' mentality. We believe a better approach is to partner with leaders, apply a high hurdle for environmentally sensitive sectors and have an explicit ‘positive impact’ allocation via issuers or securities that benefit the environment and society.
Additionally, ESG frameworks are often backward-looking – but if an issuer has a credible improvement plan to transform themselves, we believe they should still be within scope for investment.
We have also observed there is evidence for portfolios with better ESG profiles having the potential for improved long-term returns; and it is possible to generate alpha by specifically focusing on ESG themes. For example, it may be possible to identify issuers that will manage their exposure to climate change-related risks more effectively than their peers, which may in turn be reflected in relative investment performance.
These principles have informed the creation of our Responsible Horizons range of investment strategies, which go beyond purely integrating ESG factors for risk management purposes, and instead aim to align their opportunity set with client values, focus on long-term business sustainability and help enable the transition to a more sustainable future world.
Given the above, we believe it is possible to pursue a credible and effective approach to multi-sector credit investment that pursues attractive returns while also seeking to fulfil responsible investment and sustainability criteria.
For more information on Insight’s responsible investment approach, please visit our responsible investment home page. To find out more about our approach to multi-sector credit investment, please contact your Insight representative.