Scott Smith, Senior Portfolio Manager and Head of Premier Income Strategies, discusses environmental, social, and governance (ESG) investing in the investment-grade space.

Laurie King: I’m Laurie King, and you are listening to On the Trading Desk®. Trends in socially responsible investing in the investment-grade space are reaching significant milestones. Scott Smith, Senior Portfolio Manager and Head of Premier Income Strategies at Wells Fargo Asset Management, joins us to explain why his team participates in the segment and what’s driving the upward trend. Scott, welcome to On the Trading Desk.

Scott Smith: Thank you Laurie, glad to be here.

Laurie: Scott, you have a milestone of your own—30 years with the company. Congratulations!

Scott: Why, thank you. And I like it as much now as I’ve ever liked it. It has been an amazing journey here at the firm. And I’m excited about this ESG space.

Laurie: Okay! A quick program note to our audience—the next two conversations with Scott are based on a Market Insights paper written by Scott and his team that dives deeper into environmental, social, and governance investing—ESG for short—and the name of the paper is called: Incorporating ESG trends into Investment Grade Credit Strategies. And we encourage you to contact your Wells Fargo Asset Management relationship manager to get the Premiere Income team’s full insights. But Scott, how does your participation in this segment help investors meet their needs?

Scott: Employing an ESG framework to your investment process, quite simply, represents sound due-diligence and can be value-add creative. I mean, you know, ultimately we believe that employing this type of a framework will ultimately contribute to better long-term risk-adjusted returns for investors.

Laurie: Well very good. According to your paper, “Green-bond issuance has increased sharply.”

Scott: Yes indeed. So, green bond issuance hit a record high last year of approximately $155 billion. That would be about a 78% increase from the previous year. And we see this increasing exponentially again—this year we’re talking, again, anywhere from $250 to $300 billion, with that growing to $1 trillion, possibly, by the year 2020.

Laurie: And your research also indicates that part of the interest, part of what’s driving it, is political?

Scott: Yeah, and so I thinks that’s an interesting comment. And it actually is somewhat misunderstood.

And I would use the Paris Accord as a prime example of that, in that, despite the fact the U.S. announced withdrawing from the Paris Accord, what we’ve seen on the follow is hundreds of U.S. companies have stepped forward to pledge unwavering support for the goals of the Paris agreement. For us, quite practically, this highlights that many of the decisions that are made in this regard are really made at the local and company level. And in that regard, it can really transcend politics.

Laurie: And you’re also seeing it in many different places in the bond market, it’s not just the U.S. in corporate bonds here, but, for instance, China is a big leader of green bonds.

Scott: Yes. I think that’s absolutely correct. It’s not just good ethos, but it’s good for business. And it’s good for long-term value creation, fundamentally, over the long term.

Laurie: And there are also new and better tools to help you both find these green issues and measure performance.

Scott: Yeah, so, Laurie I think that’s an exciting part of the field right now. Better tools are rapidly being developed. By way of example, there are now multiple ESG benchmarks to track the performance of how ESG overlay strategies—specifically in fixed income—are performing. And then there’s new vended research analytics. MSCI is one in particular that we use which scores environmental, social, and governance issues on multiple fronts, and comes up with one composite score. And it gives investors a way to have good information that’s swept up in one single space to assess ESG worthiness of an individual company.

Laurie: Okay, how is your team adapting and changing for ESG?

Scott: For us, what’s most relevant and most exciting is we’re really incorporating ESG into the entire investment process. And where the rubber meets the road for that is on fundamental credit research. And all of our analysts now incorporate ESG into their fundamental due diligence. So I think that’s something that’s very meaningful and relevant for us as we assess companies going forward.

Laurie: Scott, let’s pause the conversation here and, in part two, talk about where your Premier Income Strategies team is seeking opportunity in the ESG segment.

Scott: Thank you Laurie—happy to do that.

Laurie: I’ll remind our audience, reach out to your Wells Fargo Asset Management relationship manager for Scott’s full market insights paper. Until next time; I’m Laurie King, take care.

 

Stock values fluctuate in response to the activities of individual companies and general market and economic conditions. Bond values fluctuate in response to the financial condition of individual issuers, general market and economic conditions, and changes in interest rates. Changes in market conditions and government policies may lead to periods of heightened volatility in the bond market and reduced liquidity for certain bonds held by the fund. In general, when interest rates rise, bond values fall and investors may lose principal value. Interest rate changes and their impact on the fund and its share price can be sudden and unpredictable. Investing in environmental, social, and governance (ESG) carries the risk that, under certain market conditions, the investments may underperform products that invest in a broader array of investments. In addition, some ESG investments may be dependent on government tax incentives and subsidies and on political support for certain environmental technologies and companies. The ESG sector also may have challenges such as a limited number of issuers and liquidity in the market, including a robust secondary market. Investing primarily in responsible investments carries the risk that, under certain market conditions, an investment may underperform funds that do not use a responsible investment strategy.

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