Scott Smith, Senior Portfolio Manager and Head of Premier Income Strategies, discusses environmental, social, and governance (ESG) opportunity in the investment-grade space.
Laurie King: I’m Laurie King, and you are listening to On the Trading Desk®. Not all companies who claim to be socially responsible measure up the same. Scott Smith, Senior Portfolio Manager and Head of Premier Income Strategies at Wells Fargo Asset Management, joins us to talk about what informs his team as they seek opportunity for investors. Scott, welcome back.
Scott Smith: Why thank you, glad to be here.
Laurie: Scott and his team authored an insights paper called: Incorporating ESG trends into investment grade credit strategies. We’d encourage those of you listening to contact your Wells Fargo Asset Management relationship manager for the full market insights paper and to download part one of this conversation if you haven’t already listened.
But Scott, before you point to the potential opportunities, I’d like to point to a concept you refer to in the paper, a couple times at least, and that’s the blending or integrating of ESG and traditional fixed-income approaches.
Can you explain the value behind the idea of blending or integrating ESG?
Scott: Sure. So, we are now looking at ESG factors as another barometer of a well-run company.
And so it becomes another fundamental data point to the process that we have carried forward on our teams for the last two decades. Right? So, ultimately, if done well, it can help mitigate risk and be accretive to value over time.
Laurie: Well let’s walk through what characteristics you’re seeking in terms of opportunity in the investment grade space, and let’s start with, traditionally, what you’re looking for from an issuer.
Scott: So, traditionally what we’re looking for in an issuer is a stable to improving fundamental credit from a bottom up fundamental credit research standpoint. Once we’ve done that part of the work, we spend a tremendous amount of time on valuation—ensuring that we’re buying that credit at the right price and extracting that value efficiently from the market. So, again, kind of back to the notion that not much has changed to our investment routine for our portfolios.
Laurie: And now what sorts of characteristics are you looking for to blend or integrate ESG into that? I guess here, specifically, the ESG factors that you’d be looking at.
Scott: Well, I think it can differ for various industries. In the energy industry, it’s going to be more environmental factors that weigh heavily. In the finance industries, it’s going to be more governance. Select industrials, pharmaceuticals can be social. By way of example, BP [British Petroleum], which is famous for the Deepwater Horizon spill, has made significant strides on the follow. They’ve made new commitments to safety that are now being embraced by the industry overall. And they’re also supporting many, many environmental efforts away from them. So, we also look at the trends. It’s easy to disregard a company because they are in a certain industry, but we’re looking for trends in improvement within their space.
Laurie: So how is the team finding out what a company’s environmental record or goals are?
Scott: We have developed specialized reporting for the clients that highlight their exposures to ESG sensitive issues across the spectrum of E, S, and G; and so, we can give them a score that highlights their score versus the overall market—do they score better or worse than the market on that specific environmental, social, or governance issue. So, I do think it gives them some context as to whether or not the overlay and the integration is being employed in a way that’s showing up in the portfolios for them.
We also have a thought leadership team that is staying abreast of all of the relevant issues in the space from a macro perspective. But more, from a bottom up micro perspective, having the boots-on-the-ground and a large credit research resource is where on the individual company level, we’re seeking out that information for good ESG practices.
Laurie: So Scott, with the minute that remains, what’s your outlook for responsible investing through credit?
Scott: So, specific to investment management, we expect client interest in socially responsible investment credit portfolios to increase. We remain optimistic that the momentum that drove development in the ESG credit space so far will continue to drive change in ways that are relevant and meaningful to our clients.
Laurie: That’s great Scott, thank you for your insights these last couple of episodes. We hope you’ll join us again.
Scott: Thank you Laurie.
Laurie: Please reach out to your Wells Fargo Asset Management relationship manager for Scott’s full market insights paper. And visit our blog, AdvantageVoice® for more ideas to help frame your investment thinking. 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.