RLAM’s new Global Sustainable Credit Fund targets true ESG leaders
The year 2020 saw a significant growth spurt in the sustainable bond market, with sustainable finance bond issuance doubling to an all-time record of $554.3bn (£401.9bn)1. This was in part driven by increased commitments from pension funds to decarbonising their investment portfolios, while global governments have poured billions into initiatives designed to help the world reach its net-zero target on time.
And according to Rachid Semaoune, manager of the newly launched Royal London Global Sustainable Credit Fund, the sustainable credit market is only going in one direction. Below, he talks about the key themes currently driving opportunities in this space, delves deep into the fund's security selection strategy and reveals the reasons why in-house ESG research is key in fixed income.
What does sustainable mean at RLAM and how is it applied to global credit?
At RLAM, we screen positively for companies whose products and services provide a net benefit for society and companies that are true ESG leaders within their sector, provided that they follow good governance practices.
When it comes to credit, the environmental and social analysis is the same as on the equity side, but the governance research is more complex. We take account of what part of the capital structure we are lending to and consider any element within the company structure that can mitigate the governance risk.
What are the key aims of the Global Sustainable Credit Fund?
The aim of the fund is to invest in companies that meet our sustainability criteria. The fund is looking to beat its benchmark (the Bloomberg Barclays Global Aggregate Corporate Total Return Index Hedged USD) by 0.75% per year gross of fees on a rolling three-year basis. The fund invests primarily in investment grade rated securities across the globe, so it is truly global by sector, holdings, geography and currency.
To what extent do you make use of third-party ESG analysis?
We use some third-party ratings, such as MSCI and Trucost, but we find that the ESG screening tools available don't really suit fixed income. For example, MSCI scores publicly rated companies, but on the fixed income side we also lend to companies that are not publicly listed and so typically wouldn't be covered by these ESG tools. For that reason, we really need our own tool to analyse these private companies.
One example is the social housing sector. These companies are not publicly traded and none of them are well covered by the ESG tools available in the market, but the sector is very important from a sustainable perspective and boasts attractive valuations.
What are the key challenges of investment selection in the global sustainable credit market?
One of the biggest challenges when investing globally is the size of the universe. In the global investment grade index you would typically have 2,300 issuers - that is a lot of names to screen.
Another challenge is that our sustainable process excludes nuclear generation for utilities. But in the US most utility companies have some form of nuclear generation in their energy mix. You have to do some digging to identify which utilities have no nuclear exposure.
Will you buy green-labelled bonds for the fund?
We do want to encourage companies to develop green projects, but we are slightly cautious because most green bonds tend to be quite expensive. By doing our own work, sometimes we can find bonds that don't have the green label, but the company is potentially a lot greener than one that has issued a green bond2.
Could you name three positive sustainable themes for global credit investors?
There are a number of long-term themes and challenges that are here to stay. The first one is decarbonisation and energy transition, since climate change is a serious threat to our planet. So the carbon intensity of a company in the portfolio is really important.
Another important theme is housing and property, and this includes the UK social housing sector and the European residential market. We want to invest in property companies which are promoting the welfare standards of their tenants, which leads us to such countries as Germany and the Nordics.
And finally, another key theme is next generation medicine. The global population is ageing, especially in the Western world. We like pharmaceutical companies that help improve people's quality of life and fight the challenges posed by old age, as well as companies helping to tackle the coronavirus pandemic, such as GlaxoSmithKline or Pfizer.
How do you find the right balance between exclusion, aiming for higher ESG scores, and investing in companies with positive effects on the world?
There are sectors and companies we won't invest in because they don't meet our sustainable criteria. The fund excludes fossil fuel extraction, thermal coal, mining, nuclear generation, tobacco, arms, bombs and pornography. We also don't tend to invest in companies that promote irresponsible drinking and gambling. It's not illegal to drink, so within the beverage sector we look for ESG leaders: companies that have a strong water management policy and use a high percentage of recycled material in their packaging.
These exclusions are not a problem, since the global investment grade universe is well diversified enough and big enough for us to find interesting sustainable companies, whose business is focused on improving society.
Is the sustainable nature of the fund likely to lead to cyclical performance differences?
I don't believe it will on a long-term basis. We may have a year in which energy will outperform because of strong oil prices. But over the longer term, the funding costs of energy or tobacco companies have gone up, which means that bond prices are underperforming. So longer term, these sectors tend to underperform versus sustainable sectors.
1 According to Refinitiv, Sustainable finance surges in 2020 | Refinitiv Perspectives
2 For further discussion and examples, see RLAM, Global Sustainable Credit - our best of both approach, February 2021: bit.ly/3sjWjXf
The value of investments and the income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested.
Find out more about the Royal London Global Sustainable Credit Fund at rlam.co.uk/GSC
For professional clients only, not suitable for retail clients.
This is a financial promotion and is not investment advice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change.
The Royal London Global Sustainable Credit Fund is a sub-fund of Royal London Asset Management Bond Funds plc, an open-ended investment company with variable capital and segregated liability between sub-funds. Incorporated with limited liability under the laws of Ireland and authorised by the Central Bank of Ireland as a UCITS Fund. It is a recognised scheme under section 264 of the Financial Services and Markets Act 2000. The Investment Manager is Royal London Asset Management Limited.
For more information on the trust or the risks of investing, please refer to the Prospectus or Key Investor Information Document (KIID), available via the relevant Fund Information page on www.rlam.co.uk.
Issued in April 2021 by Royal London Asset Management Limited, 55 Gracechurch Street, London, EC3V 0RL. Authorised and regulated by the Financial Conduct Authority, firm reference number 141665. A subsidiary of The Royal London Mutual Insurance Society Limited.
