ESG in LGIM’s Active EMD investment process

As fixed income professionals, one question we find ourselves increasingly answering is: How do you make the connection between environmental, social and governance (ESG) considerations and credit?

For most people, there is an intuitive connection to be made when it comes to ESG and the equity markets, yet when it comes to credit this connection can be harder to grasp.

If we go back to the basic principles of bond investment, as investors we are looking to reduce the uncertainty around the range of possible outcomes and be comfortable holding a
bond through to maturity. As a credit investor, investment horizons are inherently long term; this implies that the identification of downside risks should be front and centre in any robust fixed income investment strategy. Therefore, assessing return and risk only over the short term can fail to highlight factors which erode capital over the long term; it is the “fat tail risks” which require a different lens of credit assessment, and this is where ESG plays a vital role.

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