A lack of quality and transparency on ESG may have consequences for bond issuers
Integrating material Environmental, Social and Governance (ESG) risk factors are central to fixed income portfolio management at DNB Asset Management. However, in recent years we have seen a need to integrating ESG in a more systematic way. As a result, we have initiated a project to quality-check and score bond issuers in the Norwegian fixed income market. These ESG scores, in addition to credit risk assessments, will influence how we allocate capital amongst bond issuers.
ESG can impact creditworthiness and credit spreads
Over the past year, DNB Asset Management’s (DNB AM) ESG team has worked closely with the fixed income team to further improve processes and work towards integrating Environmental, Social and Governance (ESG) factors into credit analysis and investment decision making in a more systematic way.
DNB AM’s Head of Fixed Income, Svein Aage Aanes, is clear:
- We firmly believe that companies’ attitudes to and work with material ESG factors will be of crucial importance for competitiveness, earnings and creditworthiness in coming years. We have therefore seen a strong need to gain a more complete overview of the management of these risk factors within the companies that we lend money to.
Mind the data gap
Large issuers typically have substantial resources available to deliver comprehensive reporting, including sustainability reporting. These companies are often covered by third-party data providers who create ESG scores. However, as a major player in the Norwegian fixed income market, we also lend money to small and medium-sized companies. These are often not covered by third-party data providers, and we have hence not had access to assessments of their management of material ESG risks and opportunities previously.
We have seen a need to increase the coverage of ESG data and analysis for these issuers. By building on materiality assessments from sources such as the Sustainability Accounting Standards Board (SASB), discussions with industry experts and selected companies, we have created a framework for assessing material ESG risks and opportunities per sector.
Based on this framework, we have developed and sent out sector-specific questionnaires that account for distinct conditions within the Norwegian market. We have scored bond issuers on the quality and transparency of their ESG work within the bank, utilities and real estate sectors based on the responses we have received. The ESG scores can be viewed at an aggregate company level, or can be disaggregated and broken down into sub-areas within ESG. This enables portfolio managers to deep-dive into any identified ESG weaknesses and risks. The results of this work are for internal use only.