Stockholm (NordSIP) – Many investors continue to believe that inclusion of sustainability criteria costs performance and should not play a role in the decision making process. However, a cursory look at the largest defaults in history demonstrates that purely economic factors were seldom the decisive cause. In many cases weaknesses in corporate governance, poor leadership and poor risk management led to the collapse. Nevertheless, these factors rarely attract the attention of investors and analysts. Carl Berthold, portfolio manager with responsibility for sustainability and partner at the UK Investment Boutique JAR Capital, explains how important is it to consider these aspects in the selection of corporate bonds in the high yield space.
The analysis of companies using sustainability criteria not only focuses on the implementation of socially responsible and environmentally related aspects, but also has the important tasks of increasing transparency within the company and analysing the corporate culture. In particular, companies in the high yield market are mainly controlled by private owners and not listed publicly with the consequence that information availability might be of variable quality. Investors must therefore seek to increasecommunication with these companies and achieve effective monitoring techniques. This applies even more as these companies depend on capital markets disproportionately for their funding, a growing trend since more and more banks are forced to restrict their lending by the regulators.
The issue of sustainability is becoming increasingly important to a changing investor world. Today, worldwide, around ten trillion euros are invested taking sustainability considerations into account, a trend reinforced by an increasing global socio-political awareness. An example was the 2015 ethically motivated retreat from the South Korean conglomerate Daewoo by the heavy weight Norwegian state fund which manages 788 billion euros. Companies not willing to deal with the requirements of sustainability lock out a substantial and rapidly growing part of the capital market. It is in the economic interest of companies to take aspects of sustainability into account in their decision making process.
However, this is not the only reason why companies should take the issue seriously. According to a study by consulting firm McKinsey & Company most companies consider the greatest benefits from sustainability analysis to lie in the avoidance of reputational and legal risks and in identifying operational inefficiencies. Sustainability offers a win-win process for all concerned.
CRITERIA BEYOND THE STANDARD
To date, sustainability analysis by specialised rating agencies has been limited to countries, companies with listed equity, and companies in the investment grade space. Portfolio managers in the high-yield space therefore usually simply exclude certain industries or countries to give their products a sustainability label. We believe this kind of lip service does not go far enough. In addition to excluding certain industries and applying a norm-based screening process we co-operate with a specialised sustainability rating agency which investigates our target companies for us.
Identified issues or weaknesses, be it with environmental, safety or working condition standards, the inefficient use of resources or in the transparency and corporate governance space, are addressed on our behalf by an activist engagement company which represents asset owners of over one trillion Euros. We believe it is important not only to address weaknesses but also to contribute to possible solutions as part of the engagement investment style. JAR Capital works closely with our partner agencies to ensure that the necessary corporate information is available and that a constructive dialogue with the company’s management is established. Increased transparency, stronger communication and full analysis using sustainability criteria form an additional risk management resource that can help us recognise early warning signals and avoiding negative surprises.
INVESTMENT PHILOSOPHY AT JAR CAPITAL
EXCLUSION IN THE ABSENCE OF COOPERATION
A significant consequence is that companies refusing to increase transparency, enter into dialogue or improve addressed shortcomings have to be excluded from our investment universe. That this was rarely necessary to date clearly demonstrates that the majority of companies are aware of their social responsibility, the changes taking place in the broader investment community and customer base as well as the operational advantages. Company managers understand that ultimately their
investors share their own objectives: a stable performance where negative “surprises” – from whatever direction – are avoided.
ABOUT JAR CAPITAL
JAR Capital is an Asset Management boutique headquartered in London with offices in Geneva and Gibraltar. JAR Capital specialises in the European high yield market and the senior portfolio manager, Kerrin Tansley, has a track record dating back to 1996. The management focuses on the preservation of capital and portfolios are constructed conservatively. Stressed and distressed issuers are excluded as are bank, insurance and real estate related issuers. To date, the management team
has suffered no defaults. JAR Capital is believed to be the only manager in the high yield space that actively incorporates Socially Responsible Investment criteria in its investment process via an engagement process. JAR Capital is a signatory of the UN Principles of Responsible Investing (UN PRI).
This article is part of the Special report Sustainable Investing in Alternatvies published in February 2017 – read the full report here
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