Brandywine Global’s Pragmatic Take on Sustainable Fixed Income

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    Barcelona (NordSIP) – The PRI in Person conference provides ample opportunities to meet sustainability experts from all over the world and pick their brains on diverse topics, whether inspired by the plenary sessions or not. During one of the breaks, NordSIP finds a quiet spot to talk to William Vaughan, Associate Portfolio Manager & Senior Research Analyst at Brandywine Global Investment Management, an asset manager which is part of Franklin Templeton since 2020.

    The conference has just kicked off, so it is too early to ask Vaughan about his impressions. Anyway, he explains that he is hardly in Barcelona just to partake in the sessions. As a member of the PRI credit advisory committee, he expects to engage in some pertinent discussions with the other committee members, mainly concerning some cross-cutting issues on reporting. “Right now, I want to look into the question of how to treat fixed-income derivatives, for instance,” he says. “Integrating ESG aspects into credit ratings is another topic we have been discussing.”

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    As for his expectations of the conference itself, Vaughan tells us he is most looking forward to getting some guidance on the practical aspects of implementing a net zero strategy. “That is where we see the biggest disconnect right now. There is a lot of confusion among PRI signatories, both asset owners and asset managers, about which framework they should be part of and how to actually enact net zero. This is, hopefully, something the PRI could help standardise,” he comments.

    Managing mainstream credit portfolios might seem like an unlikely career for Vaughan, who studied climatology and carbon economics at university. Yet it was precisely what he aimed for. “Rather than joining a small impact fund, I always wanted to work in mainstream finance. I felt there was more impact to be achieved by moving conventional equities and fixed income towards responsible investing,” shares Vaughan.

    He joined Brandywine Global seven years ago and was part of the team to design the firm’s sustainable investment process. “To win over our leadership, it had to be a process well-integrated into how we think about managing money,” he explains. “As a value investor, we are always looking for names that are improving, whether from a financial or ESG point of view. And that is how we work with sustainability now.”

    One thing becomes evident throughout the conversation: Vaughan and his colleagues do not believe in broad-based exclusions. “Of course, we could exclude the biggest emitters, like metals and mining and oil and gas, but these sectors will still be critical for the global transition. Instead, we believe in the power of bold collective action to drive change, like some of the initiatives we recently witnessed at COP 27. Engagement works both on the corporate side and even on the sovereign side. It is encouraging to see, for instance, how Indonesia, which was hardly an investable country for sustainable funds earlier, has started on a positive trajectory thanks to collective action that we support,” he adds.

    Vaughan is certainly a big believer in engagement. “Frankly, I find the idea of actively managing a high-conviction, benchmark-agnostic fund like ours by only looking at backward data quite unworkable,” he says. “It is through engaging with corporates and sovereigns, meeting with the ones with most to improve on three to four times a year, that we have a sense of what is going to happen in their emissions in 2025. Thanks to our frequent dialogues, we feel confident in our assessments and predictions.”

    Instead of lamenting the poor state of ESG data like most investors, Vaughan comes up with a rather refreshing comment. “People complain about the huge discrepancy between the ESG scores of different data providers,” he remarks. “We actually think of it as a great starting point. Where the variability is highest, that gives us, as an active manager, the opportunity to dig deeper. It is much less likely that an ESG advantage is already in the price if there is a big discrepancy in opinions,” points out Vaughan.

    Having himself been involved in issuing green bonds in a previous job, Vaughan is somewhat sceptical of the market these days, primarily because of valuations. “You must be pragmatic about these instruments, not just tick boxes. Sometimes, we would rather buy the non-green bond of an issuer like Volvo than invest in their green bond. Ultimately, the whole company is moving in the right direction, we feel,” he says.

    Reflecting on the future of sustainable fixed income, Vaughan sounds quite optimistic. “I still remember my first COP. It was the 16th one, in Copenhagen, in 2010. At that point, equities were definitely the leaders in sustainability and ESG. Going forward, I think that fixed income will take the lead. As an asset class, fixed income is capable of demonstrating a much more tangible positive impact because of the use-of-proceeds model embedded in it,” he concludes as we both head back to the conference halls.

    Image courtesy of NordSIP
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