We believe that material ESG factors can have a significant impact on the long-term performance of the companies we invest in. As a result, we systematically integrate ESG considerations into our management of global investment-grade corporate bonds to limit our exposure to companies that aren’t addressing material sustainability risks. Similarly, we limit exposure to bonds issued by companies our analysts see as presenting an uncompensated credit risk to portfolios. We also avoid issuers with excessive ESG risk, no matter how cheap their valuations, to reduce the risk of investing in potential value traps, just as we avoid issuers rated sell by our firm’s credit analysts.
In some cases, it may even be appropriate to avoid entire industries in which companies have failed to address material ESG risks. That’s because this kind of failure creates the potential for regulatory action or shifts in investor capital that may significantly impact the value of bonds issued by companies in those industries.