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RIMES ESG Forum Perspectives: A Model for ESG Integration

On April 4, RIMES held its inaugural ESG Forum. At the event, Jesus Martinez, Fixed Income Portfolio Manager at Aegon Asset Management, presented on the topic of ESG integration in sovereign portfolios. What follows is a summary of the main points made during his presentation.

One of the great challenges of Environmental, Social and Governance (ESG) investment is that there is no unique and correct approach. As Jesus explained: different nations are doing different things, so it is difficult to establish a common methodology.

In his presentation, Jesus outlined the approach taken at Aegon; which has added a specific layer of ESG data to the four core elements it looks at for investment analysis: Fundamentals (macro developments and Central Bank assessments), Valuation (how close to fair value certain asset classes might be), Qualitative (sentiment indicators, general market positioning) and Technicals (price behavior).

According to Jesus, one key element to consider with ESG investments is the level of awareness and understanding on both sides of the fund manager/client divide. Where understanding is low, exclusion lists tend to become longer, as asset allocations are dictated by fear of investing in certain areas. For Jesus, it’s therefore important for knowledgeable fund managers to lead the conversations with clients to ensure the asset universe remains as broad as possible while still complying with ESG investment goals.

Jesus then turned to specifically address ESG integration in his field of sovereign portfolios. As this is free from some of the challenges associated with ESG in credit and equity markets, and there is more historical data available from different private and public sources, it’s an area that’s primed for analysis.

At Aegon, Jesus’ team takes global exclusion lists as starting point and assesses material ESG factors to calculate the company’s proprietary quantitative score (tailored to an issuer’s development profile). Each country analyzed has an ESG score and a momentum indicator. The company then brings together the ESG and traditional credit analyses to reach an investment decision. This process is underpinned by regular discussions between the sovereign and responsible investment teams at Aegon to exchange views and provide inputs on issuer ESG profiles.

The resulting model is based on a range of data sources and more than 110 variables that are standardized and directed. One of the key challenges in this process is that the data quality isn’t always high, especially in less developed countries, and the team therefore needed to plug a lot of gaps in the data.

Jesus and his team also found that one size doesn’t fit all – that the model would have to compensate for structural differences in the countries analyzed (such as economic development and progress in forwarding environmental policies). In some cases, the analysis uncovered countries that look similar in terms of financial rating and spread, but are worlds apart in terms of ESG metrics – providing an opportunity for sovereign fund managers.

The analysis highlights which countries are ahead in ESG and which are picking up pace, allowing managers to make decisions based on likely future outcomes. Through the tool, analysts can compare ESG dimensions to several other indicators to try and identify leaders, and can also map against Sustainability Development Goals to uncover which countries are better prepared to overcome certain challenges.

For Jesus, such tools will be important in making the right decisions, but only in so far as they assist the expertise of data analysts and their teams.

Contact us for more information on RIMES’ ESG data services.


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