Justin Jewell and Andrzej Skiba's views on how BlueBay’s Global High Yield ESG Strategy is making the right kind of waves
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The trend to take Environmental, Social and Governance (ESG) factors into account when investing is prompting new thinking across the fixed income world – not least in the high yield sector.
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BlueBay, a fixed income specialist, has spent the last few years tailoring its ESG approach to better capture the nuances of the credit markets. In this Focus, BlueBay’s Justin Jewell and Andrzej Skiba explain how their Global High Yield ESG Strategy integrates ESG into investment decisions – and take us through some of the implications.
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The ESG strategy sets a much higher bar, beyond investment materiality
So how much blue water is there in practice between the ESG strategy’s portfolio and more conventional global high yield portfolios?
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Justin Jewell and Andrzej Skiba are the managers of BlueBay’s Global High Yield ESG Strategy. With the strategy now past its three-year anniversary, the team believe they are well-positioned to explain its distinctive characteristics.
Sustainable screen
wo powerful phenomena – the search for yield, and the growth of responsible investing – are helping to shape post-pandemic investment markets. They are also both sparking interest in a relatively novel investment approach: high yield
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“We launched the strategy in partnership with a consultant and investor in the Nordic region,” explains Jewell, “who wanted to ensure there was a greater level of ESG in the investment process by starting with negative screens.”
That analysis, conducted by credit analysts working hand in hand with BlueBay’s specialist ESG team, is unusual in creating two separate data points: a fundamental issuer ESG risk rating; and an ESG score at the security level. (1)
The first difference lies with company-specific departures, says Jewell. “If we have a top-down view, we keep the general themes we invest in consistent across BlueBay’s conventional and ESG strategy, but certain names within those themes just won’t fit the ESG strategy,” he says, citing a business involved in making military hardware that the team recently decided would be inappropriate.
greener yield?
These strategies invest in riskier credit assets with the goal of offering higher yields to investors as part of a diversified investment strategy, while channelling capital in more socially responsible ways through, for example, restricting investment in areas such as coal extraction.
“In the same way, in periods when the oil price underperforms, the ESG strategy tends to outperform our similar conventional high yield strategy by a little bit,” he says.
BlueBay conducts proprietary ESG assessment alongside external data
The investment process begins with a special set of enhanced screens based on both product type and corporate conduct, says Jewell, which leverage exclusions used by the Norwegian Government Pension Fund and the UN Global Compact. The strategy also uses thresholds to screen out firms involved in tobacco, coal mining, and power generation heavily dependent on thermal coal power, he says, as well as applying screens with regard to certain controversial weapons.
Jewell says that BlueBay takes ESG risks into consideration across all its investing, including conventional strategies, but that “our global high yield ESG strategy sets a much higher bar, beyond investment materiality, on how we integrate ESG into the decision making.”
BlueBay, a fixed income specialist, has been tailoring its ESG approach to the nuances of credit investing since around 2013. Whereas many asset managers rely on third-party data providers, Skiba says that “BlueBay conducts proprietary ESG assessment alongside external data to assess credits, which often yields different outcomes.”
Deeper dives
The granularity helps because the team think that, unlike equity investing, fixed income ESG risks can be strongly influenced by the maturity and credit structure of each instrument. So the high yield investment team can quickly “highlight the aspects of ESG that might impact the valuations of particular high-yield securities,” says Skiba.
CoCo triggers are normally set well below where we would expect to see the point of non-viability for a banking institution today
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But the strategy’s true differentiator, he says, is that the team also leverage BlueBay’s years of investment in its firmwide ESG process “to remove any company we see as having very high ESG risks.”
The different energy and extraction industry weightings are likely to be a persistent driver of difference in performance patterns, explains Jewell. “If the oil price goes to $80, the ESG strategy may be unlikely to perform as well as its sister conventional strategy due to the sorts of investments it has foregone,” he says.
Performance pattern
That view was tested somewhat during the corona crisis turbulence in March 2020, when the team say “the ESG strategy tended to marginally outperform our conventional high-yield strategy, and the damage done to commodity prices was a factor in that.” Conversely, “the conventional strategy tended to outperform the ESG strategy during the recovery phase in April 2020.”
strategies designed to take better account of Environmental, Social, and Governance (ESG) risk factors.
Note: (1) The former is co-owned by the credit analyst and the ESG team; the latter is owned by the credit analyst.
Portfolio profile
The team’s close dialogue with the ESG team is helped by BlueBay’s work since 2018 to make key ESG data points easily accessible within its proprietary platforms. That transparency also helps the team track divergences between external scores and BlueBay’s proprietary internal scores.
The second difference, which has a more profound effect on portfolio-wide performance patterns, lies in the treatment of whole sectors. “By far the largest area of differentiation between the high yield ESG strategy and our similar conventional strategy is in the energy and extraction sectors,” says Jewell, “where the ESG strategy has meaningfully less exposure.”
Performance patterns are one thing, but could the stronger ESG slant give the ESG strategy an edge in performance over the very long term? The industry-wide jury is still out in terms of whether ESG tends to reduce, improve or have no consistent effect on long-term performance, so the team offer a considered answer.
Long look
“One thing we've always said to investors is that while through time we hope to see benefits from our ESG process, many of those potential benefits may accrue to BlueBay’s conventional strategies too, due to our firm-wide stance on ESG,” says Jewell.
At the ESG strategy’s three-year mark, the ESG and conventional strategy were at a similar performance point, he says, having shown a relatively similar performance over the previous three years, though the performance pattern then changed somewhat during and after the crisis and could differ further over time. “We rather hope that any ESG benefits accrue to the ESG strategy particularly strongly,” he says, “but it will be a very long time before we can truly assess that. We regard it as early days, even though we are almost 4 years in now.”
The difference in terms of ESG profile, however, is already marked. Not only does the ESG strategy avoid many investments in individual companies that might worry progressively minded investors, but it can demonstrate a lower weighted average carbon intensity than many similar conventional strategies.
Progressive professionals
As economies roll out recovery plans that incorporate a ‘build back better’ ESG slant, professional investors can now consider taking a similarly responsible route in their search for yield.
The team can quickly highlight ESG aspects that might impact valuations of high-yield securities.
Justin Jewell, Senior Portfolio Manager Andrzej Skiba, Senior Portfolio Manager
BlueBay Global High Yield ESG Bond Fund
BlueBay Global High Yield ESG Bond Fund and BlueBay Global High Yield Bond Fund
Performance Comparison
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Source: BlueBay Asset Management, as at 31 October 2020.
Past performance is not indicative of future performance Performance has been run from 8 February 2017 for comparison purposes when the BlueBay Global High Yield ESG Bond Fund was launched
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That view was tested somewhat during the corona crisis turbulence in March 2020, when the team say “the ESG strategy tended to marginally outperform our conventional high-yield strategy, and the damage done to commodity prices was a factor in that.” Conversely, “the conventional fund tended to outperform the ESG fund during the recovery phase.” (See figure below)
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BlueBay Global High Yield ESG Strategy
Strategy team and ESG team
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Typical number of issuers
100-120
BAML Global High Yield Investment Grade Country Constrained Index (HWIC)
BENCHMARK
8 February 2017
Inception date
UCITS
FUND STRUCTURE
$217m
AUM
Key Facts
The BlueBay Global High Yield ESG Strategy is designed to invest in high yield bonds globally explicitly adhering to environmental, social and governance (ESG) criteria. The ESG strategies employed include negative and norms-based screening, as well as integration and engagement.
Justin Jewell Andrzej Skiba Tim Leary
Portfolio managers
Issuer ESG evaluation process for new investment ideas
Flagging of issuer ESG developments and changes in ESG performance metrics (e.g. in ratings, controversy exposures etc.) for held issuers
Collaboration on issuer ESG engagements
Sector analyst interactions/communications
Strategy level ESG performance monitoring
Click on the icons to reveal the flow of interaction
A highly experienced team-based approach with 26 investment professionals situated in both London (UK) and Stamford (Connecticut, US) with 15 research analysts
BlueBay's team-based approach
Source: BlueBay Asset Management, as at 30 September 2020
The investment team is one of the most experienced within the European leveraged finance market with, on average, 16 years of investment industry experience
An in-house ESG investment risk team working closely with investment team members to generate ESG insights which add value to the credit process
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What is shaping your big picture of investment markets?
Justin: The outlook going forward hinges on two things: first how the recovery continues – and that's part medical including vaccine rollout and part economic. Second, policy makers' willingness to extend schemes if it takes another 3, 6, 9 months to get through any issues.
Andrzej: What we're experiencing right now is investors adapting to a world of near zero interest rates. With investment grade assets trading at the lowest yield in years, there is significant investor willingness to extend credit to high yield companies that might be going through temporary disruption but offer relatively attractive yields – provided those companies are expected to survive.
Can you pick out a key dynamic in post-pandemic markets?
Justin: When it comes to credit selection, we have a deep bench of experienced professionals with rigorous mindsets who know these markets. Most importantly, we are decisive in pushing capital around: we will take concentrated risks in single names when we see asymmetric opportunities in our favour.
What other features of this new market environment play to BlueBay’s strengths?
Andrzej: Also, while we rise or fall as investors on the strength of individual credit calls, we’ve spent time in recent years becoming smarter in translating macro views into segment and individual credit positioning. So in the same way that we engage with individual management teams, challenge business models, and work out the blind spots in particular credit stories – we’re doing the same on the policy front. BlueBay’s credit investors like myself and Justin go to policy meetings, for example, in normal times travelling three or four times a year to Washington DC to meet Federal Reserve and other officials who often say they're not accustomed to meeting credit investors, as opposed to economists or strategists.
Justin Jewell and Andrzej Skiba on both their high yield outlook and ESG integration
Global high yield –
Justin: One difference goes back to the history of the strategy, which we launched in partnership with a consultant and an investor in the Nordic region. Our investors wanted a greater level of ESG in the investment process and therefore they wanted us, in order to ensure that we were delivering that, to start the investment process with an enhanced set of negative screens. Then on top of that, and more importantly, we have our own incremental proprietary overlay that removes from the strategy any company that we see as having very high ESG risks.
How does the Global High Yield ESG Strategy approach differ from the ESG approach included in your conventional strategies?
We hadn't fully appreciated how game-changing it would be to have those explicit ESG numbers and ratings
Lucy Byrne, Senior ESG Analyst
ESG is now considered one of our alpha sources
My-Linh Ngo, Head of ESG Investment
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My-Linh joined BlueBay in July 2014 and leads on ESG integration across the firm’s global assets. She was previously from Schroders Investment Management Ltd where she was an ESG Analyst in the Responsible Investment department and responsible for ESG analysis and engagement. Prior to this, My-Linh was in the Sustainable & Responsible Investment team at Henderson Global Investors. She holds a Masters in Leadership for Sustainable Development from Middlesex University/Forum for the Future, an MSc in Environmental Management Systems and Auditing as well as a degree in Environmental Sciences, both from the University of East Anglia.
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Lucy has been at BlueBay since July 2018, joining initially as an ESG Analyst, becoming a Senior ESG Analyst in January 2020. Her responsibilities are to support the integration of ESG analysis across the firm, working closely with the investment teams. She also assists in our ESG engagement efforts. Prior to this, Lucy was an Assistant Sustainability Manager at KPMG where she worked with companies across a range of sectors and geographies, as well as investors, on their sustainability strategies and reporting and assurance activities. Previous to that she was a waste management and environmental consultant. Lucy has an MSc in Environmental Technology and an MSci in Environmental Geoscience, both from Imperial College London.
Our broad view is that policy makers, particularly monetary policy makers, remain very much on side and we also expect to see medical progress: therefore, for the most part, we'll likely continue to see recovery. But there may be cross winds and sectors where recovery takes time, or is a bit uneven, or just doesn't happen because consumer preferences change.
Andrzej: We’ve actually seen similar patterns to the equity markets: the best performing, quickest recovering segments were tech-driven; the most vulnerable and slowest were deep cyclicals – energy, heavy industrials, and names with stretched capital structures – plus leisure issuers historically seen as defensive but disproportionately hit by Covid-19.
Our approach is embedded into our investment process - something that's paralleled or siloed is not going to work – that’s not integration
Three secrets for ESG success
EMBEDDED
There's many ways to approach ESG investing so we think being very clear to investors – about what we do and don't do – is critical
CLEAR
We’ve separated out fundamental issuer and investment risk scores in a way that suits fixed income
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Is the outlook sustainable?
Higher yields come with higher risks – what performance patterns are you seeing?
Investors are interested in deciphering which business models will work once we have progressed on vaccine roll out and have better therapeutics: for example, we think airlines, especially domestic travel, should return pretty quickly, with more question marks over business models like cruise lines.
Justin: Part of our day-to-day job now is picking through which names will be earlier or later in reopening, perhaps because they are exposed to a younger or older clientele.
Justin is a Senior Portfolio Manager in BlueBay’s Global Leveraged Finance Group. Justin joined BlueBay in April 2009, initially as Head of High Yield Trading, before moving into portfolio management at the beginning of 2012. He has over 17 years’ industry experience and spent a large part of his career at UBS where, most recently, he was Director of High Yield and Distressed Trading in Europe. Justin worked as a senior trader at MKM Longboat LLP between June and November 2008, though he returned to UBS after the fund wound down. Justin holds a BSc in Economics from the London School of Economics and Political Science.
Part of our job now is picking which names will be earlier or later in reopening
Justin Jewell, Partner, Senior Portfolio Manager
Andrzej joined BlueBay in February 2005 and is a Senior Portfolio Manager responsible for the Developed Markets team in the Stamford, Connecticut, office. Andrzej spent his first four years at BlueBay as a credit analyst covering the TMT, utilities and retail sectors for the Investment Grade team. Prior to BlueBay, Andrzej worked for Goldman Sachs as a credit analyst covering European investment grade telecom, media and utility sectors. Andrzej holds a BSc (Hons) in Management and International Business Economics from UMIST and is a CFA charterholder.
What we're experiencing is investors adapting to a world of near zero interest rates
Andrzej Skiba, Partner, Head of US Credit, Senior Portfolio Manager (US-based)
Justin: By far the largest area of differentiation between the ESG strategy and our similar conventional global high yield strategy is meaningfully less exposure to energy and extraction sectors. On top of that, ESG considerations may make a specific business inappropriate for the ESG strategy. But individual decisions, while important, don't usually have a huge influence over the shape and nature of the portfolio.
How does the approach give a special character to your portfolios?
Andrzej: We engage with them on a daily basis. So for example, all those proprietary ESG checkups on individual credits that we invest in are executed in a partnership between the analyst responsible for the credit, and the ESG team. Our ESG team, initially part of the firm’s risk function, has now been integrated into the investment function.
Do you work closely with BlueBay’s specialist ESG team?
So there is a ton of dialogue happening between those groups and we want to integrate them into our day-to-day investment activities as much as is physically possible. I'm involved in the ESG steering group at BlueBay and we're continually looking at how we can further integrate ESG into day-to-day work. And at how we can offer solutions to our clients that take advantage of the hard work we’ve put into developing our ESG capability to where it is right now.
Andrzej: Absolutely. Whenever we're discussing credit stories for investment, ESG is liable to come up. And when we communicate our views on individual credits using our internal cloud-based decision tool, ESG considerations are part of that assessment as well. So ESG is not a separate exercise – it’s an integral part of the investment exercise that we perform for each investment.
Do you spend a lot of time discussing ESG issues during the investment process?
Andrzej: We've been discussing deforestation in Brazil and how some of the Brazilian meat producers – big issuers in the global high yield benchmark – might have contributed to that deforestation. We discussed how BlueBay can engage with companies in the sector and have reached out as a result. So for us this is not just about determining the course of action for our investments, but also about engaging with individual issuers.
Could you describe a recent theme you've discussed with the ESG analysts?
Tim joined BlueBay in January 2012, as Head of Trading, North America within the Global Leveraged Finance Group, before being promoted to his current role in January 2017. Prior to BlueBay he was a director in high yield and distressed credit trading at the Royal Bank of Scotland. Before joining RBS, Tim spent three years as an analyst on the leveraged loan trading desk at Bear, Stearns & Co. Tim holds a BS in Business Administration with Finance concentration from Fordham University.
For the BlueBay team, ESG is also about engaging with individual issuers
Tim Leary, Portfolio Manager (US-based)
Fund Management Team
ESG Team
Explore BlueBay’s unique approach to integrating ESG with My-Linh Ngo and Lucy Byrne
