As delegated investment advisor of the GAM Star Credit Opportunities Funds*, we at Atlanticomnium have a fiduciary duty to act in the best long-term interests of our clients and their beneficiaries by seeking to protect and enhance their economic interest when making investment decisions.
It is within this context that we undertake our responsible investment and corporate governance activities.
As a starting point, it is important to note that our investment process focuses on identifying quality issuers of credit and it is our belief that such well-managed companies should deal effectively with all aspects of their businesses. However, we have sought to strengthen our investment decision making process by integrating the consideration of stewardship activities and Environment Social and Governance (ESG) analysis into our credit analysis framework. Moreover, we aim to increase transparency to clients by providing independent third party ESG ratings and data for our funds.
Integration of ESG factors into our investment process
As long-term buy and hold investors, our investment team conducts in-depth fundamental analysis of issuers, spanning both financial and extra-financial aspects. This means that several aspects of ESG have long been part of our analysis framework, such as considering the corporate governance of financials (banks and insurers). Additionally, we have refrained from investing in a number of industries for ethical reasons, including: tobacco, alcohol, weapons and gambling.
Nevertheless, in the second half of 2019 we undertook a project aimed at formally integrating ESG factors into our investment process, leveraging the experience and expertise of both GAM Investments’ in house Governance and Responsible Investment (GRI) team and external consultants’ KKS Advisors. The result is a fully integrated approach, where ESG factors are incorporated in the team’s credit research process in a manner that is consistent with our long-established bottom-up research philosophy.
Overview of integrated ESG credit analysis framework
ESG is now one of the key building blocks of our credit analysis framework and directly influences analysts’ recommendations and subsequent investment decisions.
Our ESG analysis focuses on the potential impact of these factors on issuers’ credit profiles and enhancing our research capabilities. To achieve this, we are working with external ESG data provider MSCI, one of the leaders in this space, to help identify key ESG trends and topical issues material to the analysis of issuers. The result is that our research notes will incorporate an ESG section, incorporating (non-exhaustive) the issuers’ ESG rating, rating trends, key ESG focus areas, controversies, underlying rating drivers and implications for the credit profile. For issuers with poor ESG ratings, rating downgrades, controversies and other risks, there will be an extra layer of analysis to assess the implications for the credit profile.
In-line with our wider fundamental research process, analysis will go well beyond the ESG rating and trends to focus on the underlying drivers of the rating – thereby harnessing the investment team’s proven ability to add value through research. As well as including ESG into our formal research notes, we will be closely monitoring any new ESG ratings changes and controversies on an ad-hoc basis. Ultimately, this ESG analysis will become one of the tools we use to assess the opportunities and risks as part of our research and investment decision-making process, any exclusions are unlikely to be based purely on low ESG ratings.
Engagement with issuers is also a key priority of our ESG agenda. As large institutional investors, and important providers of capital and funding to issuers, we have the ability to influence management teams even though we have no formal voting power (unlike equity holders). Interaction with the senior management of our issuers has long been an integral part of our investment process and has resulted in deep access and strong relationships.
Extending this engagement to cover ESG topics is a natural development and will be a strong support for our ESG plan. An example of how we are already covering ESG topics in our engagement is a recent update call with one of the largest Australian banks, where we challenged management on their handling of recent anti-money laundering (AML) failures, that will likely result in large fines and potential reputation implications (governance issues). We also discussed their consideration of the potential impact of the wildfires in Australia and the actions they are taking (social and environmental issues).
The final part of our ESG journey is to become a signatory to the United Nations Principles of Responsible Investment in 2020. The resulting reporting obligations will provide transparency and accountability of our ESG approach, by detailing our ESG efforts on an annual basis.
Although a considerable amount of work has already commenced on our ESG project, we expect it to be fully implemented by the fourth quarter of 2020 and will incorporate the production of internal research which has fully integrated ESG factors, ESG engagement and the monitoring of ESG developments for portfolio companies.
In addition, by end of June 2020 we will start to disclose and distribute third party (MSCI) ESG ratings and reports for our range of GAM Star Credit Opportunities* funds.
We are fully committed to integrating ESG factors in to our investment process, with the conviction that taking ESG factors into account will enhance our research process and help generate long-term value for our investors. The consideration of ESG factors complements our high conviction strategy of seeking the quality issuers that are expected to add value for stakeholders over the long-term and therefore positively reinforces our buy and hold investment philosophy.
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* The full legal name of the funds are GAM Star Fund plc. – GAM Star Credit Opportunities (USD), GAM Star Fund plc. – GAM Star Credit Opportunities (GBP) and GAM Star Fund plc. – GAM Star Credit Opportunities (EUR).