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ESG in Fixed Income: A marathon, not a sprint

Director of Fixed Income ESG, Natasha Page, explains that Janus Henderson’s Fixed Income ESG efforts, while facilitating change towards a more sustainable future, always seek to focus on transparency with clients, understanding their preferences and meeting their specific objectives.

Natasha Page

Natasha Page

Director of Fixed Income ESG


15 Jun 2023
7 minute watch

Key takeaways:

  • Janus Henderson’s ESG investment philosophy in fixed income is integration over exclusion. We allocate capital to issuers with varying ESG profiles, not only ESG leaders. We actively work with companies to ensure that their most financially material ESG risks are being managed thoughtfully and progressively.
  • Prominent ESG themes that Janus Henderson fixed income has noted for 2023 include biodiversity, human rights and labour relations (with a focus on supply chain management), ESG governance and regulation (both in terms of volume and fragmentation across regions).
  • Janus Henderson fixed income works transparently with clients to deliver ESG solutions that they are looking for and that are relevant to them. Typically, we are being asked to maximise returns for different levels and types of market risks, and sustainability factors.

 

At Janus Henderson, we believe integrating environmental, social, and governance (ESG) considerations that financially impact returns makes us better investors. Our ESG approach is thoughtful, practical, research-based, and forward-looking.

 

Janus Henderson’s role as a fixed income manager in relation to ESG

As stewards of our clients’ assets, we need always to be aware of what our clients want. And unsurprisingly, they want different things when it comes to ESG, which reflects their preferences, which, in turn, depends on, for example, the type of client they are, or where they are located. That said, one of the common themes we are seeing is the desire to solve for multiple objectives: investment returns and sustainability.

Clients are asking us to maximise returns for different levels and types of market risks, and sustainability factors. This is where we see our role and our opportunity as an active asset manager because it is what we do every day: maximising returns while minimising risks. In the case of ESG, it can sometimes be more difficult than it first appears, because conversations can get derailed by debates around the weight that should be applied to each objective.

At the same time, our clients do not want to forego returns. They want to know how to be sustainable without hindering returns – or at least minimise any return degradation. Our opportunity here is to help facilitate change towards a more sustainable future, whilst acting in the interests of our clients, and this is what being a global asset manager like Janus Henderson gives you. When it comes to ESG investing, we act globally because we appreciate that no individual regional approach will work for all.

Following the ESG backlash in the United States, what has changed?

In the US, the subject of ESG has been heavily politicised, resulting in some extreme consequences for the investment communities in certain parts of the country. In Europe, there has been some cooling towards ESG, largely driven by energy security concerns, but it is still very much a priority across the continent.

Curiously, one fact to point out is that flows in 2022 into ESG corporate credit funds held up better than flows into non-ESG equivalents, including in the US, and this trend has continued so far into 2023. I think it is important to remind ourselves that ESG is not only about E, or environmental, which has been, essentially, the focus of controversy in the US. It is also very much about S, social, and G, governance factors, both of which are absolutely instrumental in ensuring that a company is a long-term business success.

So, thinking about what has changed. It makes it harder to talk about ESG, which goes back to my point earlier, that as a manager of client money, we are reminded to keep in mind what clients actually want. But we also need to show our clients the meaning behind ESG and that it doesn’t harm investors.

In fixed income at Janus Henderson, our ESG investment philosophy is integration over exclusion. This means that we allocate capital to issuers with varying ESG profiles, not only ESG leaders. We actively engage with companies with higher ESG risk profiles to understand how they are managing these risks. This gives us an opportunity to be more forward looking. It helps us identify improving stories and, at the same time, it creates an opportunity to support transition.

In reality, imposing a blanket exclusion on higher polluting sectors, for example, does not help solve for the broader environmental issues, whereas understanding transition and progress does. We work with companies, therefore, to ensure that the most financially material ESG risks are being managed thoughtfully and progressively. We do this through engaging with them and following up on those engagements.

ESG engagement at JHI Fixed Income

The traditional and original association of engagement and stewardship has largely been with equity holders through their voting rights. However, as bondholders, we help companies access markets for financing their business activities and therefore have a great ability to play a key role in stewardship of our investee companies. For us in fixed income, engagement is integral to our ESG assessment and ultimately feeds into our investment decisions.

We see ESG engagement as fulfilling a dual objective: to ensure we understand how a company is addressing financially material ESG risks and to facilitate positive change. For instance, by challenging a company’s targets and commitments, we help promote transition. We also bring into our engagement with companies the most topical ESG themes prevalent in the markets; those that   investors are concerned with and that are financially material for companies’ business profiles.

Key themes for 2023 and beyond

We constantly monitor the developments of the most topical ESG trends and issues that investors are concerned about. Ultimately, these are driven by broader societal influences and investor sentiment. But for us, it is important to make sure that we focus on what is important to our clients. So, we speak to clients and analyse what questions they raise and what they focus on.

For 2023, we have noted the themes of biodiversity, human rights and labour relations, with a focus on supply chain management, and ESG governance. These are the more prominent themes for 2023 from our perspective.

By ESG governance, by the way, I mean greater scrutiny of targets and commitments that are set by companies. Asking them questions like: How do these ESG targets align with overall company strategy? Or, how is management being held accountable for achieving these targets?

These are, in fact, our engagement themes that we have picked for 2023 that we will be focusing our efforts on across our investee companies as far as they are material to their business profiles.

Another important theme for 2023 is regulation. Both the volume of new key ESG regulation coming in, or expected, and its fragmented nature, is adding to the complexity, both for companies and asset managers.

For instance, looking at the three markets – Europe, the UK and the US – there is no direct comparison between the EU’s Sustainable Financial Disclosure regulation, the proposed Sustainable Disclosure regulation in the UK, and the US SEC’s Fund Categorisation and Disclosure regime. Being global in our approach, Janus Henderson is well positioned, we believe, to navigate this space because we can draw on our deep regional knowledge, giving us the opportunity to respond to this challenge.

Key areas of focus at JHI Fixed Income ESG

Despite the challenges we have discussed in respect of ESG investing, one thing is clear. It isn’t going away. Its pace may have slowed in the US, for example, and it may see some ups and downs still in its journey. But it is here to stay. And global society – our end clients – continue to develop their attitudes towards a more sustainable future. So, our focus must be on being constantly tuned into those developments and on listening to our clients carefully.

We want to make sure that we monitor the broader market ESG trends, including changes in sentiment and societal demands, and that we work with our clients to deliver ESG solutions that they are looking for and that are relevant to them. I think it is important to recognise that ESG is not a sprint; it is a marathon. It must therefore be run consistently and on an inclusive basis. And so, we will continue to support companies, including those in more polluting industries, for example, that are making efforts to transition and to address key material ESG risks, and we will do this through our investment and active engagement with them.

One final point. Divergence between regions and our client expectations has made it even clearer for us that we should be transparent with our clients, which remains our key priority. This is how we can fulfil our role as a manager of our clients’ money, including in the ESG space.

 

Please note: Environmental, Social and Governance (ESG) or sustainable investing considers factors beyond traditional financial analysis. This may limit available investments and cause performance and exposures to differ from, and potentially be more concentrated in certain areas than, the broader market.

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.

 

Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

 

The information in this article does not qualify as an investment recommendation.

 

Marketing Communication.

 

Glossary

 

 

 

Important information

Please read the following important information regarding funds related to this article.

The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Janus Henderson Investors Europe S.A. Janus Henderson Investors Europe S.A. may decide to terminate the marketing arrangements of this Collective Investment Scheme in accordance with the appropriate regulation. This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.
    Specific risks
  • An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise (or are expected to rise). This risk is typically greater the longer the maturity of a bond investment.
  • The Fund invests in high yield (non-investment grade) bonds and while these generally offer higher rates of interest than investment grade bonds, they are more speculative and more sensitive to adverse changes in market conditions.
  • Some bonds (callable bonds) allow their issuers the right to repay capital early or to extend the maturity. Issuers may exercise these rights when favourable to them and as a result the value of the Fund may be impacted.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
  • When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
  • CoCos can fall sharply in value if the financial strength of an issuer weakens and a predetermined trigger event causes the bonds to be converted into shares/units of the issuer or to be partly or wholly written off.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Janus Henderson Investors Europe S.A. Janus Henderson Investors Europe S.A. may decide to terminate the marketing arrangements of this Collective Investment Scheme in accordance with the appropriate regulation. This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.
    Specific risks
  • An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall. High yielding (non-investment grade) bonds are more speculative and more sensitive to adverse changes in market conditions.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise (or are expected to rise). This risk is typically greater the longer the maturity of a bond investment.
  • Some bonds (callable bonds) allow their issuers the right to repay capital early or to extend the maturity. Issuers may exercise these rights when favourable to them and as a result the value of the Fund may be impacted.
  • Emerging markets expose the Fund to higher volatility and greater risk of loss than developed markets; they are susceptible to adverse political and economic events, and may be less well regulated with less robust custody and settlement procedures.
  • The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • The Fund may incur a higher level of transaction costs as a result of investing in less actively traded or less developed markets compared to a fund that invests in more active/developed markets.
  • Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
  • CoCos can fall sharply in value if the financial strength of an issuer weakens and a predetermined trigger event causes the bonds to be converted into shares/units of the issuer or to be partly or wholly written off.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
  • In addition to income, this share class may distribute realised and unrealised capital gains and original capital invested. Fees, charges and expenses are also deducted from capital. Both factors may result in capital erosion and reduced potential for capital growth. Investors should also note that distributions of this nature may be treated (and taxable) as income depending on local tax legislation.
The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Janus Henderson Investors Europe S.A. Janus Henderson Investors Europe S.A. may decide to terminate the marketing arrangements of this Collective Investment Scheme in accordance with the appropriate regulation. This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.
    Specific risks
  • An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise (or are expected to rise). This risk is typically greater the longer the maturity of a bond investment.
  • The Fund invests in high yield (non-investment grade) bonds and while these generally offer higher rates of interest than investment grade bonds, they are more speculative and more sensitive to adverse changes in market conditions.
  • Some bonds (callable bonds) allow their issuers the right to repay capital early or to extend the maturity. Issuers may exercise these rights when favourable to them and as a result the value of the Fund may be impacted.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
  • CoCos can fall sharply in value if the financial strength of an issuer weakens and a predetermined trigger event causes the bonds to be converted into shares/units of the issuer or to be partly or wholly written off.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Janus Henderson Investors Europe S.A. Janus Henderson Investors Europe S.A. may decide to terminate the marketing arrangements of this Collective Investment Scheme in accordance with the appropriate regulation. This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.
    Specific risks
  • An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise (or are expected to rise). This risk is typically greater the longer the maturity of a bond investment.
  • The Fund invests in high yield (non-investment grade) bonds and while these generally offer higher rates of interest than investment grade bonds, they are more speculative and more sensitive to adverse changes in market conditions.
  • Some bonds (callable bonds) allow their issuers the right to repay capital early or to extend the maturity. Issuers may exercise these rights when favourable to them and as a result the value of the Fund may be impacted.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
  • When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
  • CoCos can fall sharply in value if the financial strength of an issuer weakens and a predetermined trigger event causes the bonds to be converted into shares/units of the issuer or to be partly or wholly written off.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Janus Henderson Investors Europe S.A. Janus Henderson Investors Europe S.A. may decide to terminate the marketing arrangements of this Collective Investment Scheme in accordance with the appropriate regulation. This is a marketing communication. Please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions.
    Specific risks
  • An issuer of a bond (or money market instrument) may become unable or unwilling to pay interest or repay capital to the Fund. If this happens or the market perceives this may happen, the value of the bond will fall. High yielding (non-investment grade) bonds are more speculative and more sensitive to adverse changes in market conditions.
  • When interest rates rise (or fall), the prices of different securities will be affected differently. In particular, bond values generally fall when interest rates rise (or are expected to rise). This risk is typically greater the longer the maturity of a bond investment.
  • Some bonds (callable bonds) allow their issuers the right to repay capital early or to extend the maturity. Issuers may exercise these rights when favourable to them and as a result the value of the Fund may be impacted.
  • Emerging markets expose the Fund to higher volatility and greater risk of loss than developed markets; they are susceptible to adverse political and economic events, and may be less well regulated with less robust custody and settlement procedures.
  • The Fund may invest in onshore bonds via Bond Connect. This may introduce additional risks including operational, regulatory, liquidity and settlement risks.
  • The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
  • If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
  • When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • Some or all of the ongoing charges may be taken from capital, which may erode capital or reduce potential for capital growth.
  • CoCos can fall sharply in value if the financial strength of an issuer weakens and a predetermined trigger event causes the bonds to be converted into shares/units of the issuer or to be partly or wholly written off.
  • The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Natasha Page

Natasha Page

Director of Fixed Income ESG


15 Jun 2023
7 minute watch

Key takeaways:

  • Janus Henderson’s ESG investment philosophy in fixed income is integration over exclusion. We allocate capital to issuers with varying ESG profiles, not only ESG leaders. We actively work with companies to ensure that their most financially material ESG risks are being managed thoughtfully and progressively.
  • Prominent ESG themes that Janus Henderson fixed income has noted for 2023 include biodiversity, human rights and labour relations (with a focus on supply chain management), ESG governance and regulation (both in terms of volume and fragmentation across regions).
  • Janus Henderson fixed income works transparently with clients to deliver ESG solutions that they are looking for and that are relevant to them. Typically, we are being asked to maximise returns for different levels and types of market risks, and sustainability factors.