With the launch, M&G follows in the footsteps of BlueBay Asset Management which launched a global high-yield ESG strategy in February this year.
The fund is co-managed by James Tomlins and Stefan Isaacs, the same duo that already manages M&G’s conventional global high yield bond fund.
The new high-yield bond fund uses a two-pronged ESG screening process.
Firstly, it screens out companies from the ‘sin sectors’ of tobacco, alcohol, adult entertainment, gambling, thermal coal, defence and weapons. The fund also excludes companies that are in breach of the UN Global Compact Principles.
As such, about 10% of the US high-yield universe is excluded, and 15% of the European high-yield universe.
As a second step, “any companies that are classified as industry laggards displaying poor ESG credentials compared to its industry peers” are filtered out, on the basis of MSCI’s ESG company ratings.
A skew to Europe
Since more than a quarter of US companies are dropped because of their poor ESG ratings (B or CCC) alone, only 62.4% of the US high-yield remains after providing for all exclusions. For European high-yield, it is 71.3%.
“A global ESG high yield strategy might therefore be expected to display a slight bias towards Europe, given the region’s stronger ESG credentials,” Tomlins said.
Since the US high-yield market dwarfs its European equivalent in terms of size, Tomlins does “not necessarily expect significant geographic differences between an ESG high yield strategy and a conventional high yield strategy,” however.
“From a sector perspective, an ESG high yield strategy would differ slightly from a conventional high yield strategy as a result of sector exclusion.
“However, the excluded sectors account for a relatively small part of the high yield market, and the ESG high yield universe still offers good sector diversification with no single industry dominating,” he adds.
“Furthermore, employing a sophisticated ESG rating methodology – which assesses a company’s ESG performance relative to its industry peers rather than in absolute terms – can help ensure that a portfolio is not skewed to a few individual sectors.”