Integrating ESG factors has long been part of our approach to risk management and potential alpha (excess return) generation within emerging market (EM) corporate bonds.
The ESG profiles of companies within the EM corporate bond universe can vary markedly, making ESG integration essential to investment decision‑making.
Three key ESG dynamics are at play within the EM corporate bond universe: growing investor focus, greater regulation, and an increasing market impact.
Integrating environmental, social, and governance (ESG) factors within our investment process is a long‑standing part of our approach to risk management and potential alpha (excess return) generation. Credit analysts research company fundamentals to identify those that we believe are inefficient or have the potential for ratings upgrades—this includes the consideration of ESG factors alongside traditional financial analysis.
We screen the portfolio using T. Rowe Price’s proprietary Responsible Investing Indicator Model (RIIM). RIIM analysis and the research of our in‑house responsible investing and governance teams provide broad coverage of the ESG risks and opportunities among companies in our universe. It offers a second perspective on the ESG characteristics and any elevated exposures in the portfolio.
Last, we utilize sovereign research and analysis to inform macro and sovereign views that underpin our corporate positioning. An emerging market country with better sovereign ESG characteristics—and a more robust regulatory environment—will typically provide a better backdrop for corporate investing and potentially encourage better corporate ESG practices. RIIM is invaluable here—it evaluates sovereign issuers on ESG criteria. Our sovereign analysts provide added insights on transparency, geopolitical assessments, and social stability factors.
The Integration of ESG Factors Is Essential
Integrating ESG factors is essential to our alpha generation and risk management goals. The ESG profiles of companies within the emerging markets corporate bond universe can vary markedly—there are questionable companies, and there are good ones. Some sectors are more prone to having riskier ESG characteristics, such as extraction industries, while others are leveraged to more sustainable business trends and have shown good progress on certain ESG factors, such as Chinese real estate companies.
Three key ESG risk categories that demand particular attention in the emerging market corporate bond universe are:
1. Social and Political Risk: The policy direction of a country—institutional quality, free speech, rule of law, and wealth equality—can have a profoundly positive or negative impact on its population and businesses. Conversely, improvements in areas like property rights and education can create sustained opportunities in the private sector. Our sovereign analysis is vital to building an in‑depth understanding of the social and political profiles of each country in which we invest.
2. Environmental Risk: In areas such as energy, utilities, and mining, which comprise a relatively large share of the emerging markets universe, a company’s environmental practices can have significant effects on its business. On the positive side, companies that improve their practices are likely to enjoy lower capital costs and regulatory support.
3. Corporate Governance Risk: For emerging markets, this is particularly important. Given the risks inherent in emerging markets lending, we require a high degree of comfort with the history, reputation, and other business relationships of the management teams we support.
ESG Trends to Watch Within Emerging Market Corporate Bonds
There are three dynamics at play here—client demand, regulatory pressures, and markets.
Regulation is also changing rapidly, driving changes in the way companies conduct their business and the extent and quality of their ESG disclosure. Particularly when it comes to environmental regulation, the landscape will be very different going forward. For decades, companies have borne little to no cost for the externalities of pollution or use of natural capital. Markets are increasingly pricing ESG factors into credit risk and spreads (the additional yield that investors require for holding riskier assets). For example, a Brazilian pulp and paper company we recently researched issued a sustainability‑linked bond at a lower cost than traditional debt.
Clients around the globe are increasingly concerned with how ESG factors play a part in their investment portfolios. It’s rare for our institutional client meetings not to feature discussions on ESG.
ESG Factors as a Direct Influence on Investment Decisions
A recent example is our analysis of the impact of climate change on a Russian mining company. The company has infrastructure built on permafrost (ground that remains frozen at zero degrees or below for at least two years consecutively) in northern Russia. As the permafrost layer has begun to thaw and subside due to the warming of the climate, the company’s logistics infrastructure has suffered collapses, including a rail line and a storage tank. These issues will be costly to remedy and will require ongoing investment. As a result, we reassessed the appropriate spread.
Another example is a Chilean utility issuer. The company’s shift to renewables should lower the group’s average carbon intensity. The company is also transitioning its coal assets from providing baseload power generation to providing crucial grid balancing services, which has the potential to facilitate deployment of renewables in the electricity system. These adaptations have potential benefits in a world where momentum is building for a transition to cleaner energy.
This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.
The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.
Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.
The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.
Australia—Issued in Australia by T. Rowe Price Australia Limited (ABN: 13 620 668 895 and AFSL: 503741), Level 50, Governor Phillip Tower, 1 Farrer Place, Suite 50B, Sydney, NSW 2000, Australia. For Wholesale Clients only.
Brunei—This material can only be delivered to certain specific institutional investors for informational purpose upon request only. The strategy and/or any products associated with the strategy has not been authorised for distribution in Brunei. No distribution of this material to any member of the public in Brunei is permitted.
Canada—Issued in Canada by T. Rowe Price (Canada), Inc. T. Rowe Price (Canada), Inc.’s investment management services are only available to Accredited Investors as defined under National Instrument 45-106. T. Rowe Price (Canada), Inc. enters into written delegation agreements with affiliates to provide investment management services.
China—This material is provided to specific qualified domestic institutional investor or sovereign wealth fund on a one-on-one basis. No invitation to offer, or offer for, or sale of, the shares will be made in the People’s Republic of China (“PRC”) (which, for such purpose, does not include the Hong Kong or Macau Special Administrative Regions or Taiwan) or by any means that would be deemed public under the laws of the PRC. The information relating to the strategy contained in this material has not been submitted to or approved by the China Securities Regulatory Commission or any other relevant governmental authority in the PRC. The strategy and/or any product associated with the strategy may only be offered or sold to investors in the PRC that are expressly authorized under the laws and regulations of the PRC to buy and sell securities denominated in a currency other than the Renminbi (or RMB), which is the official currency of the PRC. Potential investors who are resident in the PRC are responsible for obtaining the required approvals from all relevant government authorities in the PRC, including, but not limited to, the State Administration of Foreign Exchange, before purchasing the shares. This document further does not constitute any securities or investment advice to citizens of the PRC, or nationals with permanent residence in the PRC, or to any corporation, partnership, or other entity incorporated or established in the PRC.
DIFC—Issued in the Dubai International Financial Centre by T. Rowe Price International Ltd. This material is communicated on behalf of T. Rowe Price International Ltd. by its representative office which is regulated by the Dubai Financial Services Authority. For Professional Clients only.
EEA ex-UK—Unless indicated otherwise this material is issued and approved by T. Rowe Price (Luxembourg) Management S.à r.l. 35 Boulevard du Prince Henri L-1724 Luxembourg which is authorised and regulated by the Luxembourg Commission de Surveillance du Secteur Financier. For Professional Clients only.
Hong Kong—Issued in Hong Kong by T. Rowe Price Hong Kong Limited, 6/F, Chater House, 8 Connaught Road Central, Hong Kong. T. Rowe Price Hong Kong Limited is licensed and regulated by the Securities & Futures Commission. For Professional Investors only.
Indonesia—This material is intended to be used only by the designated recipient to whom T. Rowe Price delivered; it is for institutional use only. Under no circumstances should the material, in whole or in part, be copied, redistributed or shared, in any medium, without prior written consent from T. Rowe Price. No distribution of this material to members of the public in any jurisdiction is permitted.
Korea—This material is intended only to Qualified Professional Investors upon specific and unsolicited request and may not be reproduced in whole or in part nor can they be transmitted to any other person in the Republic of Korea.
Malaysia—This material can only be delivered to specific institutional investor upon specific and unsolicited request. The strategy and/or any products associated with the strategy has not been authorised for distribution in Malaysia. This material is solely for institutional use and for informational purposes only. This material does not provide investment advice or an offering to make, or an inducement or attempted inducement of any person to enter into or to offer to enter into, an agreement for or with a view to acquiring, disposing of, subscribing for or underwriting securities. Nothing in this material shall be considered a making available of, solicitation to buy, an offering for subscription or purchase or an invitation to subscribe for or purchase any securities, or any other product or service, to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the laws of Malaysia.
New Zealand—Issued in New Zealand by T. Rowe Price Australia Limited (ABN: 13 620 668 895 and AFSL: 503741), Level 50, Governor Phillip Tower, 1 Farrer Place, Suite 50B, Sydney, NSW 2000, Australia. No Interests are offered to the public. Accordingly, the Interests may not, directly or indirectly, be offered, sold or delivered in New Zealand, nor may any offering document or advertisement in relation to any offer of the Interests be distributed in New Zealand, other than in circumstances where there is no contravention of the Financial Markets Conduct Act 2013.
Philippines—THE STRATEGY AND/ OR ANY SECURITIES ASSOCIATED WITH THE STRATEGY BEING OFFERED OR SOLD HEREIN HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES REGULATION CODE. ANY FUTURE OFFER OR SALE OF THE STRATEGY AND/ OR ANY SECURITIES IS SUBJECT TO REGISTRATION REQUIREMENTS UNDER THE CODE, UNLESS SUCH OFFER OR SALE QUALIFIES AS AN EXEMPT TRANSACTION.
Singapore—Issued in Singapore by T. Rowe Price Singapore Private Ltd., No. 501 Orchard Rd, #10-02 Wheelock Place, Singapore 238880. T. Rowe Price Singapore Private Ltd. is licensed and regulated by the Monetary Authority of Singapore. For Institutional and Accredited Investors only.
South Africa—T. Rowe Price International Ltd (“TRPIL”) is an authorised financial services provider under the Financial Advisory and Intermediary Services Act, 2002 (FSP Licence Number 31935), authorised to provide “intermediary services” to South African investors.
Switzerland—Issued in Switzerland by T. Rowe Price (Switzerland) GmbH, Talstrasse 65, 6th Floor, 8001 Zurich, Switzerland. For Qualified Investors only.
Taiwan—This does not provide investment advice or recommendations. Nothing in this material shall be considered a solicitation to buy, or an offer to sell, a security, or any other product or service, to any person in the Republic of China.
Thailand—This material has not been and will not be filed with or approved by the Securities Exchange Commission of Thailand or any other regulatory authority in Thailand. The material is provided solely to “institutional investors” as defined under relevant Thai laws and regulations. No distribution of this material to any member of the public in Thailand is permitted. Nothing in this material shall be considered a provision of service, or a solicitation to buy, or an offer to sell, a security, or any other product or service, to any person where such provision, offer, solicitation, purchase or sale would be unlawful under relevant Thai laws and regulations.
UK—This material is issued and approved by T. Rowe Price International Ltd, 60 Queen Victoria Street, London, EC4N 4TZ which is authorised and regulated by the UK Financial Conduct Authority. For Professional Clients only.
USA—Issued in the USA by T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore, MD, 21202, which is regulated by the U.S. Securities and Exchange Commission. For Institutional Investors only.
© 2021 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.
