About Us - Environmental, Social and Governance (ESG)

Western Asset Management's Overarching Approach to ESG

Western Asset believes in long-term, fundamental value-oriented investing using multiple diversified strategies. Our objective is to meet or exceed our investors' performance objectives within their tolerances for risk. We believe that environmental, social and corporate governance (ESG) factors can affect the creditworthiness of fixed-income issuers' securities and therefore impact the performance of fixed-income investment portfolios. Accordingly, we incorporate ESG considerations in investment analysis and decision-making as a matter of good investment principle. Western Asset has adopted an ESG investment policy that seeks to reflect the changing environment in which the Firm and its clients operate, and incorporates ESG considerations into our credit analysis of corporate bond and other debt issuers.

  • ESG and Western Asset Management's Investment Philosophy

    Western Asset is aligned with institutional investors in embracing the growing importance of ESG factors in the investment decision-making process. These factors are wholly consistent with our long-term, fundamental value-oriented investment philosophy.

    The Firm recognizes the importance of softer factors in investing alongside rigorous industry and financial analysis. As a matter of standard business practice, Western Asset's investment analysts include any and all factors that may materially impact cash flow, either positively or negatively. Many such factors are ESG factors. We believe that incorporating ESG issues into fixed-income investing is about ensuring standards are reflected in the price at which the investor lends to an issuer, as well as engagement with the issuer at the point of issue on the price that low ESG standards carry.

    As a fixed-income rather than equity investor, Western Asset can best exercise influence by letting the financial management of companies in which the Firm invests know the extent to which Western Asset seeks compensation for low ESG ratings by demanding a greater premium (or spread) at the point of issue. Companies can be made aware that poor management with respect to ESG issues carries a cost that will be reflected in the price at which it can raise finance in the world’s capital markets.

    All other things being equal, a company that rates highly on ESG factors may be expected to have a better risk/return profile than would otherwise be the case. It would be reasonable to expect that a company meeting high environmental, social and governance standards may have less regulatory risk and may be exposed to less reputational risk than one with low environmental, social and governance standards.

  • Integrating ESG Issues into Our Investment Process

    Western Asset studies and evaluates the macroeconomic and geopolitical landscape as it pertains to challenges and opportunities for industry sectors and individual credits. Environmental, social and corporate governance issues impact many sectors from healthcare to manufacturing, and from energy to agriculture. After evaluating impacts at the sector level, Western Asset's credit analysts look specifically at the impact on individual issuers' ESG factors, which are taken into consideration in formulating the credit and risk profile of the investment. Investments that do not meet the highest standards in terms of E, S or G factors could be deemed at higher risk (for example from regulatory sanctions) and would demand a higher risk premium of that issuer in order to be compensated (via a higher yield) for that risk.

    Western Asset continues to evaluate how ESG is implemented across the investment management industry, and we believe our current framework represents the best tradeoff between seeking superior investment returns and promoting sustainability.

    We consider "G" to be the most important of the three ESG factors. Without good governance (which Western Asset takes to include strong investor relations and financial reporting, among other things), it is hard to be confident that management, leadership and integrity will be in place for the "E" and "S" factors. Good governance should be a fundamental of every business.

    Many of the businesses Western Asset considers for investment have exposure to "E" considerations. These include utilities for which regulation places precise requirements around environmental quality factors. On a broader basis, many sectors of the economy including metals and mining, oil and other heavy industries are subject to more challenging ESG considerations, including pollution abatement, energy consumption and waste recycling.

    Social factors can also impact a company's consumer perception as well as its operations, with labor relations in the automotive industry an example of an "S" factor that Western Asset monitors closely.

    Western Asset evaluates the extent to which businesses in these industries are making efforts to manage such challenges. We view corporate policies pertaining to ESG issues as another aspect of companies' management and a reduction of the operational cost structure of their business, which must be assessed in the process of credit research.

  • Western Asset and United Nations-Supported Principles for Responsible Investing (PRI)

    Western Asset is a signatory to the United Nations-supported PRI initiative-an international network of investors collaborating to put the six Principles for Responsible Investing into practice.1 For investors acting in a fiduciary role, the Principles demonstrate the belief that ESG issues can affect the performance of investment portfolios. In implementing these Principles, signatories contribute to the development of a more sustainable global financial system. Western Asset, as a fixed-income manager, is not an asset-owner but as a PRI signatory, commits to the Principles where consistent with our fiduciary responsibility. We embrace the first Principle to "…incorporate ESG issues into investment analysis and decision-making processes." The Firm is confident that its approach is compliant with the PRI's other Principles regarding disclosure on ESG issues by entities in which we invest, industry engagement to promote the Principles and collaboration on enhancing the effectiveness of the implementation of the Principles. In accordance with principle 6 of the PRI we will report annually on our approach to integrating ESG factors into our investment management process and will include details about the fixed-income assets for which we are fiduciaries.

    1www.unpri.org