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.