ESG Thinking Has Evolved (October 10, 2019)

Alix Steel: Bonnie Wongtrakool of Western Asset Management still with me. You're also in charge of ESG. What's your top trade within ESG right now?

Bonnie Wongtrakool: Well, there are a lot of opportunities with ESG because the way that we view it at Western Asset is we're integrating ESG into our investment process. So it's one factor that goes into our investment decisions. We're looking at financial factors, but we're also looking at ESG factors because we think that that really offers the best way to determine the fundamental value of an investment, within the investment universe of ESG. You know, you do have thematic bonds, as we're just talking about, Ireland just issued. But that's just one small part of the universe. We're seeing different parts of the capital markets develop sustainability, length, loan sustainability, bonds, all that's grown in response to the demand for ESG from investors primarily on other continents, but beginning also in the United States. And so we think that this is an area that will continue to be supported by investor demand and by regulations elsewhere and therefore a place where, you know, we want to be active.

Alix Steel: Bob Dudley, the CEO of BP, talked about ESG yesterday at the Money; Oil Money Conference in London. Here's what he had to say about how he views this base.

Bob Dudley: I think the world of ESG investors is a bit confused now. You know, I think the E sometimes big and the S is small, G sometimes doesn't count. There's four or five different was 30 something different ESG metrics and ratings. So all that's going to sort itself out. There is a difference. Fund managers want certain returns. Governance. People say no, no, no. Fossil fuels. I mean, the markets will have to sort themselves out.

Alix Steel: Bonnie, what's your response to something like that?

Bonnie Wongtrakool: Well, clearly, there's going to be a difference of opinions when you're applying any type of investment analysis technique. And ESG is not an exception. So you know which ESG metrics to look at, which are important. That's going to be the investors decision. And in our case, you know, we do think that there are certain metrics that matter more than others. He referenced Mr. Dudley referenced the third party research funders. And I think that there are very many of them and many of them don't correlate with each other. So what you really need to do when looking at those metrics is drill down into what those ratings mean. We can be somewhat misleading looking at top line ratings, especially in these passive indices. These ESG index indices, because they are going off a number of different metrics, some of which might not be material. So I would recommend that investors really need to roll up their sleeves and think about what matters in terms of the credit worthiness of the issuer when looking at ESG bond investing rather than just taking these third party ratings as they are at face value.

Alix Steel: Ok, fair in terms of returns, what so far have you noticed in returns for ESG focused investments in that lens versus other types of investments? You get the same. Do you have to sacrifice?

Bonnie Wongtrakool: Well, it's interesting because the thinking on this has also evolved because in the past a lot of people would equate ESG with exclusionary investing. So excluding things like fossil fuels or tobacco, and now we have a lot more data and more tools to work with. So we are getting strategies where you're able to achieve ESG objectives without having to exclude. And with those strategies, what we're seeing is that you're not giving up performance. And so during normal working market conditions, you are performing in line. And we're seeing evidence come out that when the market goes down and you have downside risk, that actually these strategies can outperform, they have better risk adjusted returns.

Alix Steel: Interesting. All right, Bonnie, thanks a lot. Really appreciate it. Bonnie Wongtrakool of Western Asset Management..