The authors discuss how their investment firm uses environmental and social as well as financial considerations to produce superior fixed-income returns for its limited partners. The firm is committed to the idea that, by making ESG analysis part of its deal sourcing, underwriting, monitoring, issuer engagement, and portfolio management decisions, such labor-intensive practices end up providing valuable investment insights that help drive long-term value creation.
Using three of its investments as case studies—two involving short credit positions and one long position—the authors show how the incorporation of ESG in leveraged credit analysis has not only differentiated its approach, but proved effective in identifying undervalued (and distressed) debt as well as overvalued credits ripe for a fall. Conviction about the firm’s two credit shorts rested on fundamental analysis reinforced by social and governance considerations—one involving opioids and price gouging, the other a conflicted governance structure. The third case involved investment in the distressed credit of a California utility premised on both environmental tailwinds from investments in renewables and a view of the bankruptcy process, triggered by California wildfire liabilities, as a social and economic forum for accomplishing an overall welfare-increasing reassignment of risks and rewards—one likely to benefit society as a whole as well as (some) investors.