ESG & Sustainable Investing

Last week Oodle Financial Services successfully priced its fifth UK Auto ABS transaction, Dowson 2022-1.

Russia’s invasion of Ukraine has triggered fresh debate about ESG considerations in fixed income, particularly when it comes to emerging markets assets.

We can model all kinds of credit risk as long as there is enough protection in the structure for investors to get comfortable with a degree of residual value risk.

As companies and individuals adopt sustainable practices, we believe the potential exists for inflationary consequences.

It is hard to draw any immediate conclusion from this transaction other than Repsol's notable persistence to obtain sustainable financing.

In both instances, the good intentions of the regulator and the authorities are clear… But at the same time both changes have the potential to cause an increasingly undesired side effect.

We have a high opinion of Kensington as a mortgage lender and when we score it for ESG as part of our investment analysis it performs very well even without this latest Green initiative, but we do feel it can stretch further.

As long as coal usage is not illegal, a private buyer of any origin will be able to purchase these assets cheaper and run them for as long as possible with no regard for ESG matters.

Tobacco company bond spreads were volatile last week on news that the Biden administration is exploring a ban on menthol cigarettes and may pursue a policy to reduce nicotine levels in all cigarettes to non-addictive or minimally addictive levels. Rumours about an increased tobacco tax also surfaced, further shaking up the industry.

ESG conscious investors, ourselves included, of course, are applauding this brave decision by Barclays to put their conscience before profit, but they are not the first to do so.

There are many other aspects of SFDR to discuss and we expect the market to take some time to fully adjust.

In terms of execution, it is difficult to assess any ‘ESG premium’ in Brass 10 given the overall strong demand, and in our view it’s still early to weigh the importance of a ‘social’ label for ABS investors.