PIMCO credit analyst Christian Schuetz discusses the Environmental Social and Governance (ESG) factors he looks at when evaluating the European utilities sector, and why understanding these is critical for thorough credit analysis.
Q: Why is it important to integrate ESG factors in credit analysis?
A: The idea of incorporating ESG factors in an investment process has been growing in importance and is a trend that looks set to stay. In part this reflects increased demand from investors who seek more than just financial return, and wish to align themselves with processes that reflect this. But it also makes good investment sense.
At PIMCO, we seek to deliver risk-adjusted returns for our clients in a manner that is sustainable over the long term. That means making sure that the investments we make on their behalf represent business models that are competitive not only today but well into the future, and this requires looking at ESG. In European utilities for example, which is the area I focus on, many large vertically integrated companies are facing big challenges as a result of structural changes in the market. Most of these changes are directly connected to "E", "S" or "G".
Q: Can you provide an example of how ESG factors have influenced an issuer's credit quality?
A: A good example of this is RWE, a German-based vertically integrated utility, which has seen its credit rating fall from BBB+ in 2014 to BBB- today. A combination of