Portfolio Customization for Effective ESG High Yield Implementation

Posted on September 16, 2021

In a number of recent blogs, we discussed ESG implementation and whether it is possible to construct a dedicated high yield ESG portfolio that meets the ESG objectives of its investors. Ultimately, DDJ strongly believes that an investment manager can implement a high yield ESG strategy that pursues a dual mandate: provide high yield investors with strong risk-adjusted returns while also contributing a positive ESG impact.

We believe a high yield ESG strategy should be customized to address the ESG considerations that are most important to a particular investor. Moreover, every credit should be included for a clearly articulated ESG reason with an overriding goal to lower the cost of capital for companies that provide a positive ESG impact consistent with the portfolio’s overall ESG objectives. Finally, engagement with both management and owners of portfolio companies can and should be another powerful tool in implementing such a strategy.

In June 2020, DDJ launched its own Environmental Sustainability High Yield Strategy via a simulated portfolio. The investment objective of the strategy is to maximize total returns while specifically focusing on environmental sustainability. As such, particular consideration is given by DDJ’s research team to the contribution or response of the underlying issuers to certain environmental sustainability challenges, such as climate change, natural resources use, pollution and waste. The strategy seeks to identify resilient businesses that help mitigate or potentially benefit from evolving environmental issues, trends and regulations. The simulated portfolio avoids exposure to fossil fuel industries, which contributes to, but is not the sole reason for, its significantly lower carbon intensity relative to the benchmark. If you are interested in more detailed information on the strategy, please contact investorrelations@ddjcap.com.

In addition to the Environmental Sustainability High Yield Strategy, DDJ has the capability to customize ESG integration and portfolio construction to align with other ESG objectives. For example, in February 2021, an existing client approached DDJ to see whether we could create a high yield portfolio where each holding aligned with and supported at least one of the UNPRI’s Sustainable Development Goals (“SDGs”). The client highlighted six specific SDGs that focus broadly on having a positive Equality and Environmental impact –  topics that are particularly important to the client (and its underlying investors) from an ESG impact perspective.

Based on the parameters outlined by the client, DDJ constructed a diversified simulated “paper” portfolio (the “DDJ sustainable development goals high yield portfolio”) in which every holding is aligned with at least one SDG, and over 90% of the net asset value of the portfolio supports at least one of the six specific SDGs identified by the client. Consistent with our investment process, DDJ constructed the portfolio using bottom-up fundamental analysis, with each holding in the portfolio supported by an ESG investment thesis that articulates the reasoning for why such holding was appropriately included in a portfolio with the custom ESG objectives described above.

DDJ recognizes that a consensus has not yet been established with respect to some of the views expressed in this paper. However, as the high yield marketplace develops more nuanced views of ESG and as institutional investors increasingly choose their investment managers based on their ability to achieve various ESG objectives, we believe that our approach to ESG investing, premised upon the fundamental analysis of each issuer, will gain traction. As ESG becomes more and more of a priority for the broader investment community, the larger the tangible difference the high yield asset class can make by affecting issuers’ cost of capital to achieve specific ESG objectives.

Interested in taking a deeper dive on ESG in the high yield space? The above post is an excerpt from our 2021 white paper, Dedicated ESG High Yield Strategies: Can They Achieve Their Objectives? We invite you to download your free copy of the white paper, available below. 

 

Dedicated ESG High Yield Strategies

 


The information and views expressed herein are provided for informational purposes only, and do not constitute investment advice, are not a guarantee of future performance, and are not intended as an offer or solicitation with respect to the purchase or sale of any security. The inclusion of particular investment(s) herein is not intended to represent, and should not be interpreted to imply, a past or current specific recommendation to purchase or sell an investment. Any projections, outlooks or estimates contained herein are forward-looking statements based upon specific assumptions and should not be construed as indicative of any actual events that have occurred or may occur. This material has been prepared using sources of information generally believed to be reliable; however, its accuracy is not guaranteed. Investing involves risk, including loss of principal. Investors should consider the investment objective, risks, charges and expenses carefully before investing with DDJ.
Past performance is no guarantee of future returns.