In fixed income investing, security analysis has traditionally focused on financial metrics, such as company earnings, strength of balance sheet and cash flow, as investors seek to measure the risks and potential value associated with a security. However, we believe that this exclusive focus on financial statements overlooks other information critical to gaining a complete understanding of an issuer’s fundamentals. In our view, strong security selection relies on a deep, multidimensional understanding of business risks and opportunities. Impact investing, with its emphasis on generating measurable social and environmental outcomes alongside the primary objective of financial returns, can significantly enhance this multidimensional analysis by uncovering layers of risk and opportunity often overlooked by conventional analysis. Here, we highlight how we believe applying an “impact lens” can support credit research and security selection and can lead to more robust portfolio construction.

Complementing traditional credit analysis

We believe that by evaluating issuers through an impact lens, investors can unearth unique insights into the longer-term viability of business models. For example, applying an impact perspective involves a thorough examination of an issuer’s products and services. Investors will not only seek to establish how the issuer’s offering helps end beneficiaries but also uncover any risks that could reduce the overall contribution to society and the environment and indirectly undermine an issuer’s business model. Assessing an issuer’s ability to generate sustained impact over time also requires an in-depth analysis of its operations and governance, the broader dynamics within the markets and demographics it serves, and any structural tailwinds or challenges that could affect its longer-term impact potential. A better understanding of these factors can complement traditional credit analysis by providing additional datapoints on the issuer and the sector in which it operates, which, ultimately, may translate into better investment decisions. 

Example 1: The value of impact analysis 

Objective: 

• Assess emerging markets telecommunications issuer against impact criteria.
• Assess creditworthiness with a view to a potential investment.

Action: 

• On-the-ground visit to offices, tower sites and local communities in Central Africa.
• Meetings with management, interviews with beneficiaries of expanded internet access.

Unique insights:

• First-hand view of the investment opportunity. A direct visit helped us to understand the company’s operations and infrastructure as well as culture. It also allowed us to get a much better sense of the challenges associated with national grid connectivity as well as the structural opportunity this represents for this company. We also saw how the company is seeking to execute its ambitious plans to increase use of renewable energy at tower sites.
• Experiencing the positive impact of expanded internet access on local communities through in-depth interviews. These interviews allowed us to gauge consumer satisfaction directly. We believe that positive sentiment stemming from the empowerment of individuals, businesses and entire communities should translate into strong customer retention and increased market share over time, reinforcing our fundamental outlook for this issuer.

Uncovering new engagement angles

Impact investing can also contribute to a more robust dialogue with issuers. For example, impact investors may seek to engage with issuers on topics such as impact key performance indicator (KPI) performance or how an issuer’s evolving business model is aligning with a specific impact theme. 

Engaging with issuers on impact-related topics encourages transparency and can lead to a deeper understanding of an issuer’s business, industry dynamics and likely growth areas. The resulting insights can help identify and assess investment risks and opportunities outside the realms of traditional financial statement analysis. 

Example 2: The value of impact engagement 

Objective:

• Engage with a non-profit conservation organisation that issues debt, to gain a deeper understanding of the low marginal annual increase in their impact KPI.
• Understand how the issuer considers biodiversity in its business decisions, as well as how it addresses potential negative externalities given its involvement in the timber industry.

Action: 

• Organised a call with the issuer’s chief financial officer, directors and senior managers.
• Ahead of the call, we shared questions and observations in order to foster a constructive dialogue.

Unique insights: 

• Better awareness of the issuer’s growth plans and future financing needs by gaining an understanding of the key drivers of the impact KPI, such as the availability of land, capital and opportunities to receive grant funding.
• Reassurance that the issuer is adequately managing material negative externalities, through our dialogue regarding the issuer’s approach to biodiversity, a major economic risk for the timber industry. Importantly, uncovering how the issuer manages this risk is not just significant from an impact angle, but also matters from an ESG and financial perspective. We learned, for example, how the issuer uses third-party tools to ascertain which specific areas require protection to maintain biodiversity, how the issuer closely engages with government agencies to evidence consideration of biodiversity and how the issuer pursues independent certification under the Sustainable Forestry Initiative (SFI) standard. 

Building better bond portfolios from the bottom up

In summary, the additional layer of information uncovered through impact analysis can contribute to a more complete mosaic of insights and, in turn, to more informed investment decisions.

In an uncertain economic era, in which investors are likely to face volatile inflation, shorter cycles and disruptive trends such as deglobalisation, geopolitical rivalry and AI, anything that portfolio managers can do to better understand an issuer’s opportunities and risks —using as many lenses as possible — could help to enhance the potential for long-term alpha through security selection. 

As markets become more turbulent and issuers’ fortunes diverge, the insights gained from impact investing can serve as a welcome complement to traditional financial analysis.