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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
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.
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.
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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.
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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.
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