Environmental, social and governance factors
Challenger Investment Partners Fixed Income (CIP FI) believes that incorporating material environmental, social and governance (ESG) factors in investment decisions can improve investment outcomes for clients by promoting more sustainable business practices and reducing the risk profile of investments.
CIP FI has a systematic approach to incorporating ESG considerations into its investment process, and its specialty in private lending markets provides a greater opportunity for active engagement. CIP FI manages investment portfolios taking into consideration ESG risks as part of a thorough and robust investment process. It regards these risks as being inherently linked to the sustainability of the businesses to which it lends, to their ability to refinance and ultimately the risk of default.
CIP FI believes that its approach to ESG integration not only benefits its clients but also can have a positive impact on society and the environment.
CIP FI’s investment philosophy is heavily influenced by its heritage in private lending markets. For over a decade CIP FI has approached credit markets as a lender as well as an investor. As an investor CIP FI applies a relative value approach, integrating ESG risk factors into its pricing and valuation considerations. As a lender CIP FI prioritises direct engagement to mitigate ESG risk factors through incentivising more sustainable business practices.
CIP FI’s approach is guided by these key principles:
- To us responsible investing is about being responsible to clients to deliver long term predictable streams of income. Over the long term CIP FI can only do this by incentivising sustainable business practices from the businesses it lends to. It does this by raising the cost of capital for businesses who do not engage in sustainable business practices and lowering the cost of capital for businesses who do.
- CIP FI assesses ESG risk against exogenous factors. There are only two ways that CIP FI can exit a position: either the cashflows of a business pay down CIP FI’s debt or other investors refinance CIP FI’s position. If the cash flows generated by the business are insufficient to pay CIP FI back, then CIP FI need to be comfortable that other investors will be prepared to lend to the borrower at the time of refinancing which could be 5 or more years into the future. CIP FI considers responsible investing to be gaining rapid attention from a broader investment group which will have an impact on long term investment outcomes and we believe this is something all investors should be mindful of, regardless of their investment philosophy.
- Effective engagement drives positive performance by mitigating downside risk. CIP FI believes effective engagement incentivises more sustainable business practices. For many years CIP FI has achieved this through a focus on structure and documentation as a means to manage risk, a prioritisation of direct due diligence with borrowers to gain transparency into business practices and by promoting better market practices on behalf of all market participants. CIP FI’s long history in private lending markets informs its approach to effective engagement across both public and private strategies.
- ESG risks are most pronounced when poor environmental or social practices are combined with poor governance. Environmental and social risks are inherent in many businesses. Most have adapted to evolving standards around their business practices. However, CIP FI believes businesses with poor governance are most at risk of prioritising short term results over long term sustainability, greatly increasing their risk of default.
These principles inform the CIP FI approach across public and private lending strategies. Assessing the sustainability of the businesses, pricing for the risks identified and engaging with borrowers to mitigate these risks has always been embedded in the CIP FI investment process.
For further information on the CIP FI ESG integration process please refer to the CIP FI Responsible Investment Statement.