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Securitise this: Amid hedge funds’ green push, BlueBay eyes structured credit’s ESG credentials

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Structured credit is a “naturally ESG-friendly” asset class, owing to its focus on real asset financing, underlying loan transparency, and strict governance on structures, BlueBay Asset Management portfolio managers said this week.

Structured credit is a “naturally ESG-friendly” asset class, owing to its focus on real asset financing, underlying loan transparency, and strict governance on structures, BlueBay Asset Management portfolio managers said this week.

With the drive for sustainable assets and responsible investing maintaining its momentum, Ashley Blatter and Tom Mowl, portfolio managers at the London-headquartered credit and multi-strategy fund manager, noted how structured finance instruments – such as asset-backed securities, residential mortgage-backed securities and collateralised loan obligations – are “low risk” from an ESG perspective.

Environmental, social and governance factors are gaining ever-greater prominence within the global asset management industry, including hedge funds, with several high-profile marquee managers – such as Sir Chris Hohn’s TCI Fund, Caxton Associates, and Man Group – emerging as vocal ESG evangelists.

Earlier this summer, little-known US activist hedge fund Engine No. 1 hit the headlines after it secured three members on the board of ExxonMobil as part of its push for clean energy reforms at the US oil giant.

Citing recent stats from the Global Sustainable Investment Alliance, BlueBay noted the total size of the sustainable investment universe expanded by 15 per cent between 2018 and the start of 2020 to some USD35.3 trillion.

From an ESG perspective, asset- and mortgage-backed securities benefit from their focus on financing real economy assets such as houses and consumer purchases, according to BlueBay. Where environmental risks have been flagged, steps have been taken to address such challenges in the underlying collateral, with a focus on energy efficient homes or electric vehicles, for instance.

While certain structured finance instruments came under close scrutiny from regulators and investors in the aftermath of the 2008 Global Financial Crisis due to their central role in the crash, Blatter and Mowl pointed to the stricter regulation and increased transparency on underlying loans and cashflows.

“From a social perspective, lending regulations have generally tightened up significantly post the global financial crisis, which has led to a lending environment across geographies with stronger consumer protections,” they explained in a market note on Thursday.

ABS’s governance credentials are further bolstered, meanwhile, by the bankruptcy-remote structures of special purpose vehicles set up to hold securitised assets, they noted.

The PMs also pointed to further ESG developments within the structured credit space this year.

“The UK RMBS market has had its first issuances of ICMA-labelled green and social bonds – financing energy-efficient homes and underserved portions of the population, such as first-time buyers,” they said.

“The number of CLOs containing restrictive ESG language has increased in recent years and we are at the stage where inclusion is normal in the European market. CLO managers have also made concerted efforts to broaden ESG-related exclusions as part of their investment eligibility criteria and an increasing number of managers are reporting ESG scores for their portfolios.”

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