Episode 51

MAY 18, 2022

Olesya on trends in ESG integration

Olesya Zhovtanetska, Senior Director, Public Fixed Income, Credit Research and ESG in Bonds & Treasury at SLC Management, discusses ESG integration in the fixed income space as well as her professional and personal connection to Ukraine.

Steve Peacher: Hi everybody, this is Steve Peacher at SLC Management, and this is another episode of “Three in Five,” and today really pleased to have Olesya Zhovtanetska with us. Olesya is a senior director and in our credit research area in our in fixed income and also focuses in particular on the ESG as part of that role. So today, I wanted to talk to Olesya about two things: ESG and how we how we factor that into our work, but then also Ukraine. So let's start with the ESG investing if that's okay. As I mentioned in you know you focus on the ESG investing your role, you cover financial institutions as an analyst. ESG is on everybody's mind, but I do think it can be confusing for some people in terms of what does that mean, how is that implemented? And especially with the fixed income portfolio, it can mean different things, so can you talk about the different approaches to ESG investing and what do we do for our clients at SLC Management?

Olesya Zhovtanetska: Certainly Steve. There are different approaches to ESG investing. I think of them as a continuum. The main ESG investing approaches are ESG integration, positive or negative screening and the impact investing. And each of them has its merits and benefits for clients’. Different clients will be interested in different approaches. I’ll start with ESG integration, which is our preferred approach, basically a systematic and explicit consideration of ESG factors in the investment decision making process. Now, when we talk about negative screening what we mean by that is that certain companies or sectors would be excluded from the portfolio based on specific sustainability criteria, for example tobacco or coal. Conversely, with positive screening, the portfolio would be tilted to companies that are ranked highly in their sectors, based on the ESG criteria. And lastly, impact investing simply means investing in companies or projects that would deliver a certain environmental or social impact. As I mentioned before, the main approach that we use for clients at SLC Management is ESG integration. Having said that, we can customize the approach depending on clients’ goals or preferences. For example, some clients may want to explicitly exclude some companies or sectors while taking an overall integration approach. So SLC we have developed and ESG Plus Program. That was a cross asset class effort started five years ago. To be sure, we have been looking at some of this ESG factors before, for example governance for banks, but now we have formalized the approach. Plus factors such as technology disruption was SLC’s addition to the traditional ESG factor lens, that's why we call our program the ESG Plus program. Now, the way that the ESG Plus program is applied in the public fixed income context is through the proprietary ESG Plus ratings, which are the credit analysts’ responsibilities and are used by portfolio managers in their investment decision making process.

Steve Peacher: So we rate our corporate bond holdings and issuers on the E, S and the G. On environmental on social and governance. And how do you approach that? So, when our research team looks at an issuer exactly what are they evaluating to give it that rating to evaluate that issue on a sustainability basis and what factors do you take into consideration as part of that analysis?

Olesya Zhovtanetska: So, as I said, we've developed our proprietary methodology. That was because the external ESG ratings landscape is still evolving. So as I mentioned, ESG Plus ratings are credit analysts’ responsibility. We score the issuers on their relative levels of E, S, G and Plus risk within their respective sectors to generate an overall ESG Plus rating. We use our sector expertise as well as various external resources to determine what factors are most important for the particular sector and what factor weights we should assign, and then we score the issuers using their own data. Now, in terms of what factors we take into consideration, why don't I walk you through the bank scorecard as an example. So for banks, we believe that the most important ESG factor is governance, which we assess we're looking at corporate governance practices as well as the level of controversies that the bank has been involved in. We also think that the various social factors such as data privacy and security, human capital, consumer financial protection are also important. And in terms of environmental factors will look at the bank’s climate transition risk. Last but not least, we also look at the bank's level of preparedness for the technology disruption for our Plus assessment.

Steve Peacher: I want to turn to the situation in Ukraine, and you as part of your role you cover European banks. So obviously there's a lot to consider from an analytical standpoint as you evaluate those banks and how they may be impacted. But I know that you're from Ukraine, so there's a whole personal connection that you have to the situation that we're all watching every day as we try to monitor what's going on. And I was hoping you could talk about the situation in on two levels: one, as a bank analyst. So kind of more analytically as you think about the impact on financial institutions and banks in Europe, how does that come at you? But then also how has this come at you personally? I just, it's hard to imagine, for me, you know, having family there and monitoring on a level that's so personal. So I’d love you to get your take from both those perspectives.

Olesya Zhovtanetska: So I will start with the bank question. So realistically no one really knows for certainly how all of this will unfold. But since the Russian invasion of Ukraine, our team is seeing rising risk of recession in the Euro area and the UK next year. As the rising energy costs are having an immediate impact on European consumers and manufacturers are facing a significant rise in input costs. This, of course, would have a knock-on impact on banks as they are a leveraged play on the country's economy. What this means is that European banks profitability could be pressured by higher loan losses and cost and with high inflation. Asset quality and capital could also come and the pressure. In terms of European banks direct exposure to Russia and Ukraine, that's mainly concentrated in a handful of Austrian, Italian, and French banks, which we are not involved with. We do have some European bank holdings that have manageable exposure to Russia and Ukraine. However, the concern would be more around the second order impacts, as I mentioned. Potential banks in direct exposure through thoroughness and inter-bank lending. But I would say overall I view the credit impact as manageable given the high capital laws and strong loan loss reserves going into this. And that's thanks to post financial crisis regulatory changes, as well as the build out during the Covid period. Now, on the personal level I’d say has been stressful and emotional. I know that my extended family lives in Lviv in western Ukraine, which has been a relatively safe place. So I’m very thankful that everyone is safe so far. But I’d say even in Lviv there have been a few missile attacks and my family lives under constant threat with multiple air raid alerts day and night. And as you know, the situation is a lot worse in other parts of the country with massive destruction and immense suffering. But I would say that amid all of that, I remain hopeful and proud of Ukraine’s spirit of resistance. And I’m also grateful for the support that Ukraine has received so far from the West.

Steve Peacher: Well it's been amazing to watch the West rally around Ukraine, although though it's certainly devastating to watch the images you see in the papers and on the news every day. I know a lot of institutions and people have wanted to know how to help. Sun Life donated, I think, $200,000 to Canadian Red Cross back in March, my wife actually and some friends in Boston organized the fundraiser, but you've probably got particular insight. Any advice that you can give to people who, in terms of, looking for ways to help? What would you recommend?

Olesya Zhovtanetska: I would say what well, there are various ways to help and my view I’d say the most effective way would be to donate to various Ukrainian causes. So there are lots of different charities out there that help refugees provide medical or other humanitarian assistance. So, for example, I would actually refer people to the Ukrainian Humanitarian Appeal Program at the Ukrainian Canadian Congress. Ukrainian Canadian Congress website also lists Canadian and Ukrainian organizations that people can donate to, and these all have been vetted and I know that the money's really making it over there and making a difference, so I would appreciate.

Steve Peacher: So the Ukrainian Canadian Congress has a website that has some recommended and well vetted legitimate organizations that can be that you can feel comfortable donating to, and you feel good that the money is actually getting where it's needed?

Olesya Zhovtanetska: Yeah, and Ukrainian Canadian Congress has its own program called Ukrainian Humanitarian Appeal Program as well.

Steve Peacher: Well, listen Olesya thanks very much for those insights on those insights, both ESG but, in particular on the situation in Ukraine, I know everybody listening really got a lot out of that, and thanks to everybody for dialing in to this episode of “Three in Five.”

Olesya Zhovtanetska: Thanks for having me.


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