MacKay Municipal ManagersTM (MMM) is a fundamental relative-value bond portfolio manager, applying both top-down analysis and bottom-up credit research in the construction of municipal portfolios. Our investment philosophy is centered on the belief that strong long-term performance can be achieved with a relative value, research-driven approach. As we focus on bottom-up security selection, we perform extensive security-specific risk analysis on the bonds we purchase.
MMM believes that Environmental, Social and Governance (ESG) investing can be material to the risk/reward profile of every municipal bond credit. As such, in line with our fiduciary duty to act in the best financial interest of our clients, these factors have always been a meaningful part of our credit analysis. Many municipal bond projects address or finance ESG considerations and are also aligned with the sustainable development goals, including conservation projects for water and wastewater systems, wind farms, non-profit hospitals, public education, infrastructure, public transport and affordable housing.
ESG concepts are complex and dynamic with little standardization in the investment market. MMM has developed an internal process to assign an ESG risk ranking to each municipal issuer under consideration. We believe the consideration of ESG factors in assessing both risk and return at the security and portfolio levels should be an integrated and dynamic part of the research, portfolio construction and risk management processes.
Integration Recently there has been a growing interest in the impact of ESG factors in the investment process yet little research focusing on the municipal market is available from outside sources. As MMM ardently incorporates extensive security specific analysis on credits we purchase, in 2018, the team initiated an internal process to articulate and expand upon how ESG criteria are integrated into our investment analysis. The process created a matrix to assign ESG scores and rankings to new potential investments. Each security ranking is subjective, based on a rubric of criteria and is assigned by each individual analyst as part of their security specific credit analysis. The ranking process considers a variety of ESG risk such as those outlined in the table below. Through the process, each analyst will assess the materiality of the impact that each Environmental, Social and/or Governance factor is expected to have on a potential investment and assign a separate E, S, G ranking score of 1 (Low Risk) to 3 (Significant Risk). Once a risk group is assigned, an average is calculated for the issuer as a whole. Typical characteristics of ESG risk group classifications are as follows:
No material environmental liabilities.
Low risk of increased regulatory scrutiny and proposed legislation.
Full and timely compliance with local standards and regulations
May have some environmental liabilities.
Some risk of increased regulatory scrutiny and proposed legislation.
Full compliance with local standards and regulations.
Material environmental liabilities.
High likelihood of increased regulatory scrutiny and proposed legislation.
May not be in full compliance with local standards and regulations.
Strong relationship between issuer and the general public.
Financial ability and willingness to make timely and full pay out of retirement benefits and obligations.
Minimal negative media or perception
Satisfactory relationship between issuer and the general public.
Financial ability and willingness to pay out retirement benefits and obligations.
May have some negative media or perception.
Tensions between issuer and the general public.
Questionable financial ability and willingness to pay out retirement benefits and obligations.
Some negative media or perception regarding company or business
Transparent and extensive reporting practice.
Adequate maintenance or financial provision for emergency response and community protection measures.
Management is available and willing to meet with investors.
Transparent reporting practices.
Sufficient maintenance or financial provision for emergency response and community protection measures.
Management is available and willing to meet with investors.
Questionable reporting practices.
Inadequate maintenance or financial provision for emergency response and community protection measures.
Management does not make themselves available to investors.
In making risk assessments, the analysts may consider use of bond proceeds, transparency in reporting practices, relations between the issuer and the general public, media perception regarding the company or business, risk of increased regulatory scrutiny, compliance with local standards, as well as other considerations. Certain factors may be not be relevant for certain issuers, sectors or regions, while quite material for others. When making investment decisions, considerable judgement is required in weighing our clients’ interest in return generation against the risk factors associated with any possible portfolio investment. As it relates to ESG related risk factors, our commitment is to ensure that such factors are properly assessed and taken into consideration when constructing and managing client portfolios.
As investors in bonds, we recognize that we do not have the voting right that accompanies an active ownership stake, such as in the equity market. However, through our bond ownership, our research analysts engage with issuers, through meetings with the management to promote transparency and best practices, if we find lack of disclosure or questionable management practices. The information gained during our engagement activities, along with our internal credit analysis and information received from 3rd parties, helps us better assess the ESG risks facing an issuer and the issuer’s awareness and management of such risks. While we do not classify ourselves as “activist” investors, we may employ escalation measures if the outcome of an engagement is not to our satisfaction. The method of escalation will vary depending a variety of factors however as an example, 1345 Avenue of the Americas New York, NY 10105 212.230-3811 MacKayShields.com A New York Life Company in certain instances we may exit a position and monitor for future improvement, while in other instances we may engage with other constituents, including counsel, with the aim to influence the outcome of a material ESG related concern. Findings from our engagements are logged in our research credit notes which are accessible by all municipal team members, and factored directly into our investment analysis.
As climate related risks can be material to issuers, it is important that issuers are aware of and consider the long-term impact on their future investment performance, We work collaborate with outside third parties to identify and assess climate change risk across the municipal markets and issuers, in particular, and promote greater disclosure of metrics that are material to shareholder value. In addition, we engage with public policy makers and government affairs offices regarding government policy and regulations.
We believe that as more investors use this approach, management teams and the market, in general, will respond favorably over time.
Senior members of the municipal team are responsible for the implementation of the ESG integration process including Brian Stewart, COO, and Frances Lewis, Head of Municipal Research.
Team members participate in seminars and presentations focused on ESG and Sustainability issues by organizations like the PRI, CFA Institute, etc. All team analysts have taken ESG investing training. In addition, the MMM team is a participant in a working group with PRI to promote ESG integration in the municipal market.
We continue to seek sources of ESG information through conferences, external research providers, NGO’s, universities, and general news services.
With the application of our ESG screening, the matrix ranking is a component of our internal credit reports and is included in our internal data bases and trading systems. In addition, the following reports on ESG related research and risk factors can be provided to ESG sensitive clients: