ESG integration within corporate credit
The fixed income group integrates ESG into the corporate credit research process, depending on applicability and data availability, using a materiality map similar to that of the equity group. The primary difference is the addition of a category within governance focused on covenants and bondholder rights. Additionally, several categories have varying degrees of relevance between equity and fixed income.
Putnam's ESG corporate research philosophy combines fundamental analysis with relevant ESG insight, understanding that application of ESG factors vary by industry. In the same way our fundamental analysis is forward looking, our evaluation of relevant ESG considerations must also be forward looking. This has applications in sector and issuer selection, as well as portfolio construction. ESG considerations help build a more nuanced assessment of an issuer's credit portfolio, which can potentially limit ratings volatility, and more importantly, tail risk in credit portfolios.
Bausch Health is an example of a company where we were able to identify improving ESG trends despite weak scores from third-party scoring organizations. Following management changes at Bausch Health, resolution of pricing issues, and a complete company turnaround, we made an investment in the company, seeing the potential for ESG improvement despite lagged external scoring that is backward looking. As of 3/31/20, Bausch Health Cos. Inc. represented 0.48% of Putnam High Yield Fund.
Integration of ESG issues into fixed income analysis is an emerging area that currently has more limited applicability within certain areas, such as mortgages and government securities. As a result, for fixed income investments managed outside our corporate credit team — for example, within our multi-sector fixed income portfolios — our ESG analysis generally pertains to corporate credit holdings, but not necessarily to other sectors. Similarly, our Global Asset Allocation team is currently exploring the role of ESG analysis within the context of their process. The GAA team's strategies combine equity, fixed income, and other asset classes, using proprietary quantitative modeling, and have pursued investment themes such as strong corporate governance practices. We expect that our integration of ESG issues in additional asset classes and investment disciplines will continue to evolve over time as available data increases.