Norwegian Fixed Income and

ESG Integration
Theory and practice
 Agenda

1. Background for the report

2. Literature review
3. The Norwegian fixed income market
4. ESG investment practices in
Norwegian corporate fixed income
5. Conclusion

Slide 2
1 Background for the report

How do we integrate ESG in Norwegian fixed income investment?

What can we learn from our colleagues? From the academic
literature?
2 Literature review – Professor Bruno Gerard

What can we learn from the academic literature on ESG in fixed

income investing?
3 The Norwegian fixed income market

What are the unique characteristics of the Norwegian fixed income

market?
The Norwegian fixed income market

 Small market
 Repeat players
 HY vs. IG

Slide 6
The Norwegian fixed income market

 Small market
 Repeat players
 HY vs. IG
 Duration

Slide 7
The Norwegian fixed income market

 Small market
 Repeat players
 HY vs. IG
 Duration
 Documentation and regulation
 Credit ratings

Source: Stamdata Source: SSB

Slide 8
4 ESG investment practices in Norwegian
corporate fixed income

How do investors in the Norwegian fixed income market currently

address ESG?
What’s different about fixed income?

Downside risk
► Limited upside  focus on risk of negative events

Duration
► Does the time horizon matter?

Lack of ownership rights

► How much influence and corporate access do bond investors have?
► Loan agreement

Unlisted companies with minimal reporting

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ESG issuer analysis – why?

Focus pre-investment

Why ESG?
► Compliance with fund/institution guidelines
► Better assess credit risk
► Contribute to positive impact

More extensive analysis for HY than IG

► Higher ESG risk – industry, geography, regulatory exposure
► More vulnerable to negative events
► Generally less comprehensive reporting
► Often new to the capital markets

Slide 11
ESG issuer analysis – how?

Sources
► Company disclosures
► Second opinions
► External ratings
► In-house ESG scores
► Media
► Sell-side analysts
► Cooperation with equity teams
► Stamdata

Slide 12
ESG issuer analysis – who?

Who conducts ESG analysis?

► External service providers
► In-house credit analysts
► In-house ESG staff
► Portfolio managers
► Hybrid model – collaboration among above

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ESG issuer analysis – what, and so what?

Goal: identify risk exposure and ability to handle negative events

Topics for analysis?

► Governance – management, board, main shareholders, creditor protection
► Industry-level risks, e.g. shipbreaking, antibiotic resistance
► Geographic exposure

Impact on investment decision?

► (Rarely) divest
► Engage
► Shorter duration
► Impact targets, e.g. for green bonds

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Bondholder engagement

Engagement (dialogue) with companies is a common part of the investment

process for bond investors – including focusing on ESG topics
► Focus on the primary market  engagement with companies ahead of new debt
issuances

Engagement with whom? Alone or in collaboration with other investors?

► Often with management only, in connection with sell-side corporate access
► Some of largest Norwegian fixed income investors also have extensive ongoing
contact with large issuers, even IG. Often have dedicated ESG staff (and/or “ethical
committees”)
► For incident-based (reactive) engagement, several investors also liaise with equity
teams
► Most engagement done alone or in loose/informal cooperation with other investors 
could one utilize existing arrangements for more formalized ESG engagement?

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Bondholder engagement

Engagement topics (including covenant terms)?

► Substantial variation on topics for engagement and types of engagement
► Most have minimum ESG criteria (for negative screening/exclusion lists)  at a
minimum, use engagement to “tick the boxes”
► Engagement pre-issuance useful to give insight into issuer ESG profile  particularly
for issuers with no or low ESG ratings
► Pre-issuance engagement – often discussion on pricing and general covenant terms.
If standard ESG elements in the covenants, will often be related to governance
► Including additional ESG criteria in loan agreements perceived to be difficult
(exception: green bonds)
► Incident-based engagements often post-investment, more reactive (e.g. corruption)

Slide 16
 Special situations - restructuring

Norwegian bankruptcy laws appear inadequate to ensure an efficient restructuring

processes
► Bankruptcy regulations in Norway fairly general in comparison to, e.g. US Chapter 11 
restructuring processes less efficient

The importance of the governance aspect of ESG in restructuring situations in Norway

► Possibly due to general Norwegian bankruptcy laws, main owners and banks perceived to
often have significant advantage  focus on governance, including main owners and
board

Norwegian portfolio managers have limited experience with restructuring situations

► Many IG issuers, and more than 20 years since the Norwegian banking crises
► One exception: recent restructuring of Seadrill Ltd. Took place under the US Chapter 11
legal framework

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4 Conclusion

What do investors perceive to be the effect of ESG integration in

Norwegian fixed income?
Effect of ESG integration in fixed income –
practitioners’ perception
Systematic integration of ESG in fixed income portfolio management is fairly new
in Norway –> many interviewees uncertain about financial effect
► At any rate, growing customer demand for ESG integration and ESG requirements in
fund mandates

Effects on risk-adjusted return perceived to be uncertain, but consensus that

governance aspect of ESG was most important
► Two of interviewees pointed to Barclay’s study on ESG from 2017

Strong theme in interviews: most important financial motivation for ESG

integration is to limit downside risk
► Example: goal of avoiding tail risks – seeking lower risk and the same yield, e.g.
“Deepwater Horizon”

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SUMMARY

 The financial effect of ESG integration in fixed income is unclear,

both based on practitioners’ perceptions and the systematic
literature review by Professor Bruno Gerard

 Nevertheless, practitioners still see increased levels of ESG

integration as important in bond portfolio management

 Our intent with this report is to inspire the various actors in the
Norwegian fixed income community to move this discussion
forward

Slide 20