ESG and evaluating Risk in Fixed Income

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By Ahmed Farooq, CFP, CIMA, Franklin Templeton Canada

(Sponsor Content)

ESG (environmental, governance and social) has become a hot topic in investment circles.

Sustainable investing is a key consideration for most asset managers nowadays, reflecting changing attitudes among investors.

Responsible or sustainable investing was once a very niche part of the market, but now accounts for US$35.3 trillion worldwide, according to recent data from The Global Sustainable Investment Alliance (GSIA).

This rise of ESG is most closely associated with equities, but this approach to investing can also be applied in the fixed income space too. Being able to minimize downside risk is a key objective for fixed income investors, and this certainly aligns with the characteristics of ESG investing.

Green Bonds evidence of ESG’s growing significance

ESG’s growing significance was displayed further earlier this year when the federal government’s 2021 budget included a plan to issue $5 billion in green bonds to support environmental infrastructure development in Canada.

Speaking at the recent Exchange Traded Forum, Brandywine Global Investment Specialist Katie Klingensmith discussed the firm’s investment philosophy and how ESG has become an important element of its strategies in recent years.

One of the specialist investment managers brought under the Franklin Templeton umbrella after its acquisition of Legg Mason in 2020, Brandywine Global has US$67 billion in assets under management globally.1

Of that total AUM, US$53 billion is in fixed income, where the investment team combines a global macro perspective with a disciplined value approach to select suitable holdings for the Brandywine  funds.

A signatory of the UN-supported Principles for Responsible Investment (PRI) since 2016, approximately 99% of the firm’s assets under management now feature ESG integration.

Brandywine has built its own proprietary ESG portfolio management dashboard as a result, and will publish its first Annual Stewardship Report in 2021.

It’s been a busy year for the Philadelphia-based asset manager, having introduced a new strategy this summer for Canadian investors with Franklin Brandywine Sustainable Income Optimiser Fund and Franklin Brandywine Sustainable Income Optimiser Active ETF (FBGO).

This fund/ETF has had proven success in other regions using a high-conviction unconstrained global mandate with a goal of providing high-yield-like returns, while keeping risk closer to the U.S. investment grade bond index. This is achieved by not only moving up and down the credit spectrum to keep risk levels controlled, but also to actively manage duration from 0 to 10 years. As duration is often a big concern for investors, this strategy allows them to outsource such decisions to an active, well-established manager with a long-term track record. The mandate has achieved a ★★★★★ Morningstar ranking in both the US and in UCITS format.2

Evaluating inflation, sustainability and default risks

In constructing these funds, the portfolio managers evaluate sustainability risks and opportunities in tandem with traditional indicators such as inflation expectations and default risk.

ESG is used alongside the firm’s core 3-D approach, which means:

  • Dual Approach of top-down macroeconomic perspective and deep fundamental analysis
  • Dynamic Sector Rotation
  • Downside Protection

When it comes to fixed income, sovereign and corporate bond issuers are evaluated according to the firm’s proprietary rating and ranking methodology, while ESG ratings identify sustainability risks and opportunities on a relative and absolute basis.

After holdings are selected for a fund, sustainability risks are tracked over the short and medium term and may lead to an adjustment of overall exposure based on the mitigation or deterioration of those risks.

Looking at government issuers in particular, Brandywine’s ESG research suggests that opportunities for countries to improve ESG scores are already priced into sovereign bond yields, while sovereign credit ratings offer a compelling reason for governments to improve their overall ESG scores, particularly on governance.

ESG is clearly a major part of the investment industry in 2021 and its importance will only increase in the years to come. Risk assessment is at the foundation of every successful portfolio and in the future risk and ESG concerns will converge to an even greater extent. It’s why firms like Brandywine and Franklin Templeton have made ESG such a priority, so expect sustainability  to be a key element of many of our strategies going forward.

Farooq, Ahmed


Ahmed Farooq, CFP, CIMA® is Ahmed Farooq is Senior Vice President – ETF Business Development, responsible for directing and expanding the Franklin LibertySharesTM ETF business across major Canadian Investment Dealers and financial professionals. Mr. Farooq has 10 years of experience in the ETF industry and 14 years in the investment industry.  Prior to joining Franklin Templeton in 2017, Mr. Farooq spent 10 years at BlackRock Canada supporting the promotion and growth of iShares ETFs. Recently, Ahmed was a senior wholesaler covering Toronto and Ottawa. Previously, he managed the internal sales team for the iShares ETFs business across Canada and lead wholesaler activities in Atlantic Canada.


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1.)  As of September 30, 2021

2). The Morningstar Rating™ for funds, or “star rating,” is as of September 30, 2021 and is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history, and subject to change monthly. Current monthly ratings can be found at Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total return, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total return. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. Ratings do not take into account the effects of sales charges and loads. Class A, I and IS shares of the Fund were rated against 271, 237, and 128 Multisector Bond funds over the 3-, 5- and 10-year periods, respectively. With respect to these funds, Class A, I and IS shares of the Fund received Morningstar Ratings of 5, 5, and n/a; 5, 5, and n/a; 5, 5, and n/a stars for the 3-, 5- and 10-year periods, respectively. Ratings shown are for the highest and lowest rated share classes only, when available. Morningstar Rating is for the specified share class(es) only; other classes may have different performance characteristics. A 4- or 5-star rating does not necessarily imply that a fund achieved positive results for the period. 


This commentary is for informational purposes only and reflects the analysis and opinions of Brandywine Global as of October 31, 2021. Because market and economic conditions are subject to rapid change, the analysis and opinions provided may change without notice. The commentary does not provide a complete analysis of every material fact regarding any country, market, industry or security. An assessment of a particular country, market, security, investment or strategy is not intended as an investment recommendation nor does it constitute investment advice. Statements of fact are from sources considered reliable, but no representation or warranty is made as to their completeness or accuracy. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus or fund facts document before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.

Commissions, trailing commissions, management fees, brokerage fees and expenses may be associated with investments in mutual funds and ETFs. Please read the prospectus and fund fact/ETF facts document before investing. Mutual funds and ETFs are not guaranteed. Their values change frequently. Past performance may not be repeated.

Brandywine Global, part of Franklin Templeton Investments Corp.

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