Nordic credit and Nordic bonds - ESG research

Nordic Credit and ESG research – IG and HY bond issuers – A problem?

The Nordic credit Market is large and active, both for Investment Grade and High Yield bonds. The latter is especially important in number of issuers with much lower average issue size compared to the larger continental Europe.

Many of the companies are not listed on the stock market and bonds may be issued by special vehicles. Most Nordic bonds are listed on a market.

The Nordic Green Bond market is also very active and is growing fast.

The Nordic credit market and ESG research

Private companies and special vehicle represent a challenge with regards to ESG data and ESG research coverage. Why is that?

Private companies do not have the pressure from Equity investors that are in average more advanced in ESG risk integration and other Sustainable and Responsible Investment (SRI) strategies than bond investors. The result is that they spend less effort to publish sustainability reports and ESG relevant data.

Many of them, particularly in the HY space, are small, some are very small, and do not consider they have the internal resources to do this kind of reporting.

Nordic IG and HY issuers should ramp up the Sustainability/ESG reporting now.

Investors in Nordic bonds also need ESG research

As bond investors, globally, not only Nordic, are becoming more used to integrating ESG risks in their investment decisions and also to consider other SRI strategy aspects, this demand is increasing.

Is really the bond investors’ need different than equity investors when it comes to ESG research?

A clear no from our point of view, despite the popular view that this is very different. Where we see it different, is when the information on ESG risk is integrated in the investment decisions. Where equity investors have an eternity perspective and can adjust required risk premium, bond investors have a shorter horizon (bond maturity) and technicalities like integration in the credit rating process and impact the risk may have on covenants breach probability. Both can integrate the risks on a P&L or BS level. By the way, in the Nordic HY market meltdown in the oil price crisis that started in 2014, most investors realised that when the refinancing problems occur, they increase the bond investments’ risk horizon far beyond bond maturity.

Today, the ESG research coverage in the credit space is limited, particularly in the Private and smaller ends. It is cumbersome and not easily assisted by all kinds of algorithms to reduce the human work burden. The only way to get around for the ESG analyst it to pull up the sleeves and start digging. Not all find this profitable enough compared to the risk of such an activity.

Note that investors in Nordic Green Bonds also need ESG research as a Green Bond Framework Second opinion cannot replace ESG research of the issuer. More about this here.

Do Nordic credit (HY and IG bonds) have higher ESG risk?

With less sustainability reporting and less data, the ESG risk must be high? Yes, overall, the ESG risk in the HY segment is a higher than in the IG segment, but equivalent to small equity issuers. It is mainly about size, resources and priorities.

Bear in mind, it is not always a question of availability of ESG relevant data, it is also by choice that many smaller companies take more ESG risk. An example here is in Corporate Governance, a part of the G in ESG. It can also be by not setting up management systems they need for environmental (E), quality (S), and H&S (S).

But do not despair, there is a solution at hand!

We started sustainAX to help you out with Nordic Credit ESG research

To help investors, we started sustainAX early 2021. We cover close to 200 companies no other provider covers with fundamental ESG research, ESG scoring and with raw ESG data (121 metrics available). Our ESG research reports make 33 pages and also contain ESG risk integration suggestions for equity and bond investors, the engagement questions to ask the companies plus SFDR and EUT relevant data. Our ESG Research coverage universe is dominated by Nordic Credit issuers and the largest group therein is Nordic High Yield.

This year we have also started to produce SDG scoring for the companies based on the quality of their SDG communication, with other words, do we agree with their SDG impact claims? For relevant sectors, we also do a Transition Pathway Initiative scoring.

If you need help with this, let’s discuss to see if we can be useful for each other!

How does the ESG risk profile vary between different industries within the Nordic HY and IG bond markets?

The variation in ESG risk profiles across different industries in the Nordic HY and IG bond markets is intricate, shaped by specific sectoral challenges and sustainability considerations. This complexity requires a nuanced approach to ESG evaluation, considering the unique environmental, social, and governance factors that impact different industries.

What specific challenges do investors face when trying to integrate ESG research into their decision-making processes for Nordic bonds?

Investors integrating ESG research into Nordic bond decision-making grapple with the scarcity of detailed ESG data, particularly for smaller and private issuers. This situation demands innovative strategies for data collection and analysis, emphasizing the need for a more robust framework for ESG evaluation in the investment process.

The outlook for ESG reporting standards and regulations in the Nordic bond market points towards gradual improvement, driven by growing demand for sustainable investment options and increased regulatory focus. This evolution suggests a future where ESG considerations are more deeply integrated into the financial assessment and reporting practices, enhancing transparency and sustainability in the market.