Case study by NN Investment Partners 

AuthorJod Hsu, Investment Analyst

Market participant 

Asset Manager

Total AUM

US$227 billion (as at September 2018)


US$202 billion (as at September 2018)

Operating country


Action area:

  • Materiality of ESG factors

The investment approach

The integration of ESG analysis in NN Investment Partners’ (NNIP) credit investment process enables us to identify opportunities and avoid downside risks. ESG analysis is integrated into our credit analysis process and, ultimately, embedded in our internal rating assignment. We officially introduced ESG analysis into our internal rating assignment in 2015 and continuously enhance the integration process. Despite that our internal rating assignment remains the key element in the investment process, credit ratings by CRAs, on which we have no formal investment limits, are still important as some of our mandate guidelines are based on them. Additionally, if the internal rating of a company differs significantly from CRA ratings, the credit analyst will review the internal rating to ensure that all perspectives are considered.

The investment process

Working with our responsible investment teams, credit analysts with industry expertise first identify the material ESG issues within their sectors. The credit analysts then evaluate the performance of each company they cover within the sector against these factors, looking at negative and positive impacts where appropriate. To complement this internal analysis, we also use ESG data and scores from external data vendors. The aggregate ESG analysis forms part of our fundamental evaluation of business and strategy, and corporate governance. In cases where there is expected to be a material financial impact from an ESG-related issue, this feeds into our assessment of a company’s financial profile.

When a company has been identified as having very weak performance in areas where ESG analysis applies or with material controversies, discussion is often elevated to the Controversy & Engagement Council (CEC). The CEC always assesses companies with higher controversies. It receives input from portfolio managers, analysts (on the equity as well as the credit side) and ESG data providers. The council may then decide to put a name on the company-wide exclusion list. We might also engage with the company depending on whether we are currently invested, the degree to which the company is receptive to engagement, and the expected rate of positive change that engagement might facilitate.

The investment outcomes

We have chosen the automotive industry, which is undergoing significant transformation, to illustrate how ESG factors provide a valuable mechanism for analysing these changes.

While emission regulations remain the core focus of environmental issues for the sector, substantial litigation claims and recalls, partly driven by inadequate governance, have occupied headlines and driven credit valuations in recent years. The diesel scandal is an example where this approach has proven valuable. While Volkswagen has spent approximately €30 billion on settlements, fines and recalls, and suffered credit rating downgrades along the way, other original equipment manufacturers also spent large amounts on retrofitting or replacing old diesel vehicles.

The European Union CO2 emission target is another example. The CO2 emission target of the fleet average set by the EU is 95 grams of CO2 per kilometre by 2021. Car manufacturers that fail to achieve this target must pay a €95 fine per gram from the first gram of exceedance onwards per vehicle sold. Missing the target could be a significant risk for car manufacturers, from a financial (see below) and reputational perspective.


Carmakers on CO2 emissions and potential fines.

Sources: PA Consulting, ACEA, Bloomberg and NNIP

Besides downside risks, there are opportunities for companies that are well positioned for these emerging environmental and social trends. As the electrification of vehicles remains crucial to reduce CO2 emissions, companies with leading technologies in electrification, such as 48V hybrid, batteries and electronics, should benefit from the industry transformation.

However, the appropriate time horizon for investors to assess impact from ESG factors remains challenging. Though the CO2 emission target (2021 and further in 2030) appears to be a story for the longer term, litigation risks could surface in a relatively short period of time, which was the case in the diesel scandal.

We strongly believe that ESG factors are important to the fundamental credit strength of companies in the automotive sector, and that they can drive credit valuations. In our ESG assessment, BMW is considered a strong performer due to its electric vehicle (EV) strategy and better product control in emissions. In the last three years, the senior Z-spread curve of BMW significantly outperformed the whole automotive sector (see below), showing that ESG performance can impact spread performance.


BMW versus Barclays EUR aggregate automotive senior curve Z-spread change

Source: Bloomberg and NNIP

Besides focusing on ESG leaders, it is also important to identify companies exhibiting an improving ESG profile. Volkswagen is a good example of this. After the diesel scandal, the company launched an ambitious EV strategy, reshaped its corporate culture and improved governance policies and practices. We believe the improving ESG profile of Volkswagen is reflected in the outperformance of short to medium-term bonds versus the index (see below).


Volkswagen versus Barclays EUR aggregate automotive senior curve Z-spread change

Source: Bloomberg and Barclays

Key takeaways

The appropriate integration of ESG analysis provides an extremely useful framework for assessing the potential impact of certain non-financial, hard-to-model factors on an issuer’s credit profile and rating. But it is often difficult to determine the materiality of each issue and the relevant time horizon.

It is also important for FI investors to monitor and engage with companies regarding serious ESG shortcomings and controversies, as improvements may not only positively contribute to society, but also provide attractive investment opportunities.

Download the report

  • Download report

    Shifting perceptions: ESG, credit risk and ratings: part 3 - from disconnects to action areas

    January 2019