“When it comes to ESG, it’s important to be balanced. And as important as efforts related to climate and the environment obviously are, there are certainly other areas that are important to PIMCO in the marketplace with regards to the social impact we can have. We focus quite a bit on human capital management – including staffing, worker treatment and worker rights. When assessing a given business or assets or government, we focus on health and safety and wellness, particularly in areas such as nutrition, food and pharmaceuticals, as well as a variety of other similar topics. It’s about asking – are tangible goods being sourced and distributed in a reasonable manner? Is access to those products equitable? Are they a healthy construct for the consumer? And to the extent that claims have been made, are they viable and reconcilable?” Grover Burthey
Retail investors are faced with an ever-growing array of ways to invest responsibly, ranging from direct investments in equities, ‘green property’ and fixed interest securities to managed funds across all asset classes.
Superannuation funds have been at the forefront of offering sustainable options, and according to Rainmaker research, in 2021 there were over 170 ESG investment options offered across the market32.
Managed fund options in this space vary greatly in terms of the underlying approach. Some are narrowly focused on particular issues – for example climate or renewable energy. Others are more thematically based or aligned to particular UN Sustainable Development Goals (SDGs).
Managers and individual funds also vary in the approach to engagement.
More passive managers and products will largely be managed in a non-interventionist fashion, relying on straightforward techniques such as excluding firms from industries such as alcohol/tobacco, fossil fuels, gambling, and firearms, or proactively seeking out companies and industries exhibiting more ESG friendly behaviours.
But for some specialist managers, this hands-off approach is sub-optimal and misses the opportunity to engage with companies across many industries and help them fundamentally reshape their businesses to be more resilient and more sustainable, and ultimately more profitable. This is particularly relevant for those companies and industries that are in a state of ‘transition’ to a low emissions future. For example, negatively screening a fossil fuel company simply starves them of capital but does not help them transition towards net zero. Actively engaging with the management of that company could help them make that transition faster and more sustainably.
This active engagement approach delineates those managers who are not only ensuring their client’s investment is being more impactful but are likely achieving superior risk adjusted returns compared to other options.
“Now for some, ESG primarily – or even solely – means exclusions. And that means taking parts of the market and saying, I’m not going to invest in those. And if you take out large parts of the market from an opportunity set, then you miss out on potential opportunities that may come up in those areas over some period of time, especially when we think about those companies and industries that are doing a good job of transitioning. Similarly, you may end up with more concentration in other parts of the market, because you’ve reduced your opportunity set, and that can have an impact on returns.” Grover Burthey.
“I think the focus should be on the fact that everyone cares about something. So having a list of topics that they can care about, and then paying attention to the conversation cues prior to that point. What have they talked about with regards to their diet, exercise, their routine or hobbies, their location, have they got family, particularly grandchildren, what do they do for a job, what they have previously done for a job?” Nathan Fradley
“There will certainly be ways you can really ask some meaningful questions based on their background. For example, have they lived overseas or travelled? What are their hobbies? They might enjoy gardening, for example, and they might know, that they’ve certainly seen less native bees in their garden, or they might be interested in, the impact on native wildlife because of large scale development and land clearing. So, there’ll be ways you can tailor conversations to clients, depending on who they are, and what’s important to them. I think our knack as an adviser is knowing our clients.” Karen McLeod.
“As part of the initial client meeting, we do a fairly comprehensive ethical profile with them. So, we will have a discussion about the sort of things that they want to either avoid or support, with their investment money.” Michelle Brisbane.
Many people equate investment markets purely and simply with equity markets. But in fact, fixed interest markets are larger, with PIMCO estimating the size of global fixed interest markets to be around $106 trillion USD, compared to the $95 trillion in global stock markets33.
And one of the fastest growing parts of the bond market is Green Bonds (and their close relatives Social Bonds and Sustainability Linked Bonds). World-wide issuance of Green and Social Bonds reached half a trillion dollars during 2021, a figure expected to grow to $1 trillion annually by 202334.
Unlike traditional fixed interest instruments, Green Bonds are issued to raise funds specifically for projects that have positive environmental impacts. The majority of Green Bonds issued are ‘Use of Proceeds’ Bonds, where proceeds are earmarked for specific projects35. Best practice issuers of such bonds will be extremely transparent in the setting of targets, the allocation of proceeds, and the reporting of progress towards defined goals.
Social bonds work in a similar way but are used to fund projects with social, rather than environmental goals.
A newer alternative to Green Bonds is the Sustainability Linked bond. These bonds do not have their proceeds set aside for any specific project. Instead, they penalise the issuer by requiring higher interest payments to investors if the issuer fails to meet pre-defined sustainability targets, such as reducing carbon emissions. Some experts believe such bonds can be more powerful in funding the transition to a low carbon economy.
Green and social bonds in Australia
Although Green and Social Bonds first originated in Europe, Australia now has a buoyant and growing market for such instruments. Although largely issued by state governments, there is also a nascent corporate green bond market. Developer Lend Lease for example, raised $800m in just 5 months during 2021 through 2 oversubscribed Green Bonds36. Proceeds were earmarked for a number of ‘green building’ projects, with benefits ranging from the lowering of carbon emissions, to reducing the environmental impact of materials and the delivery of health and wellbeing benefits.
State governments are currently issuing bonds to fund everything from light rail projects and cycleways to solar farms and social housing. In terms of Federal Government issuance, the Australian Financial Review recently reported that issuances by the National Housing and Finance Corporation were regularly oversubscribed two to three times37.
Australia’s ESG Superannuation Funds, rainmaker.com.au, April 2021.
Introduction to Sustainable Investing, presentation prepared by PIMCO, October 2021.
2021 Green forecast updated to half a trillion – latest H1 figures signal new surge in global green, social & sustainability investment, Liam Jones, climatebonds.net, August 2021.
Explaining green bonds, climatebonds.net
Lendlease Media Release, lendlease.com/au, March 2021.
NHFIC bonds snapped up by investors, Michael Bleby, Australian Financial Review, October 2021.
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