Feature – ESG Club Conference 2022
ESG CLUB CONFERENCE: SUSTAINABLE DEBT
Debt is a cornerstone of institutional investment strategies, so how are sustainable-led asset owners navigating the fixed income universe to ensure that their capital is being used to build a better world?
Demand for sustainable debt now outstrips supply. Luckily, there is more to sustainable debt than green bonds. Julien Halfon, head of pension and corporate solutions at BNP Paribas Asset Management, opened the panel by discussing the alternatives to green bonds for investors trying to build expo- sure to sustainable debt, such as in the listed space. “Last year, only half of the sustainable-labelled bonds issued were green. The rest were social, sustainable and a few others,” he said. Then there are corporates which have positive ESG profiles, so do not dismiss the debt they issue just because it does not have a sustainable label.
There are also places to look in the private asset space. “If you want to look at true sustainability, there is an area many inves- tors are not paying enough attention to, which is the illiquid credit segment of private debt,” Halfon said. This is not so straightforward for insurers, with Solvency II limiting their investments in illiquid assets. But this is not stopping Phoenix Group from lending to sus- tainable projects and borrowers, said Sindhu Krishna, the insurer’s head of sustainable investments. “Within our annuity portfolios, we have long-dated assets,” she added. “There is a huge opportunity for us to invest sustainably, especially in pri- vate assets.
“In that space we have a commitment to invest in sustainable 42 | portfolio institutional | September 2022 | issue 116
opportunities, but equally we are making sure all our portfolios are resilient to ESG risks,” she added. To help guide its managers, Phoenix has an eligibility frame- work. “It is not only about listed-labelled bonds, but also a more thematic, sectoral approach where there are opportuni- ties for us to invest.”
This means Phoenix invests in housing associations, infra- structure and green buildings. “It is important for asset own- ers to have their own view and define those frameworks,” Krishna said.
Claire Curtin, head of ESG at the Pension Protection Fund, said the pensions lifeboat does not constrain its investment managers in terms of labels or set hard targets on the percent- age of capital to be held in sustainable assets. “For our externally managed mandates, we pass that decision to our portfolio managers to determine, on a case-by-case basis, whether a green issuance could provide the return we are looking for.”
Regulation, regulation, regulation
The regulator is taking an interest in how pension schemes are mitigating climate risk. This has led to trustees having to show how they are protecting members from the negative material impact of climate change. Could this mean institutional inves- tors are becoming forced buyers of sustainable-labelled assets?
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