Feature – ESG Club Conference 2022
“When companies have been through that process and are thinking about issuing a form of labelled debt, it engenders long-term thoughtfulness about the structure of their business and how it is going to evolve in the long term,” he said. “Whilst you may get a small greenium associated with the bond in the short term, you are getting a longer-term approach from those companies, which in the long run should give you a better risk-reward profile,” Mennie added. For Phoenix, sustainable debt does pay. “The key is we are look- ing at a risk-adjusted return,” Krishna said. “Peter’s point about the long run is key for us. When you look at it holistically, we believe it pays.
“In the traditional listed side and the private space, we see huge opportunities in the pipeline, not just in labelled debt but thematically.” For Krishna, the future sustainable debt space offers opportu- nities. “The mantra of any investment professional is past per- formance is not an indicator of future performance. But the past way of living is not the future way the world will live,” she said. “There is, therefore, a huge pipeline of opportunities, which we want our asset managers to tap into.”
What’s the score? With more and more investors building portfolios to earn a return but also make a positive impact on our climate and soci- ety, new tools have emerged to help investors research those issuing debt. BNP Paribas AM is one such provider, which has scored the ESG credentials of 12,000 debt issuers. “Investors are keen on the scores,” Halfon said. “They are interested in the potential future evolutions [of issuers], espe- cially when you look at the energy transition, which is a big, big chunk of green bonds and illiquids.”
There is also the option of having a specific metric assessed. “A big advantage is that not only can you have an average ESG score, but you could have something more social impact, more environmentally friendly or more governance oriented to avoid scandals and corruption,” Halfon said. ESG scoring has evolved and is no longer just about asset manag- ers. “Credit rating agency Moody’s has integrated ESG within its credit ratings,” Halfon said. “This is fundamentally where you want to be. The credit rating and ESG rating will be consistent, based on a thorough analysis of a company’s potential future.” But for those who wish to do their own research of an issuer, is the data available strong enough to help spot greenwashing? “I wouldn’t say we are there yet,” Curtin said. “Getting Scope 1 and 2 reporting from issuers has been a challenge. Now we are realis- ing that Scope 3 has so much more of an enabling capacity. “Over the past year we have assessed where each of our hold- ings are and where they need to move to from an energy transi- tion point of view. As soon as you bring in Scope 3 that assess-
44 | portfolio institutional | September 2022 | issue 116
ment changes. All the banks that were thought of as non-material are suddenly misaligned from a Scope 3 perspective.”
Don’t be afraid With concerns over the quality and consistency of the data available, and the impact regulation will have on it, how easy it is to measure outcomes?
“It is definitely progress over perfection,” Krishna said. “Where we have given mandates with sustainability objectives, we have discussions with asset managers on how they are approaching our mandate in terms of the risk perspective and opportunities.” Then it seems that engaging with issuers is the easiest option to access the information you need, and size does not matter, according to the Pension Protection Fund’s Curtin. “We are focusing more on engaging with our managers because we are not hugely resourced to carry out significant direct engagements,” she said. “So we are pushing our manag- ers to report on stewardship a lot more. We are not just looking at our equity managers on that, we expect reporting on engage- ment progress and outcomes from all of our managers. “We are also looking at the different collaborations that you can join,” she added. “Climate Action 100+ was established to focus on public equity, but it is expanding to bring in some of the larg- est emitters that may only issue debt. It is putting critical mass and assets together to push these companies on specific asks.” Mennie agrees that asset owners should not be deterred by their size from trying to change corporate practices. “Company management want to talk to informed investors. “We have the advantage in that we are aligned with company management, we want the same outcomes in that we have an interest in the financial return they are achieving,” he added. “So when we talk to management we are able to explain why we are asking them for data on carbon emissions, why we want them to have a transition plan and to quantify what the cost of climate change will be to them. Mennie repeated the importance of investor engagement. “It is perfectly possible for investors of all sizes to engage quite well with companies, as long as they are bringing something to the table,” he said.
“There has been no disagreement on this panel about how important it is for fixed income investors to engage. They should engage. Unlike equity, fixed income is not perpetual capital, it has to be renewed. There is an ongoing opportunity to engage with companies as they need new debt. It opens up a wider part of the market. There are lots of companies, particu- larly in Asia, which are government or family owned and debt is a way into those businesses. “It opens up a whole new area for engagement. It is critical that debt investors of all sizes are thinking about engagement,” Mennie added.
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