ESG and sovereign debt – Roundtable
How important is ESG to institutional investors when investing in sovereign debt?
Adam Matthews: As an ethical pension fund, we consider a range of ESG criteria when assessing an asset class. Issues like climate change are important, so we need more evidence of the measures countries are taking in the assets they are bringing to market. We also need to understand how what is on offer sits within a coun- try’s transition plan.
That is why it is important for a fund like us to work with assets owners and fund managers to determine a criteria to understand what credible looks like. Chris Grant: This is not yet a big issue for us as we are at the beginning of our ESG journey in regards to sovereign debt. Our LDI portfolio is also quite vanilla, in that it is all gilts. We watched the recent 10-year green gilt supply closely and may take part in the long-dated bond due in October. So, we are looking at this, but it is not something we have executed in the government space yet.
What ESG issues standout for the Nation- wide Pension Scheme? Grant: There are many. For example, in my previous life, I focused on the multi- lateral development banks and suprana- tional agencies. They have a clear social mandate, which I expect will migrate into the government green debt space in time. However, a potentially big limiting factor is the pipeline of green projects that gov- ernments can invest in. For example, investor demand in Germany is high, but the supply is not there. So, the market is evolving as it starts its journey.
How important is ESG to Unilever when investing in government debt? Gerard van der Pol: We try to do more. Cur- rently, we focus on ESG ratings and meas- uring the average score against the bench- mark. We are also looking more at the carbon intensity of countries. Some are
difficult to measure, but some managers have their own propriety system. We want to investigate this further to better assess the exposures. That is the way we are moving.
ESG ratings are supplied by external pro- viders and are a complicated issue. There is always an element of politics involved, which I find somewhat tricky. We are try- ing to achieve a better score than a bench- mark, which is a minimum, and measure carbon exposures, if the data is available. You could even take broader steps by being compliant with the UN Sustainable Development Goals. Nuwan Goonetilleke: Sovereign debt is tra- ditionally considered a risk-free asset. In other asset classes, ESG considerations came in earlier and there has been more development around corporate credit. That view is starting to change. Whilst we do not have a specific ESG sovereign mandate, we participated in the green gilt. This could be a shift. As we work to decarbonise 50% of our investment portfolio by 2030, we are going to have to look at our sovereign bonds given their high percentage of our total assets.
Why is it important for governments to issue ESG-compliant debt? Dr Laura Ryan: ESG risks impact every- thing from GDP to corruption and geopo- litical outcomes, which all affect a govern- ment’s ability to repay its debts. There is lots of research showing that credit ratings are highly correlated with ESG risks, and one of the biggest drivers of yield are credit ratings. This means that ESG risks are important for driving yields, and government bond yields are impor- tant for everything. For example, every asset class is priced off the yield curve, it sets the price of your mortgage and tells governments how much it will cost to borrow to fund their fiscal stimulus packages. So, ESG and the government bond market impacts everything.
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