ESG and sovereign debt – Roundtable
There is an urgent demand to transition to an alternative source of energy that can equally be scaled, but, at the same time, the country is dependent on the energy system they currently have and the mines that mine the coal needed.
A significant investment is required to get South Africa’s carbon-based energy sys- tem onto a different path. I want to see bonds that can back that transition crea- tively in that they not only meet the gov- ernment’s needs but provide what the pri- vate sector wants to support, whilst managing the transition of existing mines in a just way. We need to support a country’s transition in a more whole market approach that recognises it is not just about providing a bond to a government. It is part of a gov- ernment’s plan, how it sits in terms of its ability to deliver it and working with com- panies operating in that country to pro- vide the transition finance, which may not necessarily be perfectly green in its pack- aging but is transitioning dirty assets.
Rima, what are emerging market govern- ments investing their ESG-compliant capi- tal in?
Rima Sen: There is increasing issuance, but there is a long way to go to catch up with the levels seen in developed markets. What is encouraging is that last year sev- en new countries came to the market, and there is a lot more engagement happen- ing from the multi-laterals. The proceeds are funding the purer green projects, but there is scope for that to become broader or to address more com- plex issues.
There is an additional layer of complexity in emerging markets, where a more ‘just’ transition is needed and the E does not always align with the S and the G. There are also governments whose trajectory conflicts with the green bonds they are issuing. Some in Eastern Europe, for example, are issuing green bonds but are increasing their coal capacity when there are viable alternatives.
The difference between corporates and governments is starting to make itself present in the green bond space.
Tamar Hamlyn, Ardea Investment Management
These are things we expect our managers to look at and clients should be cognisant of. It is another issue that makes emerg- ing markets more complex than devel- oped markets.
When it comes to ESG, do you trust sover- eigns to do with your capital what they said they would? Goonetilleke: This is where the Green Bond Framework comes in. We also use third party fund managers. When picking managers, this is an area where we look to work with them. It is not just about what they buy on day one, it is what is their continual process for evalua- tion and are they able to work with the framework and get into the ESG in that report rather than just day one. It is relatively new in terms of its evolu- tion, so there is time for that to bear fruit and to evaluate how well it is working in terms of reporting.
Is there much research into ESG’s impact on government bond yields?
Ryan: There has traditionally been little research on how climate change impacts government bond markets. But that is changing. The current
narrative is that climate
change is not impacting government bond yields, but a research paper we have published challenges that. We found that there are a couple of transition mecha- nisms for climate change risks to impact government bond yields. The first is indi- rectly through GDP, which can be impacted by hurricanes, cyclones and bushfires. GDP is a big driver of govern- ment bond yields, but what was not so ob- vious to us was that climate change tran- sition risks were being recognised by market participants. We thought they would consider it a long-term risk, but we found that they were being priced in and the transition risk factors we looked at were carbon dioxide emissions, renewa- ble energy consumption and natural re- source rates. Natural resource rents meas- ures the difference between how much it costs to dig non-renewables out of the
Issue 108 | November 2021 | portfolio institutional | 51
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60
