Roundtable – ESG and sovereign debt


stand the risks and opportunities climate presents to each of our assets. This means measuring that to be assured we have understood the landscape and are manag- ing our assets accordingly.


If you are switching your existing stock of government bonds into the green issues, that is costing you money and not all policyhold- ers would necessarily agree with that. Nuwan Goonetilleke, Phoenix Group


ground and how much you can sell them for. So, if your natural resource rents are high, you probably do not have much of an incentive to move to renewables. It is the same with carbon dioxide emissions. If your economy relies on those things, it is difficult for you to transition to a clean economy. What we found was that countries with relatively high carbon emissions would see an increase in their cost of debt. If they had higher renewable energy con- sumption, their cost of debt would fall and yields decrease. If their natural resource rents were higher, then their cost of debt increases. This is a big outcome for us, particularly because we were getting that message from many investors and issuers that it was not a factor being priced in. Given that it is being priced in now, we think there is going to be an even greater premium attached to those risk factors in the future. Matthews: The challenge we have is there is no common framework to assess if a country’s request for finance is consistent with its transition path. Pension funds like us have made net-zero commitments and so we need to under-


52 | portfolio institutional | November 2021 | issue 108


That calls for a common framework to understand the transition and its implica- tions in this particular asset class. We use the net zero investment framework pro- duced by the Institutional Investor of Cli- mate Change, which frames how to approach sovereigns. But you still require a practical tool and that is why we are working with the BT Pension Fund and investor networks to devise a methodology to understand if what a country brings to market is con- sistent with its transition path on climate change. That project is getting underway and will produce a practical tool that we would look to use in our fund to navigate whether a country’s nationally deter- mined contributions are sufficient: identi- fying the risks, the opportunities and dependencies within a country’s indus- tries. There is huge potential to craft something as a collective market, to have a way that we can all look at this as a com- mon tool we can apply.


Our fund will be looking to use this to guide our interaction with managers, in how we set targets, manage risk and engage with countries because when we have a tool like that, the opportunity to engage will be different to the one we cur- rently have, which is quite limited. Grant: The comparability of these invest- ments is a concern. We have seen Europe- an sovereigns’ issue in the green space and have different standards of green, even though they are labelled the same. That makes it hard to engage with the government.


This is still new for everybody, and, as yet, we have not signed up to net zero because we are still considering how we could put a credible framework in place. Furthermore, as my fund is on a de-risk- ing path, in 10 to 15 years’ time we expect to be 90% invested in UK government


debt, so we will be dependent on the gov- ernment’s net-zero commitment to deliver on that ourselves.


What are investors looking for when selecting a manager to build a portfolio of ESG-compliant sovereign debt? Goonetilleke: In addition to the normal capabilities, it is taking engagement beyond the framework and diving into those ESG bags.


Data is also key and finding common points to use within the valuation frame- work. Managers will have their own com- mitments, so it is what points of com- monality can we make work when selecting managers. van der Pol: It is important that the manager is committed to sustainable investment. Their investment process should consider ESG factors. Then it depends on how much additional- ity the manager can provide on ESG. In government rates that is somewhat tricky as there has been more progress on the corporate side and so there is more data available.


A key element is where do you differentiate between governments and corporates. On one hand, a country has the government or


I am not sure that the premium investors are paying is directly contributing to the green agenda although clearly investment in green bonds is.


Chris Grant, Nationwide Pension Fund


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