Roundtable – ESG and sovereign debt
public sector, while on the other, there are the businesses and consumers. How do they interrelate? Where do we differentiate if we have to assess it on a portfolio level? Where are the borders, basically? Commitment to ESG sustainability is important. What additional measure- ments or indicators can the manager pro- vide on countries and all the individual bonds, such as quasi-government bonds. Basically, we try to select the best manager on ESG, but on the other hand, the return aspect is important. Clients would like to achieve a good return on one hand and have full commitment to ESG on the other, but they do not always go together.
Rima, what are institutional investors look- ing for in a manager? Sen: It is about differentiation. There are a lot of managers that have integrated ESG into their corporate credit process. Our clients are looking for a differentiated process for sovereigns. A corporate pro- cess cannot be applied to sovereign debt. Do you have a different analysis process? Do you have different scoring? Do you have a different way of looking at carbon metrics? You cannot simply apply the same WACI number that you would for corporates to sovereigns, for example. So, we are looking for managers that under- stand that difference as well. Something that is particularly important is that there has historically been a tendency to just focus on governance when it comes to government debt. That has previously been the biggest risk factor, but the E and the S are now being considered much big- ger risks. So, making sure the manager is considering those with equal importance. Finally, are they engaging with govern- ments? We have heard investors and managers say they cannot engage with certain governments because they will not make an individual impact. To move from
individual impact to collective
impact, it is important for all investors to engage with governments of varying sizes.
54 | portfolio institutional | November 2021 | issue 108
We look for managers that are willing to engage, which is important because exclusion is more difficult and nuanced in government debt.
Tamar, when you sit opposite an institu- tional investor, how do you prove that you walk the walk and not just talk the talk? Hamlyn: It is a challenge in the sense that we do not have the ability to exclude gov- ernments from our investment pool. Most of us are required to hold govern- ment bonds for portfolio construction or regulatory reasons, so we do not have that fundamental ability to withhold capital to encourage governments to take the steps we want them to take.
That means we fall back on engagement. Our journey through engagement has been interesting, because now that we have had a few conversations with govern- ment issuers, we realise that you have to take a different approach. We have learned quickly that one approach that absolutely does not work, is to go to
the government and say that our clients have a low tolerance for losing money on your bonds due to climate risk, so could you take steps to reduce the chance of yields going up, and, therefore, incurring lower returns. The government’s response is to say that they have been elected on a policy plat- form to take certain actions and will go about our business because we have been elected by voters to do so. We appreciate your feedback, but we are not able to respond to it. We learned early on that you need to oper- ate within the objectives that government responds to. You need to look at the gov- ernment itself and look at the entity tasked with the issuance and manage- ment of government debt. What you real- ise early in the process is: that entity’s pri- mary responsibility is to maintain access to funding markets because governments like to spend money.
One of the worst things that could hap- pen would be for governments to no
We look for managers that are willing to engage, which is important because exclusion is more difficult and nuanced in government debt.
Rima Sen, Willis Towers Watson
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