ESG and sovereign debt – Roundtable
longer be able to borrow to fund all the programmes that they want to do to keep the electorate happy.
When we start to phrase these engage- ment questions around, the investors we represent would like to do every- thing possible to ensure that you as the government can continue to enjoy smooth and unrestricted access to financial markets, suddenly it changes the tone and nature of the conversation from telling the government to stop doing something to laying out a path they can take to keep doing the things they are elected to do. That inevitably involves us working with the government to outline how we can continue to have a functioning govern- ment bond market by making sure a gov- ernment’s fiscal standing and strength is managed effectively. That is going to ensure that their finances remain in good shape and they can continue to access markets. When we say to governments that if they address some of these con- cerns around climate risk, you might find that you widened the potential universe of investments in your debt and, therefore, your funding costs decrease.
One of the ways governments have done that is by issuing green bonds. But they could also improve their disclosures or the framework with which they provide information to investors. We
found, through our engagement
efforts, that those types of conversations have been much more fruitful. One of the fascinating questions with this is how do you measure progress? How can you tell that governments are taking the steps they said they would take? In a lot of cas- es, you cannot measure progress, but you can look at the statements governments make and we have been satisfied with the incremental pace of change.
Engagement is totally different in the gov- ernment space, and there is a different mode of operation that we are gradually learning as a fund manager how to oper- ate within.
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. Adam Matthews,
Church of England Pensions Board
Gerard, how easy is it to discuss ESG tar- gets with governments? van der Pol: It depends on the govern- ment. Some coal producing countries have engaged with managers, given them clear objectives and allowed them to make their point about the country’s carbon emissions. But this is a complicated issue. It is not a level playing field in that you cannot engage with all governments to the same degree. Political ambition makes communication easier. But it is important that managers are willing to engage to get hard commit- ments from governments.
It is difficult because at the end of the day, it is politics, and politics can change rapidly. Matthews: As an investor community we have sent many letters to many govern- ments. There comes a point when you wonder how effective that is. On one level, it is a helpful signal because £xtrn sign- ing a letter is saying this is important, but frankly, beyond some mood music, its impact is limited.
The opportunity is then to reshape the dynamic in this dialogue to have a differ- ent conversation with governments. Investors must demonstrate they under-
stand the path a country is on, the risks it faces and how they are factoring them in. They could then collectively go into coun- tries under pressure on issues like cli- mate change and offer to work with them to achieve their transition objectives. If we can get conversations in that space, I suspect the dynamic with governments will be different and could potentially achieve a higher level of ambition on the Paris climate agreement.
There will still be letters, but we will work on a more practical level with countries, which requires a mindset change. We need to be co-ordinated in the way Cli- mate Action 100+ is with companies but engaging with countries is different. There is opportunity to come together in a co-ordinated way to signal intent, what issues are important and how we can be helpful. Those of the interventions we are looking to support and potentially engi- neer with others.
How easy is it for a bondholder to engage with governments as an individual? Ryan: We do have positive outcomes. The discussions have gone from us asking for information on ESG risks to issuers want- ing to talk to us about their ESG disclosures.
Explaining to issuers how important this is to the superannuation funds and the insurers we invest on behalf of makes a difference. They are unable to speak to those people directly, so it is important we set the tone by explaining to issuers just how important this is. So, engagement is definitely having positive outcomes.
Rima, are the agencies who issue debt on behalf of emerging market governments open to talking about how they will use the capital? Sen: There is an additional opportunity, particularly when you get to the smaller or newer emerging market and frontier issuers. Even individual bondholders can make a measurable impact with govern- ments not only open to, but actively want-
Issue 108 | November 2021 | portfolio institutional | 55
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
