How easy is it to build a sustainable debt portfolio if you are not looking at green bonds? Thompson: It is not easy, but it depends what type of bond port- folio you are putting together. Increasingly, defined benefit schemes are looking for buy-and-maintain credit mandates. So, it is about deciding what universe you want your manager to fish in. That is going to pull you towards companies which are more sustainable in the long run and, therefore, your port- folio will move in that direction. As an asset owner, I do not tell the fund manager what to do. I set the parameters for them. I worry about labels because they can have unintended consequences. Bikos: This is an important point. If you look at most buy-and- maintain mandates, due to the way the market is structured, they have a lot of utility exposure. Utilities look bad on a CO2 emissions basis, but they have made strong commitments to change. Forget about the label, it is about the direction of travel. As long as we can hold them accountable and issuers can demonstrate a clear plan of action we will support their plans. Emmons: Mark made an interesting point around the different approaches institutional investors are taking to build sustaina-


My biggest concern is that while green bonds are ringfenced for certain projects, if an issuer gets into financial trouble the proceeds could be


used to pay a debt. Henrietta Gourlay, Grosvenor Family Office


ble portfolios. In the fixed income space, everyone understands the importance of good ESG integration as a risk management tool. It is different from the equity space, where it is more about upside capture. The asymmetry in bond markets means that it is predominately about longer term risk management. The evolution we are seeing today in the sustainable space is just an extension of this. Every client will have different priorities, but it should not be about giving up returns. Good, solid ESG integration is the minimum standard people should focus on as a risk manage- ment tool. Yu: ESG integration started with excluding controversial sec- tors. Now we are thinking about ESG scores. But the major focus we have as an asset owner is meeting our net-zero goal and how that is reflected in our fixed income portfolios. Climate risk is key when focusing on this space and green bonds could be a climate-solution investment. For the majority of the portfolio, we should have a common framework for investing in the climate KPIs we are looking at to harmonise our investment approach. For example, there are more sustainability-linked bonds today and each has different clauses, so we need a common frame- work to assess them. There needs to be regulatory changes on the sustainability-linked bonds side. Forest: Green bond is not just a label. We decided to finance a project with a clear KPI, to accompany a specific issuer in their transition. Thompson: So, if an issuer has a green bond and a traditional bond, which have the same duration, but the green bond is more expensive, as a fiduciary, should I buy the green bond? Yu: It goes back to fundamental research. Ask why there is a basis point difference between bonds with the same maturity, duration and credit rating. Perhaps, investors put credentials on these green bonds as, given their dialogue with the company, they understand the ESG strategy. If you believe in the strategy and believe there is an opportunity for value creation, there is an incentive to put money into that bond. Thompson: Where is the value creation coming from because it is the same issuer? Forest: I agree with what you say from a buy-and-maintain per- spective, but benchmark and absolute return investors could make money from selling their green bonds, if the market is strong. So, for buy and maintain, there is a problem, and that is why I expect a tax change to create an incentive to invest in green bonds.


Thompson: So, a tax will change the way a fiduciary assesses green bonds? Forest: There is some interesting analysis in the US and Europe


June 2022 portfolio institutional roundtable: Sustainable debt 11


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