This is one of our biggest challenges. Take a bank, for example, how do analysts understand the risks in their lending books? Or electric cars. If you want to build electric cars, you need bat- teries and to make batteries you have to mine seven rare min- erals. Then you have to expand the national grid seven fold to cope with everybody’s power requirements. It is a journey, we are going to get there, but there are a lot of challenges along the way when you are evaluating issuers from the perspective of the supply chain. Yu: Sectors like banks, utilities or car makers, when it comes to new issuance, they are the ones who want to promote their cli- mate transition strategies and to be more in line with market standards. They are trying to engage more with investors and data providers to understand how they can measure and better disclose their Scope 3 emissions. More and more companies are disclosing their Scope 3 emissions and their climate KPIs. So, there are positive changes. Forest: Green bonds could also be the answer. Toyota are com- ing up with green bonds to finance hybrid cars, which have KPIs around CO₂ emissions saved per vehicle. Emmons: To what extent will Toyota be able to accurately report
on the emissions of all inputs into their unit production? Green bonds may be positive in that regard. Yu: There are other options. There are social bonds and sustain- ability bonds. We engaged with the World Bank in their five- year rhino bond, varying final payment depending on the growth rate of rhinos. It is a symbolic development in the mar- ket in that it makes a real impact. We will see more bonds like this going forward and not just green bonds. It is an interesting change. Petheram: It was a great deal, but we couldn’t invest. We would have had to sacrifice return. I do not have a mandate to do that. Yu: We do not receive a coupon until the bond matures. Its structure is focused on a real world outcome, compared to existing bond structure with financial return focus. Forest: Sustainability-linked bonds are good instruments to promote sustainability strategies by monitoring KPIs. Bikos: The problem our asset managers have with sustainabili- ty-linked bonds are the step ups. They are marginal – 25bps for missing your target for three years is nothing. They are not incentivised to improve. Yu: For a small company, the revenue impact of a 25bps hit
A manager will not achieve a high ESG rating if they cannot show evidence of strong engagement. Just integrating ESG is not
enough. Lewis Emmons, Mercer Investments
June 2022 portfolio institutional roundtable: Sustainable debt
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