Feature


Engagement is different in the bond market than for equities, but it does not prevent bond managers from engaging with


issuers. Matthieu Guignard, Amundi ETF


markets at Amundi ETF. “Engagement is different in the bond market than for equities, but it does not prevent bond manag- ers from engaging with issuers,” he adds. Giulia Pellegrini, a senior emerging market debt portfolio manager at Allianz Global Investors, calls for investors to take a “humble and realistic” approach to what can be achieved in engagement. “We can push issues and make emerging market sovereigns and corporates aware that we demand explanations on certain points. “We expect a high level of engagement with the emerging mar- ket corporates and sovereigns that we invest in,” she adds.


Setting the standard To encourage further growth in the green debt space, the EU has introduced a taxonomy to define what a sustainable asset is. “The regulatory landscape is evolving fast,” Guignard says. “Anything that helps define standards is welcomed by asset managers and investors.


Issuers typically need to refinance their debt when it matures. This is the time when investors should discuss the steps they want the issuer to take to reduce their climate impact. So, there is a point when a bondholder has influence over a cor- porate. “Timing is crucial when working to make issuers more sustainable,” Nietsch says. “The conversations that happen before issuance are when we have the greatest influence.” Newton has been working closely with a couple of issuers to help them understand what constitutes best practice in ESG, and to


enhance and refine their ESG disclosures and reporting.


“Bond issuers recognise they have to be more accountable, and, therefore, more open to hearing input from investors. Ultimately, that communication will improve the sustainability of issuers and their unlabelled bonds,” Freedman says. For some, bondholders have as much right to a say in how a corporate is run as shareholders do. Voting should not come into it. “The right to engage with a company is predicated in the financial stake-holding that you bear,” Reznick says. “In the US and EMs, we have seen companies we have engaged with establish science-based targets and issue sustainability-linked bonds. “If the largest companies at the end of the value chain are responding to government calls to reduce their carbon foot- print, companies are a lot more amenable to engagement than they were because of the direction of regulatory change and increasing disclosure requirements,” he adds. So, speaking with management as a bondholder can be just as effective as speaking with them as a shareholder, says Matthieu Guignard, global head of product development and capital


“There is a diversity of local labels or regulations and it is diffi- cult to find a consensus between them,” he adds. “The EU’s initiative is creating standards and will help the consensus on ESG matters.” Such an initiative is needed. “It is an important evolution,” Reznick says. The EU Taxonomy will help develop the market as access to information has been described as “patchy” by some. “It is interesting how ESG has gone from being a “wouldn’t it be nice to make the world a better place” approach to being data driven. That trend is accelerating,” King says. “Our clients and regulators are not only asking for proof of how we assess companies, but also the engagement we do and how our portfolios look at an aggregate level. This is data-in- tensive work. We do a huge amount of quantitative analysis to support that and it is only going to grow.” However, it is not perfect. “It could fuel growth in the bond market, but the taxonomy is a narrow set of criteria, so a lot of capital will be chasing a small group of issuers, which could mean that some areas of the market overheat,” Freedman says. It has also been criticised for labelling nuclear and gas as green assets.


Despite these concerns, the future looks bright. Demand is high and with regulation and pressure from stakeholders, including pension scheme members, thematic bonds have succeeded in introducing the sustainability agenda to actors that never look at it – regulators and central banks. This is something that could change how the market works. These are exciting times in fixed income and they look set to be so for many years to come.


*) This is the updated version of an article that appeared in portfolio institutional in June 2021


June 2022 portfolio institutional roundtable: Sustainable debt 29


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