PI: We are talking a lot about equities but debt is a big part of institutional portfolios. Outside of green bonds, what’s available? Thompson: It is about how you incorporate the management of ESG risks into any bond portfolio. That is the ESG risk mentality but as soon as you start talking about the green bonds part of it you put yourself into a slightly different bracket because you are investing for purpose. Barazal: Green bonds could seem the most obvious route in this sustainability revolution, but in most fixed-income strategies, it is now possible to implement ESG or risk mitigation factors into the process. Sometimes when you look at sustainability risk you might think that it’s more important in an equity investment because one imagines ownership as open-ended, whereas in a bond what you care about is getting your money back at maturity. Volkswagen was in the middle of a huge scandal, but it could pay back its bonds. Duration risk is important for owners of long-term bonds. In that sense, the risk is the same. Three years is easy, but when a sector has been disrupted who knows if that company will exist in 10 to 15 years’ time. That is the question you need to answer before investing. So it matters. The biggest challenge in fixed income that I hear when talking to clients is: “Prove to me that they don’t have a negative impact on performance.” I hate that question because it is backward looking. This is an interesting time, a kind of awareness revolution, which has an impact on the way a company will be judged and challenged. We need to take that into account in all of our portfolios. Varco: It’s good to hear that you are seeing that. Having met pretty much every bond manager creating an ESG product, I guess it’s normal for them to think that they are reacting to client tastes or a marketing opportunity.


Many bond managers don’t believe what you are saying. They will always anchor back to bonds gravi- tating to par or Exxon Mobil may have trouble in 30 years time but they are going to repay their senior debt next June. Thompson: You just said: “…an ESG product.” I don’t know what an ESG product is. I would never buy an ESG fund; I want to buy a fund that incorporates ESG into the investment process. Varco: From multiple managers there have been a plethora of ESG-labelled bond products. I have not come across a proactive way of naming it in fixed income as we have in equities. Thompson: At one level it is simple. How do we incorporate the management of ESG, including climate change risk, into the credit assessment of an issuer? McAllister: We get our fixed income analysts to do the ESG analysis now. There is no separate respon- sible investment team. They do the analysis before it comes to our team. We review it, then it goes back and slowly the review points are going down and down and down and down. Ward: That is an integrated model we would be looking to procure. Then people in your role are picking up the emerging risks or things that are coming perhaps slightly leftfield into an area that’s managing these risks, which is where something like cyber security comes in and where companies of all sizes and sectors are finding themselves impacted. McAllister: I love it when we see a fixed income investment note that automatically includes ESG. Our team just absolutely loves it because that’s what integrated ESG should look like. It is not a separate issue.


Williams: It is important to have it joined up across all asset classes. ShareAction recently produced a report on what corporate bondholders were doing to address climate change. We found that while most accepted that climate change is a risk and were acting on it, we saw little appetite for collaboration between them and equity owners. It would be good to see more active engagement because there you have a lot of power. This is particularly true for passive investors who cannot divest on the equity side but can use their bondholdings as leverage when the refinancing comes up. Barazal: It is power in numbers. It is also challenging; you can’t vote. You need to own the subject, to integrate it, not just have an ESG team. Credit and equity analysts need to look at the risks and the opportunities of sustainability in whatever trend or metrics we are talking about. Dhillon: It is complicated. For several months we have been work-shopping with our equity and credit analysts to look at a common “lens” for each sector. This would help create a co-ordinated ESG per-


18 May–June 2019 portfolio institutional roundtable: ESG


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