PI Partnership
SUSTAINABLE BONDS OUTLOOK
Scott Freedman is a fixed income portfolio manager at Newton Investment Management
As interest in environmental, social and governance (ESG) considerations continues to grow, these are the trends New- ton Investment Management believes will help shape and grow the sustainable bond market in 2021 and beyond.
First, we anticipate further management incentives tied to ESG- related key performance indicators (KPIs). This should extend beyond senior management and is expected to enhance the align- ment between a wider range of an issuer’s stakeholders. It is important to ask companies where their board ESG oversight and expertise sits, and whether the drivers of the strategy have the necessary skills and responsibilities in place. We frequently ask these questions during engagement with management as it helps demonstrate the corporate culture surrounding a responsible strategy. Many new regulations and policies were announced during 2020, including the ‘greening’ of the European Central Bank’s (ECB) purchase programmes and the development of the European Un- ion (EU) taxonomy, which has helped to define what ‘green’, ‘so- cial’ or ‘sustainable’ means. We expect to see the continued evolution of regulatory plans designed to challenge investors, asset owners, companies and gov- ernments to improve their sustainable disclosure and reporting. There will be opportunities for issuers who can transition and those who develop long-term strategies with ESG considerations in mind. We anticipate further growth in green, social and sustainable bonds from European government issuers and globally. Funding the recovery from Covid-19 has accelerated the growth of use of proceeds from these bonds to include social factors too. Examples include the recently issued EU SURE bonds, while in the UK, Green+ Gilts should launch this year, with the proceeds going to- wards environmental and social purposes. We expect governments to lead by example in reporting on the outcomes of the ‘use of pro- ceeds’ bonds, as their robust and transparent reporting should en- courage companies to follow suit.
Investors are starting to ask more of bond issuers on ESG factors. Although fixed-income investors do not get a vote, they can still engage. However, in many of our meetings, we still see peers fail to ask important ESG questions. By asking more of issuers, from whether they have an ESG plan, to specific topics on how sustain- ability affects their businesses, bond investors can encourage issu-
20 March 2021 portfolio institutional roundtable: Responsible investing
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