At our recent London ESG Investor Summit, we were delighted to host more than 130 clients for a lively discussion on the sustainable investing landscape and the growing role of debtholders in effecting positive societal change. The sessions leaned on a combination of PIMCO ESG specialists – including portfolio managers, research analysts (sovereign, credit, climate and engagement) and product strategists – and industry leaders, like Fiona Reynolds and Jake Reynolds.
Here are our top five takeaways:
A just transition is important
Fiona Reynolds, CEO of the UN Principles for Responsible Investing (PRI), reflected on the potential benefits of a low-carbon world – both economic and social. The 2018 New Climate Economy report, for instance, concluded that transitioning to a low-carbon growth path “could deliver a direct economic gain of US$26 trillion” and “over 65 million new low-carbon jobs” by 2030. However, moving from a high-carbon economy to one focused on renewables needs to be properly managed, otherwise we risk creating stranded workers and communities, such as those in western economies during the decline of traditional manufacturing industries in the post-second world war era. Initiatives like Investing in a Just Transition offer a potential solution by seeking to align investors’ efforts around climate change with inclusive development pathways.
A policy-ambition gap exists
While the number of public policy responses to ESG (environmental, social, governance) issues has soared in recent years and the UN Sustainable Development Goals (SDGs) have received widespread support, such enthusiasm could flatter to deceive. In the case of climate change (SDG #13), current policies would likely fall short of the globally agreed aim of holding warming well below 2°C this century (see Figure 1).
Data is a barrier
Dr Jake Reynolds, executive director of the Cambridge Institute for Sustainability Leadership, explained how transparent measurement and reporting are critical in enabling investors to make informed decisions and direct capital towards positive impact. Unfortunately, current corporate environmental and social disclosures make this difficult to do. For instance, only around 40% of MSCI World Index constituents currently report on climate change. Encouragingly, there is existing guidance for issuers on how to align measurement with investor needs. For more on this topic, see our recent study of 246 issuers’ corporate disclosures, “Corporate Reporting on the SDGs: Mapping a Sustainable Future”.
Fixed income to assume a place of prominence
Since the UN Global Compact launched its concept of ESG investing in 2004, equities have received the lion’s share of attention from investors. Yet, several speakers believe the tide is changing given growing market recognition that ESG issues present a material credit risk to both corporate and sovereign debt. Moreover, with debt issuance dwarfing equity issuance in the global marketplace, bonds are an increasingly important source of corporate finance. Credit investors therefore have a significant opportunity to exert meaningful influence over issuers’ ESG risk management and disclosure.
Issuer engagement is key
Tied to the above discussion of responsible investment in fixed income was the importance of issuer engagement. Niamh Whooley, ESG engagement analyst at PIMCO, commented that for many years, ESG investing has been predicated on excluding certain sectors and companies from a fund or portfolio. But by actively engaging with issuers willing to improve the sustainability of their business practices, bondholders can have a greater impact than through exclusions alone. It is here that the 17 UN SDGs (see Figure 2) can be a tool for dialogue: They can provide a common language and reporting framework for investors and businesses to accelerate focus, accountability and impact.
The bottom line
What is abundantly clear is that ESG investing is not a fad. Governments and companies are devoted to advancing sustainable development, and the financial community has a critical role to play too. By allocating capital to best-in-class issuers and those committed to improving their ESG practices, investors can influence their behavior towards sustainability issues. This idea lies at the center of PIMCO’s ESG platform, which seeks to align investors’ financial and impact goals by combining ESG-focused portfolio construction with active engagement and transparent reporting.
For more information on our ESG platform, visit “ESG Investing In Fixed Income”.