PRI in Person is the world’s leading responsible investing conference where signatories of the Principles for Responsible Investment (PRI), like PIMCO, and other investment professionals come together to learn, network, and collaborate over three days. This year, in Paris, we were excited to participate as an industry expert and to engage with attendees on ESG investing (environmental, social, and governance) in fixed income, which we believe to be the next frontier of ESG investing.
(Background: The PRI is a UN-supported initiative to foster sustainable markets and responsible investing. It has more than 2,400 signatories globally as of June 2019.)
These are three key takeaways from our discussions on emerging ESG issues and global trends:
1) Investors want climate-focused strategies
Six sessions focused on the urgency of climate action as the recent news of wildfires in the Amazon and many other climate-related events hung over the conference. Sessions ranged from “The role of central banks in achieving the Paris agreement” to “Raising climate ambition through 2020 and beyond.” As one session noted, the financial impacts of climate change are no longer a distant threat. Natural disasters across Europe, Asia, and the U.S. in 2018 cost $155 billion in total economic losses, according to Swiss Re estimates.
Asset owners expressed an interest in strategies that target positive outcomes on climate issues. We have seen exciting progress from the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) as they clarify for issuers what disclosures financial markets want to see before investing. As TCFD supporters, we welcome the TCFD’s unified standard of disclosure so that companies can issue securities in line with investors’ desire to make vital progress on climate-related issues.
2) Engagement with sovereign issuers is crucial
In addition to corporate engagement, we believe large bond investors, like PIMCO, are well positioned to get a seat at the table with senior government officials to discuss material sustainability issues like air pollution, natural resource use, and climate transition risks. While the bulk of engagement sessions typically focus on corporate issuers, the sovereign debt market is significant. Sovereign leaders themselves are crucial to building the international support needed to achieve global goals. French President Emmanuel Macron welcomed attendees in a video that stressed the urgency of sustainability issues and highlighted the significance of convening in Paris, nearly four years after COP21 and the Paris Agreement.
Two sessions focused on ESG in emerging markets, and PIMCO spoke on a panel titled “Realising the SDGs: investment opportunities in emerging markets.” Although the timeline for successfully engaging with sovereign issuers is much longer than with corporates, we feel our size and history in the market can be an advantage when addressing ESG issues.
3) Appetite for innovative solutions beyond ESG integration is growing
Lastly, it was clear that investors are looking for innovative solutions. Integration of material ESG factors into investment decisions is important, and the progress here has been momentous, but incorporating ESG factors into existing investment processes is no longer a differentiator between asset managers. For the next generation of investors, inspired by youth activists like Greta Thunberg, ESG versions of traditional benchmarks may not be enough to satisfy their appetite for targeting sustainability themes.
Investors throughout the sessions highlighted the need for more targeted solutions across asset classes – particularly bonds – to address sustainability objectives and trends. The long-term nature of social and environmental projects means that debt instruments could be well suited to finance such efforts. Thus, we see the prospect of a blossoming market in sustainable bonds issued by emerging markets, international development banks, and global companies to help meet the ambitious UN Sustainable Development Goals (SDGs) in the coming decade. In particular, business leaders shared examples of how corporate lending rates could be tied to progress on SDG objectives, using the company’s cost of capital today as a way to incentivize their commitment to future sustainability.
We are continually inspired by the commitment of PRI to developing a more sustainable global financial system. PIMCO is committed to our partnerships in building sustainable financial markets.
PIMCO has been a PRI signatory since 13 September 2011 and regularly partners on thought leadership in fixed income, such as “ESG, Credit Risk and Ratings: A Case Study.” For the second consecutive year, PIMCO earned an A+ score from the UN PRI Assessment Report1 across every fixed income category and overall firm strategy and governance.
Learn why we believe the bond market may be uniquely suited to both benefit from and provide finance for ESG-related efforts.
Gavin Power is PIMCO’s chief of sustainable development and international affairs, Olivia Albrecht is head of ESG business strategy, and Samuel Mary is an ESG research analyst.
¹ Source: UN PRI. UNPRI assessment report limited to asset managers signed up to the Principles for Responsible Investment (PRI) and based on how well ESG metrics are incorporated into their investment processes. UNPRI Transparency Reports are available at https://www.unpri.org/signatories/signatory-accountability. For methodology, please refer to About PRI Assessment: https://www.unpri.org/signatories/about-pri-assessment. Past performance is no guarantee of future results.