There are significant constraints limiting the wider adoption of environmental, social and governance (ESG) considerations in fixed income investing, according to a report produced for Japan’s Government Pension Investment Fund (GPIF) and the World Bank Group.
The report was the result of a research collaboration between the two entities aimed at advancing adoption of ESG integration in fixed income to help achieve sustainable development.
According to the authors, ESG integration in fixed income was catching up quickly with the practice in equity markets and leading investors were “going further and viewing ESG not just as an aspect of risk and return, but merging ESG and ‘impact’ investing”.
However, many investors found implementing ESG in practice a challenge, and this could be exacerbated when it came to their fixed income portfolios, they wrote.
There were no standard definitions of ESG and data – in particular in emerging markets – was still wanting.
Other issues, according to the report, included: how to pursue engagement with debt issuers, especially sovereigns; the role ESG played in credit ratings; and a “dearth” of ESG-focused products for fixed income investors.
Principles and metrics to allow for customised approaches by investors should be refined, they said, and innovative products to accommodate growing demand for fixed income “sustainable investments” should be developed as demand for green bonds and other ESG-labelled bonds was outstripping supply.
They also recommended that conceptual work on ESG and fixed income go beyond the relationship between ESG factors and credit risk to also consider that between ESG issues and liquidity and other market risks.
Hiro Mizuno, chief investment officer of GPIF, said: “Our research collaboration with the World Bank Group will help encourage greater awareness and wider adoption of ESG integration in fixed income.
“We especially value the World Bank Group’s unique convening power and expertise to improve breadth and depth of ESG data, especially of social criteria such as human capital and healthcare, and to refine pricing and cost mechanisms for the green and other labeled bonds so that such products can become mainstream investment products.”
The pension fund was committed to working with its external fixed income managers to integrate ESG, he added.
The report was written by Georg Inderst, an independent consultant specialising in green finance and infrastructure investment, and Fiona Stewart, a lead finance sector specialist at the World Bank.
NN IP joining forces with Chinese manager
NN Investment Partners and China Asset Management (ChinaAMC) are looking to form a strategic partnership with a particular focus on ESG products and services.
On Friday the two asset managers signed a memorandum of understanding that they said would allow them “to explore joint product development opportunities and consequently leverage on each other’s capabilities in European and Chinese capital markets respectively”.
The €246bn Dutch asset manager will be an advisor to ChinaAMC and help it develop and adapt international best practices in integrating ESG factors into its investment processes, according to a statement.
Tang Xiaodong, CEO of ChinaAMC, said: “ChinaAMC hopes to bring more sophisticated investment strategies into China through cooperation with globally renowned asset management organisations like NN IP.”
The company recently struck a partnership with TOBAM to launch a Chinese equity smart beta strategy.
“At the same time,” he added, “ChinaAMC also hopes to increase the international institutions’ understanding of the Chinese capital markets and the Chinese asset management industry, so that these investors will also have more opportunities to participate in China’s economic development.”
The two managers also intend to work together on opportunities under China’s One Belt One Road programme.
Awareness about responsible investment is increasing in China. The Principles for Responsible Investment (PRI), an advocacy organisation, appointed its first head of China in September and recently published a report with recommendations for developing sustainable investment in the country.
ChinaAMC was the first full service asset manager to have joined the PRI, it said.
China’s assets under management will grow sixfold in 10 years, according to a recent report from a Shanghai-based financial consultancy.
UK consultant reports growth in client ESG assets
Consultancy firm Cambridge Associates said the value of ESG-related investments among its client base has more than doubled over the past five years.
Investments had increased from $4bn (€3.3bn) in 2012 to $9.5bn in 2017, it said. Almost a quarter of its clients made a serious enquiry about ESG investments in that same period.
“Of those already with active ESG investments in their portfolios, over 10% are fully committed to ESG, with most or all investment decisions considered through an ESG lens,” Cambridge said.
There was a “clear economic basis” inluencing the recent uptick in interest for many ESG themes, in particular environmental, government policy announcements, and good returns from and increased choice of ESG-related funds.
Recent guidance from the UK’s Pensions Regulator could fuel more demand from UK pension schemes, added the company.
It is one of 16 investment consultancies who recently pledged to help UK pension funds take account of climate change and other responsible investment issues. The pledge was co-ordinated by the Association of Member-Nominated Trustees.