Investors need to reward issuers that are committed to good environmental, social and governance (ESG) practices – and punish those which aren’t – when making bond allocations.
This is imperative regardless of whether an investor’s strategy is focused on sustainability, according to Mark Holman, chief executive officer and portfolio manager at TwentyFour Asset Management at the Spotlight On: Fixed Income event.
He believes the broader financial community must play their part in fostering the right corporate practices as far as ESG goes. This can be achieved, for example, by not lending at low spreads to issuers which don’t do any “good” from a sustainability perspective, he added.
Investor sentiment seems to be shifting in this direction. At private banks such as Union Bancaire Privée (UBP), for example, ESG factors also now feature prominently in the onboarding and due diligence process for new products, explained Aman Dhingra, head of advisory for UBP in Singapore.
End-investors are increasingly supportive, too. “Every client we talk to, if prompted, says ESG is an important issue for them,” added Noli de Pala, chief investment officer at TriLake Partners.
Making careful decisions
Putting this into practice, however, is easier said than done.
From a performance perspective, the upside of an ESG investment tends to be capped in the bond markets. This creates a perception among many Asia-based investors that ESG is more of a risk management tool, so the decision to allocate is based more on a moral judgement.
Despite best efforts and education to do the right thing in terms of sustainability, a common reluctance to compromise on returns means adoption rates in Asia might be slower in the fixed income space, explained Dhingra.
Transparency is another key hurdle to driving ESG in bond investing, as is the availability and standardisation of data.
“We assess ESG with a belief that it has the potential to impact the long-term performance of a credit, so we recognise it as a very important element of our evaluation,” said Rong Ren Goh, portfolio manager at Eastspring Investments in Singapore. “But we need more data to support our analysis.”
For example, he says that coverage by the leading index providers is typically only 60% to 70% of the entire universe. And for more focused themes such as greenhouse gas emissions, this falls to around 40% to 50%. “This impedes our ability to make an informed assessment of the portfolio,” Goh added.
Being creative to bridge these data gaps requires investors to rely on proprietary data and their knowledge of companies directly.
Setting new standards
Amid these challenges, there is mounting evidence that clients are increasingly focused on making sustainability a core part of their portfolio.
A new Moody’s Investors Service report, for example, shows that global issuance of green, social and sustainability (GSS) bonds totalled a record $231bn in the first quarter of 2021. This represented a 19% increase over the previous quarter and is more than three times higher than the same period in 2020.
For the remainder of 2021, sustainability-linked bonds remain poised for significant growth, added the report, as issuers seek access to sustainability-minded investors, while maintaining the flexibility of general corporate purposes borrowing.
As a result, investors in Asia need to pay close attention to each credit; the risks for them of not doing so are too big to ignore.
“If you’re not doing ESG analysis now as an integral part of your overall credit work, you’re missing something that could seriously hurt you,” said Holman.