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What’s next for ESG fixed income?
Bonds we can build on
For Professional Investors Only. PIMCO Europe Ltd (Company No. 2604517) is authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. PIMCO Europe Ltd services are available only to professional clients as defined in the Financial Conduct Authority’s Handbook and are not available to individual investors, who should not rely on this communication. ©2022, PIMCO Past performance is not a guarantee or a reliable indicator of future results.
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The continuous development of the sustainable fixed income market is making it more accessible for bondholders attempting to tackle global warming and social inequalities. By focusing on vehicles like Green, Social and Sustainability (GSS) bonds, for example, fixed income investors can help influence a company’s ESG profile and, potentially, help it achieve its sustainability objectives. Taking the active route is crucial in that regard. Not every bond that is labelled as ESG-compliant meets the expectations of environmentally and socially conscious investors, which makes thorough research and case-by-case assessments a necessary requirement. We take a look at the challenges and opportunities in the sustainable fixed income space – an area that’s still in the making but is already off to a promising start.
ESG is here to stay
Turning the ideal of sustainable growth into reality is easier said than done. In this webinar, we explore how bondholders can contribute to a fairer, greener future for all.
WEBINAR - 14 June 2022, 10am BST
WEBINAR - 07 decEMBER 2022, 10am GMT
Bonds with benefits
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A real-life take on ESG
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Where will the next peak in ESG investing emerge?
Getting atop ESG
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Read our interactive ESG report, including features on engagement, the path to net zero, and climate risk.
REPORT
ESG Investing Report
Register now for our Bonds with Benefits webinar on 07 December at 10:00am GMT
WEBINAR - 22 NOVEMBER 2022, 10am GMT
Economic success, social equality and environmental consciousness can - and must - co-exist.
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ESG bonds 101
Register now for our Bonds with Benefits webinar on 22 November at 10:00am GMT
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DISCLAIMER. All investments contain risk and may lose value. Investing in the bond market and/or investing in bond strategies is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Opinion and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. PIMCO is committed to the integration of Environmental, Social and Governance ("ESG") factors into our broad research process and engaging with issuers on sustainability factors and our climate change investment analysis. At PIMCO, we define ESG integration as the consistent consideration of material ESG factors into our investment research process, which may include, but are not limited to, climate change risks, diversity, inclusion and social equality, regulatory risks, human capital management, and others. Further information is available in PIMCO's Environmental, Social and Governance (ESG) Investment Policy Statement. At PIMCO, we define ESG Integration as the consistent consideration of material ESG factors into our investment research process to enhance our clients’ risk-adjusted returns. Material ESG factors may include but are not limited to: climate change risks, social inequality, shifting consumer preferences, regulatory risks, talent management or misconduct at an issuer, among others. We recognize that ESG factors are increasingly essential inputs when evaluating global economies, markets, industries and business models. Material ESG factors are important considerations when evaluating long-term investment opportunities and risks for all asset classes in both public and private markets. Integrating ESG factors into the evaluation process does not mean that ESG information is the sole or primary consideration for an investment decision; instead, PIMCO’s portfolio managers and analyst teams evaluate and weigh a variety of financial and non-financial factors, which can include ESG considerations, to make investment decisions. The relevance of ESG considerations to investment decisions varies across asset classes and strategies. The Fund’s ESG investing strategy may select or exclude securities of certain issuers for reasons other than financial performance. Such strategy carries the risk that the Fund’s performance will differ from similar funds that do not utilize an ESG investing strategy. For example, the application of this strategy could affect the Fund’s exposure to certain sectors or types of investments, which could negatively impact the Fund’s performance. There is no guarantee that the factors utilized by the Investment Advisor will reflect the opinions of any particular investor, and the factors utilized by the Investment Advisor may differ from the factors that any particular investor considers relevant in evaluating an issuer’s ESG practices. Future ESG development and regulation may impact the Fund’s implementation of its investment strategy. In addition, there may be cost implications arising from ESG related due diligence, increased reporting and use of third-party ESG data providers. PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the managers and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guarantee. For Professional Investors Only. PIMCO Europe Ltd (Company No. 2604517) is authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. PIMCO Europe Ltd services are available only to professional clients as defined in the Financial Conduct Authority’s Handbook and are not available to individual investors, who should not rely on this communication. (C) 2022, PIMCO Past performance is not a guarantee or a reliable indicator of future results.
This video is produced by Citywire. Views, thoughts and opinions expressed in this video do not necessarily represent those of PIMCO.
ESG investing within fixed income is gaining steam. Active management is crucial for its ongoing success. Frameworks around research and analysis are important to determine which issues will meet both a client’s financial goals as well as their sustainability objectives. We take a look at the benefits of putting ESG issues at the centre of the investment process and explore how investors can influence a company’s sustainability journey and ESG goals in the long term.
Find out more about sustainable investing here
While the focus has largely been on companies who oversee the transition to net-zero emissions, we’re now seeing a turn to bonds as a means of driving change. The audience of NMA is in tune with the trends that are emerging in client banks across the country. Our poll takes a dive into these and identifies where the next peak in ESG investing could emerge. This piece is worth an indicative 30 minutes of CPD.
ESG trends are reshaping what it means to be an asset manager and an investor. As our latest New Model Adviser (NMA) reader poll has revealed, sustainable investing means different things to different people, but the consolidation of different views means that trends emerge within the wider ESG scope.
To learn more about PIMCO on Sustainability-Linked Bonds, click HERE
To test your ESG knowledge, click HERE
To learn more about PIMCO’s Net Zero Framework, click HERE
To learn more about PIMCO’s engagement on Methane Emissions, click HERE
In contrast with equities, ESG bonds have the unique benefit of being contractually tied to direct ESG-related activities. Use of proceeds bonds, which make up most of the market, devote their proceeds to specific sustainable projects. A good example is a large car manufacturer that issues a green bond to raise capital for electric vehicle battery development. Sustainability-linked bonds also offer unique investment opportunities, with their issuance surging ten-fold in 2021 compared with the previous year. These bonds raise capital for general purposes but offer a financial incentive to issuers to deliver on sustainability objectives. PIMCO believes that this new type of instrument has materially broadened the opportunity set to a large number of issuers and sectors that can now produce positive sustainability outcomes while diversifying their investor base. Increasingly, social key performance indicators are being tied to sustainability-linked bonds. PIMCO conclude, while social issuance has eased in recent quarters as the effects of the pandemic have started to fade, in the longer term we may see increased investor focus on socially oriented investment solutions supported by, for example, the design and development of a social taxonomy.
Do your clients believe that fixed income investing can lead to positive sustainability outcomes thanks to engagement with issuers?
57% Yes, bond investors can engage and materially influence issuers’ practices 43% No, only equity investors can do that via proxy voting 0% Yes, bond investors can engage but typically don’t have material influence on issuers
Delivering on sustainability objectives
As an asset class, fixed income is well placed to drive meaningful ESG change for two main reasons. Firstly, the global bond market is significantly larger than the equity market – providing a larger opportunity set in terms of engagement candidates, including private businesses, sovereigns, local authorities and supranational issuers. And secondly, unlike equity securities that are in perpetuity, bonds mature and their issuers have regular refinancing needs, meaning that engagement can be repeated – and even result in the issuance of dedicated ESG-labelled fixed income securities. This allows investors to deploy capital in more targeted ways and monitor how the capital is being used through covenants and other metrics according to PIMCO. Bond investors are in quite a unique spot to exert pressure and promote positive change. Engagement is an opportunity not lost on PIMCO, whose analysts engaged with 1,585 corporate bond issuers globally across a range of industries and topics in 2021. This included engaging with more than 20 global banks on net-zero commitments and time-bound expectations in lending policy in line with the Paris Agreement and more than 50 energy companies on measuring and setting reduction targets on methane emissions.
Are your clients increasingly seeking bond investments with active ESG engagement?
8% Yes, regardless of investment returns 18% Yes, but only with positive investment returns 56% No 18% No, but I think they soon will be
Bonds prime to promote change
The market for green bonds has grown exponentially and has more to offer than that of other ESG-labelled bonds. Factors compelling companies to issue more green debt include the state of energy transition in the context of secular sustainability trends, investor demand and broader environmental-related innovation in ESG markets, such as carbon capture and storage technologies. A powerful impetus for future growth is the expansion of policy and regulation as financial regulators across the globe redouble their efforts to improving environment-related disclosures. The EU taxonomy for sustainable activities aims to clarify which investments are environmentally sustainable. It was implemented as part of the European Green Deal, which aims to accelerate energy transition in the EU and has increased familiarity among investors of environment-related investment opportunities. In Asia, the Monetary Authority of Singapore and Securities and Futures Commission of Hong Kong have outlined new requirements on environmental risk management and the incorporation of climate-related risks into investment and governance processes. And in the US, the Securities and Exchange Commission has proposed rules to enhance and standardise climate-related disclosures for investors. Each piece of legislation shares a common goal: to improve the transparency of environmental disclosures, increase data accessibility to retail investors and potentially accelerate investments targeting positive environmental outcomes.
In your opinion, what will be the most significant contributor to the rise in the green bond market over the next ten years?
23% Push factors – Paris Agreement on Climate Change / UN Sustainable Development Goals 27% Pull factors – investor demand 5% Accessibility – greater market liquidity 45% Regulation requirements from financial authorities
Regulatory tailwinds
There is a distinct focus on environmental factors and standards in the context of broader ESG. A variety of reasons are behind this, according to PIMCO. Firstly, climate change and the immediacy of environmental change is more discussed now than ever before, particularly in the context of increasingly frequent natural disasters. One recent trend that has attracted significant market attention is decarbonisation and net zero – a state at which the amount of greenhouse gases emitted by human activities is exactly offset by emissions taken out of the atmosphere. PIMCO believes with carbon dioxide emission concentrations reaching new records, world leaders from the public and private sector have announced new and somewhat more ambitious climate-related commitments, spurring investors to consider and explore net-zero solutions. It is an area of intense focus for responsible asset managers. The 71 members of the UN-convened Net-Zero Asset Owner Alliance have committed to transitioning their investment portfolios to net-zero emissions by 2050, if not before. A net-zero aligned portfolio is typically still responsible for some carbon emissions but has taken steps to reduce these and then offset those remaining. PIMCO, which manages significant assets for nearly half of the 71 members, is keenly aware of the market and societal trends that are reshaping what it means to manage a global sustainable business in the 21st century. Through our partnership with these forward-thinking investors, we have developed capabilities to help clients reach their net-zero goals by decarbonising their portfolios.
What elements of ESG are your clients most engaged with currently?
45% Environmental 14% Social 14% Governance 28% All
Awareness of the climate crisis
Daniel Joseph McCurdy Vice President Account Manager, PIMCO
Sustainable investing means different things to different people, but the consolidation of different views means that trends emerge within the wider ESG scope. While the focus has largely been on companies who oversee the transition to net-zero emissions, we’re now seeing a turn to bonds as a means of driving change. The audience of NMA is in tune with the trends that are emerging in client banks across the country. Our poll takes a dive into these and identifies where the next peak in ESG investing could emerge. This piece is worth an indicative 30 minutes of CPD.
Take the quiz at the end to earn a 30 minutes structured CPD
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Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be appropriate for all investors. Equities may decline in value due to both real and perceived general market, economic and industry conditions. The value of real estate and portfolios that invest in real estate may fluctuate due to: losses from casualty or condemnation, changes in local and general economic conditions, supply and demand, interest rates, property tax rates, regulatory limitations on rents, zoning laws, and operating expenses. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Private credit involves an investment in non-publically traded securities which may be subject to illiquidity risk. Portfolios that invest in private credit may be leveraged and may engage in speculative investment practices that increase the risk of investment loss. An investment in any PIMCO alternatives funds or strategies entails a high degree of risk and investors should carefully read all fund documents and risk disclosures. Diversification does not ensure against loss. At PIMCO, we define ESG Integration as the consistent consideration of material ESG factors into our investment research process to enhance our clients’ risk-adjusted returns. Material ESG factors may include but are not limited to: climate change risks, social inequality, shifting consumer preferences, regulatory risks, talent management or misconduct at an issuer, among others. Note that there is different ESG expectations and definitions. Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice. 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The Italian Branch, Irish Branch, UK Branch and Spanish Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority; and (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). 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Grover Burthey Head of ESG Portfolio Management at PIMCO
Victoria Hasler Head of Fund Research at EQ Investors
Shilen Shah Senior Bond Strategist at Investec
David Thomson CIO of VWM Wealth
Many investors think economic success, social equality and environmental consciousness are mutually exclusive when, in fact, they can and must co-exist. But while that’s all well and good, turning the ideal of sustainable growth into reality is easier said than done. Our panellists discuss how bondholders can tackle environmental, social and governance issues while contributing to a fairer, greener future for all.
Webinar Video Heading
Multi-asset funds have become crucial for advisers and their clients – and why wouldn’t they: dynamically managed, broadly diversified and relatively risk-averse, mixed-asset strategies aim to provide steady returns in all market conditions while also giving investors access to a product that can react flexibly to the current market environment. In association with PIMCO, we set out to delve into the joys and challenges of multi-asset investing. • How have multi-asset funds fared in different market environments? • What do advisers need to be mindful of these days? • And what actually makes a good multi-asset manager? Learn about the ins and outs of navigating the multi-asset universe and find out what it takes to successfully run a multi-asset portfolio.
How can multi-asset investors make the most of the current environment and weather market jitters, inflation woes and political tensions?
Asking the big questions
In times of economic distress and mounting volatility, the ability to react swiftly to rapidly changing circumstances is becoming even more important. Enter multi-asset funds
The perfect stabiliser
Geraldine Sundstrom, managing director and portfolio manager at PIMCO, explains why multi-asset funds are thriving in the current environment
The great transformation
Citywire’s Ian Horne gives an overview of the status quo in multi-asset investing
Quest for diversification
A one-stop shop for investors
PODCAST
SUB-HEADLINE ONE
Now more than ever The case for multi-asset investing
A closer look at an investment approach that has never been more relevant than today
Register now for our multi-asset webinar on 14 June at 10:00am BST
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Sub-Headline two
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2 Educational Modules: 1. Multi Asset (May/June) 2. ESG (Oct/Nov) Each module splits into: x3 bitesize elements designed to educate + promote webinar sign up - Animated video studio recording (Similar to Hermes) - Podcast with PIMCO + 1 income investor - Longform article with audiobook version OR Mini documentary on opportunities from interest rates rise x1 webinar hosted live and distributed through catch up after
Haeding Style One
Multi-asset funds provide a level of flexibility single-asset investors can only dream of. But it’s not just their ability to move swiftly in and out of asset classes at the most opportune time that can make the lives of advisers a lot easier. By providing exposure to a variety of areas and sectors, multi-asset funds are also able to make the most of the possibilities at hand. Ian Horne, head of UK audience development at Citywire, shines a light on the intricacies of multi-asset investing, explains what to look for in a good multi-asset manager and reveals why multi-asset funds are now more relevant than ever.
MULTI-ASSET
Explore the many faces of multi-asset investing here
In this podcast we discuss: • Fundamental shifts reshaping the economy and their impact on multi-asset investing • Implications for top-line growth and inflation • How investors can account for the dynamic nature of cross-asset correlations • Where investors can find compelling opportunities in this environment
Geraldine Sundstrom Managing Director and Portfolio Manager, PIMCO
What do the current transformational trends mean for multi-asset investors?
Guy Foster Chief Strategist, Brewin Dolphin
Ian Horne Head of Audience Development, UK
Multi-asset funds have outperformed the market in recent drawdowns. In a time of economic distress and volatility multi-asset funds offer diversification and flexibility to adjust portfolio positionings in changing environments. With a potential risk of recession looming on the horizon, the ability to react swiftly to changing circumstances is becoming more and more important. We asked the audience of New Model Adviser for their take on the current multi-asset landscape. The answers we received paint a detailed – and in parts surprising – picture of an investment approach that is playing an increasingly important role these days. This piece is worth an indicative 30 minutes of CPD.
The case for multi-asset funds
A poll among NMA readers shines a light on the joys and woes of multi-asset funds, transformational shifts, and current opportunity sets
We spoke to Joseph McCurdy, account manager at PIMCO ‘Multi-asset products do something many individual fund pickers may struggle to do themselves,’ he says. ‘They act as great diversifiers, not least due to their flexibility and the broad range of asset classes they cover.’ This heterogeneity spells opportunity, especially in times of crisis. 37% of poll participants use multi-asset products as diversifiers while an equal percentage of respondents employ them as a holistic solution. Multi-asset funds, McCurdy says, provide a level of adaptability ‘you may not get if you just buy equities in a single-asset fund’. The ability to move in and out of asset classes at the most opportune time can make the lives of advisers a lot easier, he adds. ‘If something happens in the markets, there can be less worry about things like rebalancing their portfolios and adapting them to a new reality. Multi-asset funds can serve as a safety blanket, which comes in handy in times of distress.’
PQ: What are you using multi-asset products for?
37% As a diversifier 37% As a complete solution 21% Other 5% As an outsourced option
But despite their draw, multi-asset funds are by no means immune to external shocks. According to more than half of poll participants, inflation is the biggest factor in determining their decision to invest in multi-asset funds. By comparison, less than a third believe that the war in Ukraine will be the defining theme for multi-asset investors in the months to come. It’s key to remember that there are both holistic multi-asset portfolios, which are more of a one-stop shop for asset allocation, as well as more specialised solutions like inflation-fighting multi-asset portfolios. ‘Multi-asset funds can pick and choose where they get their exposure from. That’s why something like Russia’s invasion of Ukraine or Covid-induced supply chain issues, which can be managed through asset allocation shifts and thematic allocations, are generally seen as having a much smaller effect on them than on single-asset portfolios,’ McCurdy points out. As for inflation upticks, long-term experience is crucial. Investment managers haven’t had to grapple with inflationary periods in developed countries since the 1990s, so the number of fund managers who have had any first-hand experience in dealing with rapidly increasing prices constitutes a small strata. Times like these, he adds, require level-headedness and prudence.
PQ: Which theme will have the biggest impact on multi-asset investing in the months to come?
52% Inflation 29% Russia/Ukraine conflict 16% Supply chain issues 3% Reopening boom in major developed economies
Challenges
However, remaining calm is easier said than done when equity markets have been on a rollercoaster ride for the past few months, and fixed income is facing a challenging course. In PIMCO’s latest Cyclical Outlook, global economic adviser Joachim Fels and CIO of global fixed income Andrew Balls make no bones about the current environment but do see opportunities ahead. ‘Significant uncertainty clouds the outlook as the global economy confronts a shock that is negative for growth and will likely spur further inflation,’ they say. ‘In our base case, growth remains supported by the post-pandemic economic reopening and pent-up savings bolstering demand. Inflation may peak in the next few months and then moderate gradually.’ But Fels and Balls point out that there are risks to this scenario. Should the war in Ukraine escalate further, the possibility of a recession in Europe is not out of the question. To find opportunities in such a highly-charged environment, people are turning their eyes towards emerging market equities, as indicated by half of poll participants. Meanwhile, only 30% of respondents find developed market equities the most compelling asset class. Listed alternatives and government bonds bring up the rear, with a combined 20% of votes. Multi-asset funds, with their relative ease of exposure to a variety of areas and sectors, are able to make the most of the possibilities at hand. Their beauty, McCurdy says, lies in their universality. ‘For all intents and purposes, a multi-asset fund is there to deliver something different.’ After all, the ultimate goal is to diversify risks away from one single asset class. ‘That’s why people buy them as a one-stop shop solution or as a diversifier, not as a direct exposure to a specific asset class or market environment.’
PQ: Where do you find the most compelling opportunities?
50% Emerging market equities 30% Developed market equities 15% Listed alternatives 5% Government bonds and equities
Opportunities
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The many faces of multi-asset investing
In light of spiking volatility, surging inflation and the rise of geopolitical conflicts, many investors just want to bury their heads in the sand and call for a timeout. Instead of giving into the gloominess of it all - because, let’s be honest, when has that ever helped - we take a step back and focus on the bigger picture. In this webinar, we explore how multi-asset investors can make the most of the current environment and weather market jitters, inflation woes and political tensions.
Multi-asset Investing 2.0
