As highlighted in our annual ESG investment report, we are entering a new era of investing in ESG. The pandemic has exposed – and compounded – a number of social problems, while the threats posed by climate change are increasing. This development has a profound impact on investors and other stakeholders as the ESG investment market continues to expand.
Below are some of the insights from our ESG investment report, focusing on issuer engagement, climate-related portfolio considerations and social issues.
Commitment promotes constructive change
PIMCO actively and consistently works with bond issuers, including corporations and governments, to resolve ESG issues. These discussions aim to look closely at relevant ESG strategies and risks, and to promote the issuance of sustainability-related bonds and clean ESG bonds.
While climate change and ESG certified bonds remain our main areas of concern, we prioritized additional topics in 2021:
- Global banks and zero net: PIMCO has helped over 20 global banks to implement CO2– Supported issue strategies, including their credit policy.
- deforestation: We’ve talked to over 20 food producers, retailers and banks to tackle the serious problem of deforestation in their value chains.
- methane emissions: Methane is a major contributor to global warming. The energy sector is the second largest source of methane emissions (after agriculture) according to the International Energy Agency. PIMCO has worked with over 50 energy companies to reduce methane emissions.
- nutritionFood businesses play a key role in addressing the economic and social risks of malnutrition. PIMCO has spoken to nutrition experts from many of these companies about what investors expect from food producers and their willingness to increase ESG disclosures.
Our annual ESG investment report includes detailed case studies of commitment and its results.
Proactive management helps you to achieve zero net emissions
Governments, corporations and wealth managers are allocating trillions of dollars to investments related to clean energy and wider ESG initiatives. Regulation, CO2– Prices and changes in consumer sentiment and business models will also have an impact on prices. Investors need to consider how their portfolios are prepared for climate-related risks (including sudden regulatory changes, supply chain disruptions, and political and social responses).
We believe that the bond market, due to its size, diversity and number of sectors, as well as the ESG-certified tools available, plays a key role in the transition to a zero-emission economy. We work with interested clients to manage and customize their fixed income portfolios to meet the decarbonisation goals. We recognize that there is no standard definition of a “net zero” portfolio. Ways of gradually working towards a decarbonised investment portfolio include reducing or exiting exposure to issuers that have no ambition to convert emissions2– intensive sectors, investing in issuers leading to net zero, investing in green bonds and working with issuers to implement carbon strategies2-Reduction.
Understand and manage climate risk in portfolios
PIMCO realizes that climate change has a profound impact on the global economy, financial markets and issuers. Risks, but also opportunities, can appear unexpectedly and affect investments in all asset classes.
As part of our investment research process, we assess sectors’ vulnerability to two broad categories of climate risk across different time horizons:
- Transition risks, including political, legal, technology, market and reputational risks (e.g. stricter CO regulations)2emissions).
- Physical threats, including acute threats from events such as hurricanes and fires, and chronic threats from long-term changes in climate patterns.
To help analysts assess climate risk, PIMCO ESG specialists have developed seven proprietary tools based on many years of experience in the analysis of fixed income securities. The information provided by these tools is designed to assist portfolio managers in managing and mitigating climate-related credit risk – as always within the portfolio’s stated goals and policies.
Social issues remain in the spotlight and offer opportunities: “S” in ESG
The pandemic and worsening climate change have exacerbated social challenges such as economic inequality, food insecurity, unemployment and housing insecurity. In response, there was a sharp increase in the issuance of social and sustainability bonds by both companies and governments in 2021.
PIMCO has participated in several of these issues. We evaluate these ties on the basis of the level of aspiration and significance of social spending and the expected results. We deal with human capital management, labor and human rights, occupational health and safety, and supply chain management.
These social ties are another example of how bond markets can contribute to lasting change in the global economy.