PIMCO’s annual ESG Summit – hosted virtually this year – aimed to help participants keep pace with the rapidly evolving landscape of environmental, social and governance issues within the world of investing, with a particular focus on the transition to net-zero emissions. PIMCO investment professionals were joined by Mark Carney, UN Special Envoy on Climate Action and Finance, PIMCO Global Advisory Board member and former governor of both the Bank of England and the Bank of Canada; Carlos Brito, CEO of Anheuser Busch InBev; and Birgit Böhm, senior vice president and group Treasurer at BMW. Here are some of the main takeaways:
1. BONDS HAVE A KEY ROLE IN FINANCING THE NET-ZERO TRANSITION
Building a sustainable future is a capital-intensive undertaking. Over the coming years and decades, we will see trillions of dollars of additional sustainable investments at the sovereign, local government and corporate level. A unique characteristic of fixed income markets is that companies are typically repeat issuers of bonds, meaning they have to come back to market and sell their securities -- and therefore their story -- to investors on a regular basis. Much as these companies have to care about maintaining their credit ratings, they increasingly must pay attention to upholding and improving their sustainability commitments and credentials. This mechanism of market engagement gives fixed income investors a special seat at the table to partner with issuers to shape the future of sustainable bond investing and influence positive change, while also creating opportunities for investors.
2. THE IMPORTANCE OF “ENGAGEMENT”
The early days of sustainable investing mainly sought to exclude companies that didn’t meet certain criteria. More recently, the focus has shifted on broader drivers of value with greater emphasis on evaluation of investments and engagement with companies. In our view, engagement with a company’s management can often have the greatest impact, as investors can develop a deeper understanding of an issuer and a particular investment while also advocating for change.
3. DATA IS A CHALLENGE, BUT DEVELOPMENT OF GLOBAL STANDARDS WILL FOSTER EFFICIENT CAPITAL ALLOCATION
Despite the explosion in ESG data in recent years, there are undeniable challenges due to the quality and consistency of issuer disclosures, particularly in relation to climate-related risks. However, progress is being made. Several years ago, the Financial Stability Board created the Task Force on Climate-related Financial Disclosures (TCFD) to improve and increase reporting of climate-related financial information. In addition, the International Financial Reporting Standards (IFRS) Foundation is developing a new Sustainability Standards Board, with the intent of adopting a climate disclosure standard, similar to the TCFD. As countries have progressed toward adopting similar accounting practices, sustainability standards should likewise start to converge with more issuers disclosing in accordance with these standards, supporting more informed decision-making for investors involving the allocation of capital. For now, in-depth analysis of the available data and active engagement with companies remain crucial to making informed judgements about their ESG trajectory and commitments.
4. COP26 KEY TO AMBITIOUS IMPLEMENTATION OF CLIMATE ACTION
The 26th UN Climate Change Conference of the Parties (COP26) in Glasgow this November will be crucial to accelerate action towards the goals of the Paris Agreement and particularly to limit global warming to well below 2 and preferably 1.5 degrees Celsius, compared with pre-industrial levels. One of the objectives of COP26 is to build a framework so that the financial sector can allocate capital to manage risks and seize opportunities in the net-zero transition. Many companies are already making commitments to decarbonize, but investors need to carefully analyze both short-term targets and longer-term plans to assess the climate path that issuers are on. It will take innovation at every level of the capital markets to meet these ambitions.
5. BOND MARKETS MOVING BEYOND GREEN
In addition to the rapid expansion of the green bond market, there’s been growth in related bonds such as social bonds, those related to the UN’s sustainable development goals or SDGs – including gender, water, and other “use-of-proceeds” bonds – as well as sustainability-linked bonds and loans, which are general purpose bonds that link financing to key sustainability targets like global greenhouse gas reduction. These classes of instruments, particularly sustainability-linked bonds (which expand beyond the constraints of use-of-proceeds) can open doors for more companies and governments to actively participate in sustainability improvements, and for investors to direct money with clearly stated objectives and measurable targets.
For details on PIMCO’s ESG investment approach and capabilities, please see our ESG investing page.