Viewpoints

Social at the Center of ESG

As we actively engage with bond issuers through this pandemic-driven economic crisis, we see five major social themes affecting creditworthiness and driving new social bond issuance.

The social pillar of environmental, social, and governance (ESG) investing is all about people: employees, customers, and suppliers. The outbreak of COVID-19, followed by global demonstrations calling for action on racial injustice and social inequality, has propelled the S of ESG to the top of corporate and investor agendas.

This is arguably the clearest example of a sustainability crisis in the 21st century, and has highlighted how interconnected, interdependent, and vulnerable the world can be. Moreover, this crisis is disproportionately affecting the most vulnerable communities in the world, exposing and exacerbating the impacts of inequality in many regions.

A renewed focus on the S of ESG investing

Material social issues include health and safety, human capital management and product quality, but inequality and supply chain management are especially top of mind right now. Many companies are increasingly managing their business models with an understanding of the multiple stakeholders in their ecosystem.

It is clear through dialogues with our global clients, issuers, and policymakers that the current crises facing the global economy will only sharpen the focus on how businesses interact with all stakeholders. Reflecting this, we expect greater transparency going forward on social dimensions, which would be a welcomed development. As investors, we are committed to encouraging greater transparency from companies.

Watching recent events unfold, we also recognize our research and engagement approach should continue to improve. PIMCO is committed to deepening our analysis of material social factors into our fundamental research, while engaging companies on issues of equality, diversity, and human capital management. Moreover, we are active in building and driving greater social bond issuance, particularly social bonds seeking to address near-term COVID-19 response and recovery efforts for disadvantaged groups.

Deeper dive: trending ‘S’ factors

As we actively engage with bond issuers, our credit research team is tracking five major social themes that have emerged with the outbreak of COVID-19. In many cases, these themes affect creditworthiness and drive new social bond issuance.

  1. Health and well-being are key priorities: First and foremost, many companies have responded to ensure workers, especially those in essential industries, have equipment and space needed to operate safely. Beyond physical protections, many companies are also improving healthcare options and benefits to better cover peoples’ needs; approaches include telehealth, mental health counselling, and child care.
  2. Work is being reallocated: Tens of millions of people in the U.S. alone have filed for unemployment, and a much higher number are estimated to be out of work globally. Hourly wage, service workers, people with children, and minorities appear to be disproportionately affected. It is unrealistic to think that all of these workers will return to the same job, in the same capacity. There will likely be winners and losers in the redistribution of work as the recovery progresses.
  3. The way many people work may change permanently: According to a recent Gallup poll, more than 60% of employed Americans now say they have worked from home during the pandemic, up from about 30% before widespread “shelter-in-place” orders. A recent Gallup poll reported three in five workers say they prefer to work from home as much as possible even after public health restrictions are lifted. Employers are starting to think differently about working styles and benefits, with greater flexibility becoming a higher priority.
  4. Supply chains will need to be derisked: Simplified, transparent supply chains are critical to spotting and managing production stoppages. A key outcome of PIMCO’s most recent Cyclical Forum was that firms may try to reduce the risks and complexity of global supply chains, with a key step being improved transparency beyond large, first-tier suppliers.
  5. Cybersecurity and privacy defenses will increase in importance: A sharp increase in employees working remotely and customers shopping online increases risk levels for data and privacy breaches. A recent Verizon report noted VPN usage is up over 80% and collaboration tool usage is up over 1,200% compared to a typical pre-COVID day. Many companies are focused on making the accelerated transformation to digital safer.

The bottom line is that many companies will require capital to successfully manage these five social themes, and we believe that many will come to the bond market to raise capital through debt financing. We are committed to actively engaging with companies through this crisis.

Investing for impact: social bond issues linked to COVID-19 response and recovery

Bond markets have responded to financing needs of issuers for COVID-19 response and recovery via social bond issuance. Social bonds raise funds for new or existing projects targeting positive social outcomes. Companies, sovereigns, and development finance institutions (DFIs) are among issuers coming to market now with innovative social bonds aimed specifically at supporting economic and health recovery. (For more on DFIs and public-private partnerships, read this recent post on the PIMCO Blog.) This is a unique way for investors to invest in debt, which our assessment shows largely trades in line with an issuer’s existing credit curve, with proceeds being linked to measurable impacts.

This year has already set a record for social bond issuance, totaling over $20 billion raised for social projects globally. With increased focus on social issues from COVID-19, we expect a major uptick in social (and sustainability, blending green and social) issuance (see Figure 1). Well structured, credible social bonds are a unique market opportunity for investors to finance critically needed health and economic solutions.

Figure shows social bond issuance as a growing part of the total sustainable debt universe which includes green bonds, social bonds, and sustainability bonds that blend green and social factors. Sustainable debt issuance rose year-over-year from 2016 through 2019 and year-to-date issuance in 2020 as of 31 May 2020 is over $75 billion USD. 

To us, a “well-structured” social bond clearly states the projects it funds are designed to benefit vulnerable, at-risk, or disadvantaged segments of society, and reports transparently on related outcomes. We see immediate need in sectors such as healthcare, pharmaceuticals, manufacturing, and small businesses (including lending to small businesses); this list could be expanded as we learn more about the economic consequences of COVID-19. Importantly, social bonds should be structured to meet immediate needs without compromising on long-term sustainability goals. Our view is that an effective way to achieve social, environmental, and economic goals is to link issuance to the Sustainable Development Goals (SDGs).

PIMCO guidance on effective social bond frameworks linked to SDG targets 

PIMCO is an active member in the GISD Alliance (Global Investors for Sustainable Development) and ICMA’s (International Capital Market Association) Green Bond Principles and Social Bond Principles Executive Committee. In collaboration with these organizations, we are working to promote bond issuance that acts as a catalyst to improve social, environmental, and economic challenges. COVID-19 is an immediate example of issuers and investors needing to work together to create innovative finance solutions. As we actively engage with companies, we are encouraging the social bond market to grow, but with rigorous standards that drive tangible progress.

Case studies: PIMCO engaging on the S of ESG

Recognizing that the current crisis is still unfolding and company responses are evolving, our ongoing engagements with corporate issuers have identified examples of companies with advanced social performance providing rapid, innovative social support measures. Immediate support to employees, customers, and suppliers, which doesn’t need to be cash-intensive, is important to maintaining trust and goodwill and can play an important role in mitigating volatility.

  • Case Study A: A hotel real estate investment trust (REIT), operating in one of the sectors hardest hit by widespread stay-at-home restrictions, quickly partnered with businesses in essential industries to provide temporary work for employees, while maintaining healthcare benefits. This program helped mitigate devastating income loss for employees, and will help the company maintain its workforce as hotels are gradually reopened. The model has since been adopted more broadly across hard-hit sectors. After we engaged to learn about these positive labor relations efforts, we scored this pioneering company as a social leader versus its peers.
  • Case Study B: A food and beverage company went beyond needed safety measures to provide increased pay, free mental health counselling, and expanded child care services. The company already benefitted from low employee turnover rates versus peers, a trend we expect to continue and will closely monitor in future engagements.
  • Case Study C: A technology hardware company stepped up to support small business suppliers through accelerating payments, helping to avoid cash flow issues. The company has not reported major operating disruptions to date. This action confirmed our improving view of the company’s performance on social issues, a view that has been shaped by routine engagements through multiple rounds of bond issuance.
  • Case Study D: A media company updated a purpose statement for employees and executives to align with the demographics of its broadcast listeners, a diverse group broadly matching U.S. demographics. The company also published social policies covering diversity, data security and privacy, community outreach, and disaster response. Additionally, the company is now publishing an annual impact report to quantify the impact of local campaigns on social issues.

COVID-19 is devastating societies and communities around the world. How companies and investors respond will help support the health of individuals and a coordinated economic recovery. Engaging to understand and value social factors in corporate credit assessments, and investing directly in positive outcomes through social bond issuance, are two key ways fixed income investors can take action as part of a global response to the current crisis.

To learn more about PIMCO’s ESG investment and active engagement platform, please see our latest ESG Investing Report at pimco.com/esg-annual-report.

The Author

Del Anderson

Credit Analyst

Olivia A. Albrecht

Head of ESG Business Strategy

Related

Disclosures

London
PIMCO Europe Ltd
11 Baker Street
London W1U 3AH, England
+44 (0) 20 3640 1000

Milan
PIMCO Europe Ltd - Italy
Corso Matteotti 8
20121 Milan, Italy
+39 02 9475 5400

Munich
PIMCO Deutschland GmbH
Seidlstraße 24-24a
80335 Munich, Germany
+49 (0) 89 26209 6000

Zurich
PIMCO (Schweiz) GmbH
Brandschenkestrasse 41
8002 Zurich, Switzerland
Tel: + 41 44 512 49 10


PIMCO Europe Ltd (Company No. 2604517) and PIMCO Europe Ltd - Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (25 The North Colonnade, Canary Wharf, London E14 5HS) in the UK. The Italy branch is additionally regulated by the CONSOB in accordance with Article 27 of the Italian Consolidated Financial Act. PIMCO Europe Ltd services and products 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. | PIMCO Deutschland GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany) and PIMCO Deutschland GmbH Swedish Branch (SCRO Reg. No. 516410-9190) are  authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Swedish Branch is additionally supervised by the Swedish Financial Supervisory Authority (Finansinspektionen) in accordance with Chapter 25 Sections 12-14 of the Swedish Securities Markets Act. he services provided by PIMCO Deutschland GmbH are available only to professional clients as defined in Section 31a para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2), Brandschenkestrasse 41, 8002 Zurich, Switzerland, Tel: + 41 44 512 49 10. The services and products provided by PIMCO (Schweiz) GmbH are not available to individual investors, who should not rely on this communication but contact their financial adviser.

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.

Socially responsible investing is qualitative and subjective by nature, and there is no guarantee that the criteria utilized, or judgment exercised, by PIMCO will reflect the beliefs or values of any one particular investor.  Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and PIMCO is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices.  Socially responsible norms differ by region.  There is no assurance that the socially responsible investing strategy and techniques employed will be successful.  Past performance is not a guarantee or reliable indicator of future results.

This material contains examples of the firm's internal investment research capability. The data contained within may be stale and should not be relied upon as investment advice or a recommendation of any particular security, strategy or investment product. In selecting case studies, PIMCO considers investment performance in addition to other factors, including, but not limited to, whether the example illustrates the particular investment strategy being featured and processes applied by PIMCO to making investment decisions. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

This material contains the current opinions of the author but not necessarily those of PIMCO, and such opinions are subject to change without notice.  This material is 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 guaranteed.

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 is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517) and PIMCO Europe Ltd - Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The Italy branch is additionally regulated by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act. 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. | PIMCO Deutschland GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Deutschland GmbH Italian Branch (Company No. 10005170963) and PIMCO Deutschland GmbH Spanish Branch (N.I.F. W2765338E) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Italian Branch and Spanish Branch are additionally supervised by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act and 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 Deutschland GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2), Brandschenkestrasse 41, 8002 Zurich, Switzerland, Tel: + 41 44 512 49 10. The services provided by PIMCO (Schweiz) GmbH are not available to individual investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association and The Investment Trusts Association, Japan. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is managed and operated independently. The reference number of business license of the company approved by the competent authority is (107) FSC SICE Reg. No.001. 40F., No.68, Sec. 5, Zhongxiao E. Rd., Xinyi Dist., Taipei City 110, Taiwan (R.O.C.), Tel: +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Av. Brigadeiro Faria Lima 3477, Torre A, 5° andar São Paulo, Brazil 04538-133. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2020, PIMCO.

 

CMR2020-0713-1227760

Sustainability in Bond Markets Amid COVID-19: ESG in Focus
XDismiss Next Article
PIMCO