We’ve entered a new era for ESG (environmental, social, governance) investing. The global pandemic revealed and magnified a range of social issues, while the threat of climate change is escalating. These have profound implications for investors and other stakeholders as the market for ESG-related assets continues to grow.
Here, we highlight select takeaways from the full report, with a focus on issuer engagement, climate-related portfolio considerations, and social themes.
Issuer engagement fosters constructive change
PIMCO actively and consistently engages with bond issuers, including companies, governments, and others, to address ESG themes. In these discussions we seek to understand ESG strategies and risks, and encourage innovations such as issuance of sustainability-linked and ESG labeled bonds.
While climate change and ESG labeled bonds remain our primary engagement focus areas, we emphasized additional themes in 2021:
- Global banks and net zero: PIMCO engaged more than 20 global banks on implementation of their carbon emission strategies, including lending policies.
- Deforestation: We engaged more than 20 food manufacturers, retailers, and banks about eliminating deforestation in their value chains.
- Methane emissions: Methane is a major contributor to global warming, and the energy sector is the second-largest source of methane emissions (after agriculture) according to the International Energy Agency. PIMCO engaged with more than 50 energy companies on reducing methane emissions.
- Nutrition: Food companies play a key role in mitigating the economic and social risks of malnutrition. PIMCO engaged with nutrition specialists at a number of these companies and discussed investors’ expectations on their nutrition strategy and disclosure.
Our annual ESG Investing Report provides detailed case studies on engagement efforts and outcomes.
Active management can help investors navigate a path to net zero carbon emissions
With governments, businesses, and asset managers buying and selling trillions of dollars of investments linked to clean energy and broader ESG initiatives, the move toward net zero will increasingly influence the market pricing of assets. Regulation, carbon pricing, and shifts in consumer sentiment and business models will also affect prices. Investors need to consider how well their portfolios are prepared to navigate climate-related risks (including abrupt regulatory changes, supply chain disruptions, and political and social backlash). Investors should also prepare for opportunities that arise from climate policy and increasing consumer and investor demand.
We believe that the bond market plays a pivotal role in driving the transition to a net-zero emissions economy, thanks to its size, the diversity and number of sectors, as well as the dedicated ESG-labeled instruments available. We work with interested clients on managing and adapting their fixed income portfolios to reach decarbonisation goals, recognizing there is no standard definition today of a “net zero” portfolio. Ways to gradually target a decarbonized investment portfolio include reducing or ending exposure to issuers with no ambition to transition carbon-intensive sectors, investing in issuers at the forefront of the net zero transition, investing in green bonds, and engaging with issuers on carbon reduction strategies.
Understanding and managing climate risk in investment portfolios will become increasingly important
PIMCO recognizes that climate change will likely have a profound impact on the global economy, financial markets, and issuers. Risks and opportunities may materialize in unexpected ways, and can affect investments across asset classes.
Within our investment research process, we evaluate sectors’ exposures (over various time horizons) to two broad categories of climate-related risks:
- Transition risks, including policy, legal, technology, market, and reputation risks (e.g., tighter regulations on carbon emissions).
- Physical risks, including acute risks from events such as hurricanes and wildfires, and chronic risks arising from longer-term shifts in climate patterns.
To help analysts evaluate climate risk, PIMCO’s ESG specialists designed seven proprietary tools, drawing on our decades of experience in fixed income analysis. The insights these tools provide are intended to help portfolio managers manage and mitigate climate-related credit risks – as always, working within specific portfolio objectives and guidelines.
Social themes remain in focus and offer opportunity: the ‘S’ in ESG
The global pandemic and the worsening climate change have compounded social challenges such as economic inequality, food insecurity, unemployment, and housing uncertainty. In response, 2021 saw a rise in social and sustainability bond issuances from corporate and sovereign issuers alike.
PIMCO participated in several of these issuances. We assess these bonds based on the level of ambition and materiality when it comes to social category spending and targeted outcomes. We take human capital management, labour and human rights, occupational health and safety, and supply chain management into consideration.
These social-focused bond issues are just one more example of how bond markets are helping drive sustainable change in the global economy.
We believe the size of bond markets and recurring nature of debt issuance make fixed income investors a meaningful force in driving sustainable change. Visit PIMCO’s ESG page to learn more about our ESG capabilities and investment approach.
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