Most corporate bonds are owned by institutions and most institutions are getting very aware of ESG issues. Here is where the rubber is starting to hit the road for ESG-aware bond managers.
According to QIC, the big Queensland-government owned fund manager, it should be easier for ESG-aware investors to engage in the bond market than in equities.
Katrina King, director of research and strategy at QIC, and a fixed income expert, said last week that because of the domination of institutional investors in the fixed income market, including corporate bonds, the dialogue with companies was more intense.
QIC produced a paper last year which showed that ESG’s adoption transcends ethical motivations. It’s now about maximizing long-term returns.
For the fixed income market, which has not until recently been the main focus of investors, such as big super funds that have had an ESG focus, there is a confluence of circumstances. Fixed income is the most important asset class at the moment, due to the search for yield, the amazingly high price (that is, low interest rates) for sovereign bonds, and fully priced equities throughout the developed world at least. CIOs and their investment committees are perplexed about what to do with their fixed income portfolios.
King says that about 93 per cent of US corporate bonds, for instance, are owned by institutions. This compares with only 59 per cent of US equities. And institutional investors tend to be better informed than wholesale and retail investors. They have “more weight”, King says, and it should be easier for them to engage with companies.
QIC has about 10 spe3cifically ESG-focused meetings with companies per year. In 2-16, which was the first year it started this program, King says, the main theme was climate change. Last year, the manager ranked all its investee companies on ESG factors. This year it has adopted a “more balanced approach” incorporating the inclusion of a responsible investing committee to review all aspects of the portfolio.
King says QIC is getting a lot more requests for proposals that refer to ESG factors. “We think that about 10 per cent of super fund members are now actively wanting to have ESG factors included in their investments,” she says.
The manager is also becoming more engaged with UNPRI to work on its data collection. Data is one of the biggest problems with ESG assessments. Sometimes, for instance, an asset owner will not know that an investee company is involved in miscreant behaviour, such as the manufacture of armaments.