Bonds for Change: Key Takeaways From PIMCO’s ESG Investing Report
As we detail in PIMCO’s annual ESG Investing Report, 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.
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 decarbonization 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, labor 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.
Disclosures
PIMCO is committed to the integration of Environmental, Social and Governance ("ESG") factors into our broad research process and engaging with issuers on sustainability factors and our climate change investment analysis. At PIMCO, we define ESG integration as the consistent consideration of material ESG factors into our investment research process, which may include, but are not limited to, climate change risks, diversity, inclusion and social equality, regulatory risks, human capital management, and others. Further information is available in PIMCO’s Environmental, Social and Governance (ESG) Investment Policy Statement.
With respect to comingled funds with sustainability objectives (“ESG-dedicated funds”), we have built on PIMCO’s 50-year core investment processes and utilize three guiding principles: Exclude, Evaluate and Engage. In this way, PIMCO’s ESG-dedicated funds seek to deliver attractive returns while also seeking to achieve positive ESG outcomes through its investments. Please see each ESG-dedicated fund’s prospectus for more detailed information related to its investment objectives, investment strategies and approach to ESG.
This report contains examples of the firm's internal ESG engagement and research capabilities. The data contained within the report 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 multiple 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.
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. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the markets perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Diversification does not ensure against loss. Management risk is the risk that the investment techniques and risk analyses applied by an investment manager will not produce the desired results, and that certain policies or developments may affect the investment techniques available to the manager in connection with managing the strategy.
ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by PIMCO or any judgment exercised by PIMCO will reflect the opinions of any particular investor, and the factors utilized by PIMCO may differ from the factors that any particular investor considers relevant in evaluating an issuer’s ESG practices. In evaluating an issuer, PIMCO is dependent upon information and data obtained through voluntary or third-party reporting that may be incomplete, inaccurate or unavailable, or present conflicting information and data with respect to an issuer, which in each case could cause PIMCO to incorrectly assess an issuer’s business practices with respect to its ESG practices. Socially responsible norms differ by region, and an issuer’s ESG practices or PIMCO’s assessment of an issuer’s ESG practices may change over time. There is no standardized industry definition or certification for certain ESG categories, for example “green bonds”; as such, the inclusion of securities in these statistics involves PIMCO’s subjectivity and discretion. There is no assurance that the ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or reliable indicator of future results.
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice.
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