As UK pension schemes are under increasing pressure to make greener investments, and insurers are urged to consider their exposure to climate risks and build resilience, CAMRADATA’s latest whitepaper, Sustainable Credit asks if the asset class has reached a tipping point.

The whitepaper includes insight from firms including Breckinridge Capital Advisors, Morgan Stanley Investment Management, TwentyFour Asset Management, Cambridge Associates, Redington, Law Debenture and Willis Towers Watson who attended a virtual roundtable hosted by CAMRADATA in October.

The report highlights that it’s about time the bond market saw greater innovation in sustainable finance, as pension schemes and insurance companies have a great need for bonds, whether to balance their liabilities, or in the case of high yield credits, even to try and achieve growth.

Also, as UK pension schemes have long been encouraged to go green, now it’s the turn of the insurance sector, with the International Association of Insurance Supervisors urging insurers to consider their exposure to climate risks (principally from climate-related insurance claims) and build resilience.

Natasha Silva, Managing Director, Client Relations, CAMRADATA said, “This year NEST – a government-created UK pension fund – converted an existing $2 billion allocation with a bond manager to a climate-transition global investment-grade credit strategy. More evidence that a tipping point for sustainable credit could have arrived came recently, when the UK government announced plans to issue its first green gilt.

“A number of other European countries have taken similar steps. This is significant because sovereign issuance is seen by some fund managers as a prerequisite for galvanising corporates of the same nation to become bold enough to issue their own sustainable corporate bonds.

“Our panel discussed developments in sustainable credit by fund managers, the level of demand among investors, and to what extent the market is catching up with sustainable investing – making this whitepaper an essential read for investors and fund managers alike.”

The asset managers at the event discussed how they integrate Environmental, Social and Governance (ESG) issues into their portfolio management process and organisation, before the panel was asked when sustainability was a matter of values and when is it part of an investment case.

They then tackled the question of whether academic research or industry analysis justified the prospects for sustainable investing, before considering whether there was better value for sustainable credit in High Yield (HY) or Investment Grade (IG).

The final topic was diversification in asset management and the growing need for the finance industry to do more work on diversity, equity and inclusion (DE&I) to encourage the young generation to look at careers in asset management.

 

Key takeaway points were:

 

• One asset manager said they don’t have a separate ESG team so the integration of all material issues is handled by the portfolio managers and analysts. Another said that ESG is integrated across strategies, but is also a management tool, adding “ESG adds rigour, that materiality gets backed into business operations.”

 

• A consultant said there were times when carbon targets may be in conflict with fiduciary responsibility, but there was enough noise about Climate Change that if you position the portfolio to mitigate carbon risk, you are likely acting in keeping with your fiduciary responsibility.

 

• On the intersection between values and investment imperatives, one consultant said it came down to clients’ beliefs. Some are very clear what they are looking for, with some demanding 2035 net-zero carbon targets, but added that it was quite hard to find managers striking the balance between returns and climate change objectives.

 

• Another consultant said fixed income managers have always considered ESG, particularly G. With respect to E and S, they spoke to a mining analyst five years ago, who said they didn’t do ESG. When asked what kept him up at night, he said toxic spills and labour relations. He was doing ESG; he just didn’t call it that.

 

• On green bonds, one panellist felt there were challenges still to be addressed, notably where use of proceeds has been poorly communicated or too vague and not audited.

 

• Another shared some reservations, giving an example of a utility’s sustainability-linked bond where the step-up in coupon was too close to the maturity to be a meaningful motivation.

 

• But they noted that eight months later the same issuer came to the market with a much longer period between trigger date and maturity, highlighting this was a case of the issuer listening to the market.

 

• Turning to diversification in asset management it was suggested that when it comes to the social factors related to diversity, equity and inclusion (DE&I): these are already more front of-mind in the US than in Europe.

 

• Another said the social tragedies that took place in the US in 2020 certainly escalated diversity, equity, and inclusion higher up on the agenda for most companies, adding when looking for diversity, the talent pool in asset management is not as big as it could be.

 

• For another, diversity today feels as if it is where ESG was five years ago. They stressed the importance of also considering cognitive diversity rather than identity characteristics when it comes to the manager research process, as more diverse teams make better decisions.

 

• A final comment from a consultant was that they agreed wholeheartedly on cognitive diversity for improving board efficiency, concluding the session with a final point “there is a moral aspect here too, as well as the board efficiency argument – we need to get away from discrimination and considering protected characteristics are important to give everyone opportunities.”

 

 

To download the ‘Sustainable Credit’ whitepaper click here.

For more information on CAMRADATA visit www.camradata.com