ESG Investment Management: Responsibility, Research, Results

We believe ESG investing no longer needs to be an either/or paradox – either financial return or sustainable development. Investors can pursue both.

Sustainability and ESG investing (environmental, social, governance) were recurring themes during this year’s Milken Global Conference throughout many sessions. I was pleased to participate in a panel on how the investment management field is integrating ESG factors into processes and products and gauging impact on global sustainability goals. While we still confront many challenges, such as shifting regulations and incomplete data, we believe our industry is making inroads toward more sustainable markets and economies.

Fiduciary responsibility?

One key question we addressed is really a foundational issue: How does ESG align with the financial services industry’s fiduciary duty to clients? Investors and regulators globally take a range of perspectives on this question. PIMCO’s view is that ESG fits well with our fiduciary mandate: We rigorously pursue attractive risk-adjusted returns for our clients, working within specific investment objectives. As asset managers, it’s our duty to do the best job we can – and we believe that means incorporating ESG risk analysis and evaluating sustainable investment opportunities.

Looking across the broad opportunity set in the global marketplace, we believe that incorporating material ESG factors into our investment process delivers a more holistic view of the risk and return potential of our investments, especially over the long term. We believe ESG investing no longer needs to be an either/or paradox – either financial return or sustainable development. Investors can pursue both.

Research and integration

What’s both exciting and challenging about ESG is that it’s always evolving. Data, regulations, standards, and trends fluctuate. As we discussed in the panel, this means rigorous ongoing research is needed to integrate ESG risk factors into investment analysis. At PIMCO we think it’s a worthwhile use of our resources: We’ve asked our research specialists in every sector to determine the best ESG framework for their field of expertise, and we also have dedicated ESG analysts working with research teams globally and uniting and integrating our ESG views. This depth of information gives us a flexible platform and the ability to target solutions toward specific objectives, and more broadly – we believe integrating ESG risk analysis helps us make more informed investment decisions.

Results: making a difference in fixed income

We also discussed a widely held view that equity investors (as owners) have more influence than bond investors (as lenders) over the direction corporations take toward sustainability. PIMCO has found that fixed income issuers care a lot more about ESG than many investors may realize. Aside from broader questions of sustainability and corporate responsibility, many bond issuers realize that ESG risks are increasingly incorporated into agency credit ratings – which in turn can dramatically affect the cost of servicing their debt over time.

And fixed income investors can play a very big role as well by engaging directly with companies on ESG risks and opportunities. Measuring the impact of engagement efforts is critical, and the UN Sustainable Development Goals offer good language for quantifying results and impact.

Key conclusions

In our final remarks, several panelists agreed that imperfect data and shifting regulations should not stop us, as investment managers, from taking common-sense steps toward better incorporating the risks and opportunities of ESG.

As investors, we can do our part by incorporating material ESG risks and opportunities into our investment decisions and by engaging with issuers to push markets on a path of sustainability. PIMCO and other investment companies and individuals have taken substantial steps already, but we recognize there is still more for all of us to do, for our clients and for our future.

The Author

Scott A. Mather

CIO U.S. Core Strategies

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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.

All investments contain risk and may lose value. Investors should consult their investment professional prior to making an investment decision.