Key Takeaways From PIMCO’s Sustainable Investing Report
Sustainable investing has gone through several evolutionary stages. What began as a largely equities-oriented negative screening approach for socially responsible investors, has diffused into a global, multi-asset class investing movement. In recognition of this transformation, we have changed the title of this year’s annual report from Environmental, Social and Governance (ESG) to Sustainable Investing, highlighting the significance of this deemed global megatrend.
PIMCO’s Sustainable Investing Report provides our latest thinking on sustainability, detailed case studies on engagement efforts, and key topical features related to: Human Rights; Human Capital; Natural Capital; and Carbon Analytics. Here, we highlight some key takeaways from the report, with a focus on engagement, human capital, and carbon analytics.
Engagement and collaboration: influencing change
As one of the largest bondholders in the world, PIMCO has a significant platform with which to engage issuers on ESG topics and sustainability goals (including climate change), to help drive long-term investment value for our clients. In 2022, PIMCO analysts engaged approximately 1,370 corporate bond issuers1 across a range of industries and regions on ESG topics, and deepened our engagements across themes.
Four main themes that are particularly important for us when assessing an issuer’s long-term resilience against ESG risks may include:
Climate change: We can engage with companies on their climate ambitions, goals and implementation plans, notably on methane and emissions reductions in the real economy.
Human rights: As an investor, we share responsibility, where appropriate, to recognize and address any potential human rights violations through our investments2. We can conduct thorough due diligence on human rights risks embedded across an issuer’s value chain.
Human capital: When engaging with issuers we may seek to identify an effective, transparent and inclusive human capital strategy for talent retention and operational productivity.
Natural capital: Resources such as air, water, soils, raw materials, wildlife, biodiversity and the oceans – are entrenched across most or all aspects of the economy. Through our engagement with issuers, we can seek to gain a solid understanding of their impact and dependency on natural capital.
Human capital: managing workforce risks
A resilient and productive workforce can indicate a long-term sustainable growth strategy, and companies with robust recruitment and retention programs may help improve our confidence to make longer-term investments. Also, organizations that prioritize their workforce among stakeholders may see less attrition in a tight labor market, improved productivity, and positive market perception regarding its talent management. On the other hand, workforce mismanagement can have material implications and negatively affect our view of a company’s growth projections.
We can focus our engagement and analysis on a company’s approach to hiring, training and development, and target the disclosure of data that could signal the efficacy of policy implementation. Also, depending on the country in which a company operates, we may engage on various diversity and inclusion themes. We often focus in particular on how these efforts pertain to liabilities, headline risks, talent retention, and pay equity.
Carbon analytics: developing effective measurement tools
A climate-related theme that has been gaining momentum is the importance of identifying drivers for changes in a portfolio’s carbon footprint over time. A historical challenge has been the lack of data or standard to quantify whether portfolio decarbonization can be linked to actual greenhouse gas emission reductions in the real economy.
In response to these challenges, PIMCO has developed a proprietary framework for interested investors seeking to target long-term decarbonization in their portfolios. Our proprietary carbon attribution tool measures and reports the contribution of different factors to carbon emissions across corporate issuers in a portfolio. It can also measure emission data against a broad benchmark and across time periods. As a result, this tool can help make more informed decisions on the most effective levers to potentially decarbonize a portfolio's emissions while encouraging actual emissions reduction from issuers.
1 PIMCO engaged with 1,370 corporate bond issuers in 2022, referring to all tracked engagements that discussed ESG topics. Corporate bond issuers refers to ultimate parent entities, which year-on-year figures are subject to changes in PIMCO’s internal entities mapping. Return to content
2 United National Guiding Principles on Business and Human Rights: www.ohchr.org/sites/default/files/documents/publications/guidingprinciplesbusinesshr_en.pdf Return to content
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 Sustainable Investment Policy Statement.
With respect to comingled funds with sustainability objectives (“ESG-dedicated funds”), we have built on PIMCO’s over 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.
The 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. 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. Outlook and strategies are subject to change without notice.
PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2023, PIMCO.