Sustainable Investing: Understanding ESG in Bonds
As investors, we believe fixed income – or bonds – could soon rise to a place of leadership in sustainable investing. There is growing recognition in the marketplace that integrating ESG (environmental, social and governance) factors into traditional credit analysis adds a holistic and long-term perspective that aligns well with bond investing. Moreover, issuers often return to the bond market – unlike the stock market – in order to refinance old debt or seek new funding, giving bond investors a unique opportunity to identify risks, engage issuers and build relationships that can influence change.
Common approaches to sustainable investing in fixed income
Sustainable investing is a spectrum of approaches that consider ESG factors in portfolio construction and management. These include:
- Negative/positive screening: exclude or include sectors or securities based on pre-defined ESG criteria
- ESG integration: the addition of ESG considerations alongside traditional financial analysis when buying or selling securities
- Thematic: aligning asset allocations with a particular ESG theme, such as clean energy
- Impact investing: seeking to deliver positive societal outcomes as a key investment objective
- Issuer engagement: engage issuers to influence sustainable behavior and practices
Source: Global Sustainable Investment Alliance (GSIA)
PIMCO’s three-step approach to building ESG portfolios
PIMCO’s dedicated ESG strategies combine a number of approaches. They follow our time-tested investment process, applied to every portfolio, while using three additional buildings blocks: exclusion, evaluation and engagement. We call this our three-E process. Here’s what that means:
- We exclude issuers that are fundamentally misaligned with sustainability principles.
- We evaluate issuers through our proprietary ESG scoring system to identify “best-in-class” ESG issuers and candidates for engagement.
- We engage with issuers that demonstrate a clear willingness to move toward better ESG-related practices. We believe that allocating capital toward issuers willing to improve the sustainability of their business practices can generate a greater impact than simply excluding issuers with poor ESG metrics and favoring those with strong metrics.
All data is as of 31 December 2018, unless otherwise noted.
A word about risk: 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.
There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market
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.
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.
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