Questions about the “S” in ESG bond funds as assets under management approach $ 450 billion in 2021

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Members of the fixed income community were quick to defend the industry, arguing that not everyone should be treated with the same brush. However, they recognized that there is a long way to go in determining the ESG status of the market.

In August, a Financial Time investigation found that asset managers held government bonds of some countries such as Belarus. During this time, The temperature covered an investigation by SCM Direct which found numerous examples of misleading ESG-labeled bond funds.

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Prior to the revelations, investors had invested $ 62.5 billion in these bonds in the first seven months of 2021, according to Morningstar figures.

This led the assets under management of these ETFs and open-end funds to increase by 16% during the period to reach $ 445.5 billion.

There is now a question mark over the S of the ESG equation in funds.

David Katimbo-Mugwanya, manager of the £ 336.5million EdenTree Responsible and Sustainable Sterling Bond fund, explained that “the social side of the equation is probably where it could be said that some of the funds are falling apart. take off a little “.

“Having looked at climate issues for so long, the S of the equation, human rights accountability, business ethics, the employment side of the equation – I think that’s where some of these funds have been challenged more recently. “

Katimbo-Mugwanya noted that investors in sterling bond funds may feel like they don’t have to worry, but because some of these countries issue papers denominated in pounds sterling, they could be included. of the investment universe.

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EdenTree does, however, have an ESG filter that filters out issuers that may be included in its portfolios.

One of them is a screen on oppressive regimes, which is a list based on assessments by Freedom House, Transparency International, and the World Economic Forum and includes countries such as China, Russia, Syria and many more. others.

It’s hard to be green

A challenge frequently cited by bond investors is that they have fewer opportunities for engagement than equity investors, and talking to a government official is very different from talking to a CEO of a company.

However, Marion Le Morhedec, global head of bonds at AXA IM, said it didn’t hold water for her.

“Whenever we meet with the Treasury departments on the government bond side, we talk about ESG for about 75% of the meeting,” she said.

Le Morhedec said a bigger issue for her was regulations and standards. Under current SFDR rules, a portfolio can be classified under Article 8 even if not all of the underlying investments meet the criteria, especially when it comes to government bonds.

For government bonds, an asset manager can argue a country’s ranking on indicators such as health and education, while ignoring others.

“I think everyone in the industry is complaining about the lack of clarity that we have,” she explained.

Le Morhedec said asset managers have ongoing discussions with lawyers and regulators to clarify the situation.

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At the end of July, more than 50% of Article 8 funds offered exposure to equities, while 28% offered exposure to fixed income, according to Morningstar.

Jose Garcia-Zarate, associate director of passive strategies at Morningstar, agreed that “sovereign ESG screening remains a work in progress” and is “a minefield”.

“There is no consensus on how to integrate ESG analysis of politically sensitive issues,” he said.

Garcia-Zarate also said it’s important to remember that people have different perspectives on tackling ESG. For this reason, what would be a blatant case of greenwashing for some would not be for others.

There is also the issue of cultural prejudices.

“Investors from the so-called West will have a natural tendency to judge governments / countries in other geographic / cultural areas through the prism of Western values,” Garcia-Zarate said.

Pure green glory

For investors concerned about the potential darkness of government bonds, there is an obvious option: green, social, and sustainable bonds.

Government issuers react to the market at a rapid pace. Last Tuesday, Spain launched its very first green bond, as Britain prepares to sell its first in the week of September 20 and in October the EU will enter the debt-friendly world. ‘environment.

While green bonds have dominated in the past, social-themed bonds are starting to see larger increases.

Emissions more than tripled year over year, topping $ 146.6 billion in the first half of 2021, up from $ 36.8 billion in the first half of 2020, according to a report from the Climate Bonds Initiative.

However, Le Morhedec said there was a long way to go.

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“Even though the market is growing, you don’t see all issuers issuing green, social and sustainable bonds,” she said.

“The market has not yet reached the level where we can make the decision to invest only in green, social or sustainable.”

However, she said the growth in this area of ​​the market is “impressive”.

“This is probably the biggest development we have seen in the fixed income business in recent years,” she concluded.


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