Sustainable investment is not a new concept. Labor unions have leveraged investment for social change, leading to the first sustainable investment fund being launched in 1971. In the 1980s, divestment policies played an integral role in changing corporate behavior and bringing the apartheid system in South Africa to an end. And, of course, religious groups have excluded investment in so-called “sin stocks” for decades.
But for all that history, the integration, implementation, and documentation of environmental, social, and governance (ESG) risk in investment strategies – particularly within emerging markets (EM) – are still in the relatively early stages of development. At PineBridge, we began our formal integration of ESG risk within our EM debt investment processes in 2016. Over the ensuing years, the ways in which we conduct due diligence, categorize ESG risk, engage with issuers, and ultimately incorporate sustainability within our investment decisions have evolved. The way investors view EM has transformed over that time as well, from an area that was previously viewed as incompatible with most common ESG approaches to one that is integral to global initiatives and very much in need of sustainable finance. Regulation continues to better align investment objectives and provide clarity on the effectiveness of sustainable investment strategies to meet those objectives.
For our part, we have also seen robust growth in assets under management (AUM) in the past six years, particularly among our EM corporate bond strategies, which now exceed $15 billion1 across global and Asia-focused strategies. This growth provides a greater platform from which we can engage with companies on sustainability issues. It also, in our view, carries the responsibility of leadership to define well-rounded sustainability objectives and values for the benefit of our investment partners: both investors and investees. It is with that in mind that we have chosen to galvanize our sustainable investment efforts in the pursuit of well-defined goals that include environmental and social sustainability.
There are a variety of approaches under the responsible investment umbrella – from impact investments made with a specific, measurable environmental or social goal, to thematic investments that fall under a sustainability-related theme, such as clean energy, to exclusionary or best-in-class investments, wherein only companies that meet specific sustainability criteria are eligible. At PineBridge, we aim to balance sustainability with our fiduciary responsibility to clients to optimize capital preservation and investment returns.
Within emerging markets, there is a need to further balance global environmental needs with the economic and industrial needs of the region, which represents roughly 85%2 of the world’s population, much of which lives below Western poverty standards. The issue of climate change is universal, and nearly all the world’s governments have made commitments to limit global warming and mitigate its impacts. However, to ensure a just transition to a net-zero global economy, investment must also consider the roughly one of eight people3 living in EM without access to reliable electricity, help finance sustainable infrastructure and industry in EM, and ensure that communities dependent on revenue from fossil fuels can adapt and participate in the new global economy.
The UN’s Sustainable Development Goals (SDGs) were adopted by all United Nations member states in September 2015 as part of the organization’s 2030 Agenda for Sustainable Development and provide an established framework for best practices in sustainable investment. They provide a framework of 17 goals for countries and multinational organizations to pursue, ranging from ending poverty and hunger to taking climate action and protecting life on land and in the water. As corporate bond investors, our objective in promoting SDGs focuses on those goals for which corporate actions are measurable and the contributions can be meaningful: specifically, SDG 8, Decent Work and Economic Growth; SDG 9, Industry, Innovation and Infrastructure; SDG 12, Responsible Consumption and Production; and SDG 13, Climate Action.
Source: PineBridge Investments as of 31 December 2022. For illustrative purposes only. We are not soliciting or recommending any action based on this material.
These SDGs also help us maintain a balanced view of sustainability issues.
Our assessment of the sustainability of issuers within the energy sector naturally begins by looking at Scope 1, 2, and 3 emissions, as defined by the Greenhouse Gas Protocol. Investment into cleaner sources of energy – from oil to gas, gas to renewables – in an economy that reduces its dependence on fossil fuels is crucial for the economic longevity of companies within the energy sector. However, there are other ways in which a traditional exploration and production company can contribute to sustainability.
For example, there is a West Africa-based independent oil and gas producer that PineBridge’s EM Debt team favors from a sustainability perspective for a variety of reasons. To begin with, the company’s liquid natural gas projects will help provide greater energy resilience to Europe and reduce the need for higher-emitting alternatives as the continent adjusts to energy disruption resulting from the war in Ukraine. Furthermore, the company’s near-total elimination of gas flaring, its investment in renewable energy to power operations, and its use of carbon offsets are all part of a goal to achieve carbon-neutral operations by 2030. Equally important to the EM Debt team are the contributions the company is making in several key areas: employing 100% local employees in all host countries with a workforce that is nearly 40% female, establishing one of the strongest health and safety records in the industry, and launching an innovation center that empowers young, local entrepreneurs and provides training and support to turn their ideas into viable, self-sustaining businesses.
While a host of companies contribute to sustainability simply by the nature of their business activities – banks providing financial services, agriculture companies feeding the world, telecommunication companies providing digital and broadband connections – the private sector makes many meaningful contributions that are off-balance-sheet. Companies that provide a safe working environment, invest time and resources into developing their employees, hire a diverse pool of local talent, utilize local supply chains, and hold suppliers to well-defined standards make some of the most meaningful contributions toward a sustainable future for EM and the world at large. For us, it is vital to uncover these contributions at the issuer level, to partner with companies making positive contributions, and engage with companies that are failing to meet standards set by their peers.
To consider contributions that go beyond operations, products, or services requires in-depth qualitative analysis of each company, which demands a team of dedicated analysts familiar with the companies they cover. It is also important to provide focus and structure to the analysis by selecting a manageable set of goals to pursue. Our selection of four SDGs provides this structure, serving as a robust set of indicators closely linked with corporate activities that have the potential to make an impact that goes beyond the four stated goals to help enhance sustainability across the UN’s entire SDG platform. For instance, while only a small segment of our investable universe can have a direct impact on the goal of zero hunger, companies that contribute to decent work and economic growth will undoubtedly improve the ability of many people to feed their families.
In addition, the indicators associated with the four SDGs we focus on are closely aligned with regulatory frameworks, exhibiting a great deal of overlap with the Sustainable Finance Disclosure Regulation (SFDR)’s Principal Adverse Impact indicators and the EU’s sustainable finance taxonomy. As such, they provide a comprehensive basis for assessing corporate activities and their potential harm or positive contribution toward sustainable development. This consideration underpins our ESG due diligence processes and serves as a unifying focus as we engage with issuers on areas of heightened risk and the need for improvement, as well as opportunities for issuers to adopt policies and practices that will make meaningful contributions to the four focus SDGs over time.
Sustainability issues continue to gain attention, resulting in changes to government regulation and becoming a major focus of corporate capital expenditures – thus making in-depth analysis of sustainability risks essential when assessing the creditworthiness of fixed income investments over time. For large segments of the EM corporate bond market, sustainability changes will be transformational, with significant investment implications.
The utilities sector, for example, has long been a defensive component of the EM corporate bond market, characterized by a predominance of state-owned entities, government support, and long-term contracts. Yet the sector also accounts for some of the highest levels of greenhouse gas emissions in the corporate bond market, which has led to seismic shifts in the sector as more utilities turn to bond markets to finance investments in renewable energy sources. Analysis of sustainability risk will help identify issuers with better longer-term credit trends, and we can also expect markets to begin pricing material discounts for more sustainable utilities – a trend that will only increase as more investment capital becomes aligned with sustainability issues.
Until recently a notion has persisted that EM was incompatible with sustainable investment, guided by misconceptions about corporate governance and the extent to which management cared about environmental and social risks, as well as concerns about the availability of ESG-related data. Where skeptics may have pointed to high levels of coal consumption in China and India as proof that EM assets could not fit within sustainable investment portfolios, more and more investors are embracing the role their capital can play in financing investments into renewable energy within the world’s most populous countries.
The International Energy Agency (IEA) estimates that the world faces a funding gap of anywhere from $1 trillion to $4 trillion to achieve carbon neutrality by 2050.4 Emerging markets will require much of the funding needed for the clean energy transition, as home to roughly four-fifths of the world’s population – a population that is younger and urbanizing more rapidly than in developed markets (DM) – and responsible for more than two-thirds of the world’s carbon emissions. As such, we’ve quickly moved from an environment where EM fell outside the scope of sustainable investment to one in which EM investment strategies are at the center of sustainable investment decisions.
There is yet another critical benefit to EM within a sustainable investment framework: the ability to access a wide range of risk and return potential. Among DM credit markets, there is a relatively strong relationship between credit ratings and ESG ratings, meaning ESG-focused investment portfolios within DM credit markets are often constrained in their ability to source credit risk. Among EM corporate bond issuers, the relationship between credit ratings and ESG ratings is substantially weaker – due in large part to the sovereign rating cap maintained by credit rating agencies. As a result, investors can access the full risk and return potential of the market in sustainable EM corporate bond portfolios.
Source: MSCI, Bloomberg, JP Morgan, and PineBridge Investments as of 31 December 2022. We are not soliciting or recommending any action based on this material. Any opinions, projections, estimates, forecasts, and forward-looking statements presented herein are valid only as of the date of this presentation and are subject to change. For illustrative purposes only.
Our SDG-focused approach further supports the ability to construct portfolios that source risk through diversified security selection. Whereas thematic, exclusionary, or best-in-class investment approaches limit the scope of investment within sustainable portfolios, we believe our focus on SDG contribution provides a well-rounded basis for the identification of sustainable investments with alpha potential across sectors, regions, and credit ratings.
Source: JP Morgan and PineBridge Investments as of 31 December 2022. For illustrative purposes only. We are not soliciting or recommending any action based on this material. Any views represent the opinion of the investment manager and are subject to change.
No, responsible investing is not new. But the commitments of governments and corporations to address global climate change, technological advancement, and a dramatic shift in demographics ensure that the future of investment management will likely be one in which sustainability assumes a central role. We are still at an early stage of this journey, with asset managers, asset owners, and regulators all working to define the role of sustainability and to set targets and expectations to ensure the effectiveness of such strategies.
As one of the leaders in the EM corporate marketplace in terms of AUM, PineBridge’s EM Debt team intends to remain at the forefront of this journey. Our aim is to provide clear direction to our clients, investee companies, and peers about the goals that unify sustainability considerations across our investment platform and to develop investment strategies and products that leverage our capabilities to deliver investment alpha, while contributing to the advancement of core sustainable development goals.
For more asset class insights, visit our 2023 Investment Outlook.
1 Source: PineBridge Investments as of 31 December 2022.
2 Source: World Bank as of 30 September 2022. We are not soliciting or recommending any action based on this material. Any opinions, projections, estimates, forecasts and forward-looking statements presented herein are valid only as of the date of this presentation and are subject to change. For illustrative purposes only.
3 Source: World Bank as of 30 September 2022. For illustrative purposes only
4 Source: The IEA as of 30 September 2022. We are not soliciting or recommending any action based on this material.
Investing involves risk, including possible loss of principal. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. PineBridge Investments is not soliciting or recommending any action based on information in this document. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author, may differ from the views or opinions expressed by other areas of PineBridge Investments, and are only for general informational purposes as of the date indicated. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any republication of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk.