With the global economy brought to its knees last year, the pandemic focused the world’s attention on the rallying cries of environmental, social and governance (ESG) investing: inclusive economies; healthy communities; safe and equitable workplaces; resilient supply chains; and clean, alternative energy.
While most remain ideals for now, Pimco believes there is enough global capital to support a more sustainable global economy. “To effect meaningful change, however, we need greater alignment among bond issuers, asset owners, and asset managers; all need to focus on achieving healthy and inclusive global growth,” notes Pimco in its 2021 ESG Investing Report.
Sustainable bonds, in particular, are the foundation of a sustainable recovery, writes Pimco, one of the world’s largest asset managers with more than US$2.2 trillion ($2.9 trillion) under management as at the end of 2020. The global sustainable debt market grew 29% y-o-y to a record US$732 billion last year, helped by an explosion of bond issuance for social projects amid fallout from the pandemic, reports Bloomberg.
Unlike with stocks, bond issuers come back to the market regularly, notes Pimco. “Our credit research analysts engage regularly with the companies they cover; their discussions include ESG-related topics such as climate targets, human capital management, and board qualifications and composition.”
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The Pimco Climate Bond Strategy is the firm’s first sustainability-themed opportunity for investors to “green” their bond allocations.
The range of bonds available are wide and appear utopian: renewable energy, green buildings, more sustainable supply chains, bank lending to support a low-carbon economy, and even food companies focused on plantbased products.
In 2020, the Pimco Climate Bond Strategy held green and sustainable bonds linked to projects supporting 69,798 tons of avoided emissions in tCO2e (tons of carbon dioxide equivalent). This is equivalent to removing 15,079 passenger vehicles from roads for a year, or growing 1.15 million tree seedlings for a decade.
In 2020, Pimco’s credit analysts engaged 1,586 corporate bond issuers on ESG topics, with half of them based in North America and 17% in the Asia Pacific region. This engagement represents more than 80% of Pimco’s firmwide holdings of corporate debt.
By sector, industrial companies represented a lion’s share at 23% of all bond issuers engaged, followed by energy (13%), banking (8%) and utilities companies (7%). Case studies highlighted in Pimco’s report include pharmaceutical company Pfizer, French fashion house Chanel and online retailer Amazon.com.
With Pfizer’s key role in the Covid-19 vaccine roll-out, Pimco examined the company’s resilience against supply chain disruptions, employee health measures and benefits, and access strategy for vaccine delivery.
In March 2020, Pfizer issued a US$1.25 billion, 10-year sustainability bond paying interest of 2.625% semi-annually and maturing on April 1, 2030.
“The first of its kind in the biopharmaceutical industry, [Pfizer] will use proceeds to help manage the company’s environmental impact, strengthen healthcare systems, and support increased patient access to Pfizer’s medicines and vaccines, especially among underserved populations,” notes Pimco.
Luxury fashion house Chanel is privately held, but it has been raising funds via the bond market. Last September, it issued its first sustainability-linked bond priced at EUR600 million ($962.9 million), with the support of BNP Paribas, to reduce its carbon footprint and that of its supply chain. Notably, Chanel has attached “green strings” to the bond.
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The five-year tranche will repay 100.5% of face value on maturity if the company is not wholly reliant on renewable electricity by then; the 10-year tranche will cash out at 100.75% if Chanel falls short on its greenhouse gas emission targets.
“Pimco engaged with Chanel before the issuance of their bond… We advised them of our expectations about reporting of broader sustainability themes such as water, biodiversity, supply chain and sustainable sourcing to help evaluate their sustainability strategy holistically,” notes Pimco.
“Chanel’s contribution to the growing sustainability-linked bond universe sets a good example of integrating sustainability targets into a core business and addressing material issues specific to the fashion industry,” adds Pimco.
Meanwhile, Amazon has made “increasingly ambitious” sustainability commitments towards the goals of reaching net zero carbon by 2040, electric vehicle delivery fleets, sustainable packaging and more, notes Pimco.
In May, the company announced a US$1 billion sustainability bond. That said, the US e-commerce giant has faced criticism for poor treatment of workers and privacy issues related to facial recognition products.
“[Amazon] acknowledged supply chain audits cannot completely eliminate labour risk and they are working closely with partners to enhance monitoring. Amazon is also on a path to running 100% of its business on renewable energy by 2025 — five years ahead of their original target of 2030,” writes Pimco.
“In our view, the pandemic has elevated the importance of sustainable investing. It is our firm belief that healthy societies and healthy markets go hand-in-hand. It is as simple as that,” writes Scott Mather, managing director and chief investment officer of US core strategies at Pimco.
“Markets and economies cannot survive — let alone prosper — in a world facing environmental devastation, health scourges, and gross social inequities and imbalances,” he adds.
Towards an industry standard
Sustainability efforts are still being measured through capital value as industry professionals race to develop a global standard for sustainability reporting. “As a global community of investors, we must establish universal reporting standards, because what gets measured gets managed,” writes Mark Carney, Pimco global advisory board member and UN special envoy on climate action and finance.
The World Economic Forum estimates more than 50% of global GDP is dependent on nature. Hence, the Taskforce on Nature-related Financial Disclosures (TNFD) aims to build upon the momentum of the successful Task Force on Climate-related Financial Disclosures, appointed by the G20’s Financial Stability Board in 2015, with final recommendations published in 2017.
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Pimco is a member of TNFD’s informal working group, aiming to provide a framework for corporates and financial institutions to assess, manage and report on their dependencies and impact on nature. In collaboration with the corporate sector, reporting frameworks will be developed in 2021 and tested in early 2022 before being made available worldwide.
“The time has come for all of us to ask ourselves whether capital markets are doing all they can and should to finance the transition to a net zero economy,” says Carney. “We must ensure capital markets embed a sense of purpose and focus on addressing the immediate threat of climate change.”
He adds: “Bond markets, given their scale and reach, have a uniquely important role in financing the transition to a net zero economy. Can we harness the power of capital markets as a key solution to avert a climate catastrophe? We must.”
Photo: Bloomberg
