InvestmentsApr 21 2022

The role of fixed income in responsible investing

Supported by
Columbia Threadneedle Investments
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Supported by
Columbia Threadneedle Investments
The role of fixed income in responsible investing
Credit: Unsplash

The present conflict in Ukraine has led to questions being asked around the world about the impact energy policies have on wider society, and in particular how the transition to a lower carbon world can be engineered in a way that is fair and balanced in how it impacts people and companies at every level.

Ben Constable-Maxwell, head of sustainable and impact investing at M&G, says: "The transition has to happen in a fair way, or it will not gain wide social acceptance, and without that, it becomes much more difficult to achieve a transition to a lower carbon world.

"It is part of the wider ESG story, though. The transition is the E, or environmental concern, but the impact of it is the S, the social or human consideration. And whenever we look at an investment, we consider the human impact as well.” 

An example of where the two considerations may come into conflict is in the production of electric vehicles. Such vehicles are of course more energy efficient than vehicles powered by the internal combustion engine, but the manufacture of those cars involves the use of commodities mined in parts of the world where forced and child labour has been known to occur. 

 The transition has to happen in a fair way, or it will not gain wide social acceptance.Ben Constable-Maxwell

The same considerations apply to solar panels, which Constable-Maxwell says use a particular metal “and 80 per cent of the world’s supply of this metal comes from the Uighur region of China, which has issues around human rights and forced labour.

"So when we are talking to solar panel manufacturers, we need to be sure they have the right protocols, that they know what is in their supply chain. The analysis we do to ensure this is complicated, hard work.”

He adds that an area where both the public and private sector may need to be involved is in re-skilling workers who presently are employed in areas of the economy that are likely to shrink in the coming years as a result of the change to lower carbon economies. 

Governance

Thede Rust, head of emerging markets debt at Nordea, places concerns such as these within the G (governance) segment of ESG investing, and says: “If a firm has poor governance on issues such as labour, then it is likely they will have poor governance in all areas, and of course that reduces the likelihood of the company repaying you the bond, so we would see the financial risk as very much part of the financial risk of investing in such an asset.”

He says he also tries to engage with governments before investing in their sovereign bonds, in order to see if the direction of travel is the right.

"We were one of the first funds to sell Brazilian government debt, when a new leader came in, because we didn’t like the direction of travel. Now I think most funds avoid Brazil on those grounds. And the thing is, as a bond fund manager, we get plenty of opportunities to have conversations with these governments, because they constantly need to raise finance via new bond issues.

"We probably only ever owned 0.1 per cent of our fund in Brazilian bonds, but they still called us when they were issuing, and we had a chance to hear from them, and it's very much about where a country is going, but if we don’t like it, we don’t invest."

Rust adds: "All of the aspects of the E, the S and the G are part of the consideration, because each one is part of the investment case and financial risk.”  

Transitioning companies

Andrew Lake, head of fixed income at Mirabaud, says that in order for the transition to be effective, one has to invest in companies that may now be highly carbon intensive, but are seeking to change.

He says: "Microsoft as a software company produces very little carbon, but if we are going to reduce the carbon of the economy as a whole, there is very little point in investing in Microsoft. We need instead to invest in those companies that are moving in the right direction.

"And it is certainly true that there is a cost to doing all of this, to the transition. It is important that this is also recognised by governments and that subsidies are introduced to help to manage the impact, whether that is through subsidies related to higher energy prices faced by households, or another way.” 

Constable-Maxwell adds that many large companies already have technical expertise around how to deploy new technologies, while also having the resources to be able to provide clarity on their supply chains and labour practices. 

All of the aspects of the E, the S and the G are part of the consideration, because each one is part of the investment case and financial risk.Thede Rust

Lewis Aubrey Johnson, head of  fixed income products s at Invesco, says: "If you just want a low-carbon fund, that is quite easy to do, you just underweight (that is, have an exposure to a part of the market that is less than the index exposure) the companies that use the most carbon. And there is nothing wrong with that.

"But when we launched our products we wanted to be sure that we were not just a carbon-avoidance fund, we wanted to invest in ways that help to achieve change. And to do that, one has to invest in some of the more carbon-intensive companies that have management teams that understand the need to change, and are issuing bonds to fund that. We do have some exclusions, for example, mainstream oil and gas.”  

Jeremy Rogers, who runs the Social Impact investment trust at Schroders, says the challenge with the energy transition is that the cost of renewable energy growth is essentially placed on electricity bills, creating a problem for lower income households.

But he says a number of companies exist and can be invested in which enable one to invest directly in those businesses that are providing this help. 

david.thorpe@ft.com