It is imperative that asset managers making ESG principles a core investment strategy don’t “set and forget” after taking an investment position.
They must realise their responsibilities extend beyond the initial investment and take an active role in how that corporate or government entity is using that investment, whether it be equity or debt, to improve their performance on material ESG issues.
In the 12 months to 30 June 2019, we engaged with 293 issuers of debt on a range of issues: clean water, clean air, diversity, governance, sustainability reporting and opioid accountability.
We also used our proxy votes to actively support proposals that strengthened companies’ ESG practices and to vote against those we considered inimical to best practice. In the 2019 financial year, we voted against management 80 per cent of the time on the issue of greenhouse gas emissions, 43 per cent against on addressing climate change and 49 per cent against 43 per cent on advisory say on pay.
An example of impact investing includes the Calvert Green Bond Fund which focuses specifically on environmental impact. With over $441 million of FUM (as at 31 March 2020), this fund invests across a range of debt instruments including corporate bonds, government bonds, commercial mortgage-backed securities, municipal bonds and cash and incorporating multiple impact strategies encompassing green, social and sustainability debt issues.
Calvert’s approach is to uncover any financially material ESG risks to which issuers are exposed, how well issuers are managing these exposures, and the opportunities to improve ESG performance. It entails defining peer groups based on shared financially material risks, developing an investment thesis to identify current and emerging ESG risks and opportunities, using key performance indicators to evaluate ESG risks, ranking and rating each issuer based on three criteria (company, industry and execution) and to monitor progress.
It’s an exacting progress but one that’s essential to ensuring Calvert not only delivers the best results to investors but to the issuers themselves in terms of the ESG values they claim to proclaim.
Investors are increasingly demanding green bonds – US$167.7 billion were issued in 2018 – although they still only account for 1 per cent of the global debt market.
On the supply side, growth is being driven by the Paris Agreement and corporates looking for opportunities, while on the demand side it’s growing investor awareness of the impact of climate change and wanting issuers to respond to it.
In Australia, institutional investors have been leading the way in adopting sustainable investing practices. There is growing awareness that super funds and institutional asset owners can include green bonds or impact bonds into their traditional bond allocation and still achieve the return required with the same risk and provide positive impact on ESG issues.
Vishal Khanduja, vice-president and fixed income portfolio manager, Calvert Research and Management, a wholly owned subsidiary of Eaton Vance Management