It is clear ‘responsible investing’ has moved from a ‘nice to have’ to a ‘must have’ for asset managers, reflecting underlying changes in our society. Incorporating environmental, social and governance (ESG) factors into credit processes can help identify and manage longer-term risks and tailor mandates to clients’ ESG requirements. Regulations are also playing their part, a trend that started in Europe but is spreading globally, albeit unevenly.
Credit markets are starting to mark down those bonds that are seen to be in violation of the UN Global Compact. The trend for more green bond issuance will undoubtedly continue in 2020, as will bonds issued aligned to the UN Sustainable Development Goals (SDG). Indeed, we have already seen some deals with covenants established to increase the bond’s coupon if specific renewable energy goals are not achieved.
This may lead to companies with poor ESG scores facing a higher cost of funding, adding material incentives to improve behaviour. Responsible investing should not be limited to corporate debt and there is also a growing focus on integrating RI into emerging market and sovereign debt analysis.
Lucy Speake, head of european fixed income, Insight Investment.