Corporate Debt Buyers Cull Companies That Shun ESG Standards
Corporate Debt Buyers Cull Companies That Shun ESG Standards
(Bloomberg) -- For investors paying more attention to environmental, social and governance risks, it’s no longer enough to simply reward companies that are doing well. They’re increasingly punishing those that don’t measure up.
Insight Investment is selling about $100 million worth of bonds of an automaker for lagging its peers in switching to electric cars amid tightening emission regulations. Amundi Pioneer is divesting from a utility company that’s falling behind on its plans to transition to renewable energy from coal. And several of Eaton Vance Management’s funds recently exited positions in a renewable energy producer that sells electricity to a California utility company facing material climate risks.
Money managers have been greening their portfolios as investing based on ESG principles is becoming more mainstream, and companies that ignore such risks are increasingly penalized. While investors have had the chance to buy more than $460 billion of do-good debt this year -- up 46% from 2018 -- they’re selling other positions that have low ESG scores, and often improving returns in the process.
“Our process of evaluating ESG risks has evolved over many years and have identified some bonds that show elevated risks that we have been selling from client portfolios,” said Josh Kendall, senior environmental, social and governance analyst at Insight Investment, overseeing about $900 billion in assets. That can help performance too, Kendall said.
Consider PG&E Corp., the embattled California utility forced into bankruptcy this year after its power lines sparked some of the state’s deadliest wildfires amid heightened climate change risk, leading to billions of dollars in damages. About 90% of bankruptcies in the S&P 500 between 2005 and 2015 were by companies with poor environmental and social scores five years prior to filing, Bank of America Corp. said in a September report.
Avoiding those kinds of blowups, as well as buying bonds that meet ESG criteria can be rewarding. The Bloomberg Barclays Corporate ESG Index has returned 14.3% this year, in line with the broader investment-grade market. Bond portfolios integrating such analysis have also been found to exhibit less volatility, BlackRock Inc. said in a November report, citing JPMorgan Chase & Co. indexes.
Equity investors have for decades used their voting powers to push corporations to factor in ESG issues that may affect growth and profitability. But it’s been a different story for bond investors, who have limited engagement with borrowers and typically care more about credit and default risks. And with investors increasingly worried that companies may be “greenwashing” them by talking up projects that aren’t always true to their marketing, it’s hard to tell if the use of proceeds is honest.
“People are making this up as they go along in some cases,” said Andrew Feltus, portfolio manager at Amundi Pioneer Asset Management, which manages about $86.4 billion in assets.
But that’s changing fast, thanks to more tools like benchmark indexes helping investors to bring ESG debt into their portfolios, BlackRock’s global head of sustainable investing Brian Deese said in the report. European lawmakers are inching closer to finalizing a classification system for green financial products, and credit raters are diving in to include ESG analysis in their methodology.
But asset managers, especially in the U.S., have been slow to incorporate ESG risks, partly because of the lack of standardized data, or they fear breaching their fiduciary duty, said Carmen Nuzzo, head of fixed income at Principles for Responsible Investment. The United Nations-backed organization has support from investors holding nearly $30 trillion of assets to incorporate ESG into credit analysis and ratings.
“In the 21st century, a more holistic understanding is critical to preserve capital over the long term,” Nuzzo said.
More managers are realizing that and unloading stakes that don’t align with ESG mandates, like Eaton Vance’s Calvert funds, which focus on responsible investing. Insight Investment and Amundi Pioneer are based in Europe, which has been much quicker and more aggressive in adopting ESG investing principles.
“The selling will absolutely continue,” said Vishal Khanduja, head of investment-grade portfolio management at Eaton Vance. “It’s incumbent on company management to pay attention to and report on material ESG factors because investor concern about these issues is on the rise.”
To contact the reporters on this story: Caleb Mutua in New York at dmutua@bloomberg.net;Emily Chasan in New York at echasan1@bloomberg.net
To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Molly Smith, Christopher DeReza
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