Aussie Bond Fund Searches for Debt Safe From Climate Change
Aussie Bond Fund Searches for Debt Safe From Climate Change
(Bloomberg) -- One of Australia’s specialist fixed-income managers has set out to find answers to an issue of increasing relevance to bond investors: How will climate change impact sovereign debt?
Ardea Investment Management and the University of Technology Sydney will undertake research on whether climate change has had an effect on bond yields historically and how it could influence sovereign debt valuations in the future. These are important questions for the A$15 billion ($11 billion) money manager whose strategy seeks to take advantage of mispricings between government bonds and interest rate derivatives, according to head of research Laura Ryan.
“At this stage we can’t say whether these risks will materially impact our strategy or the markets we invest in, but we certainly want to try as far as possible to understand if they will,” Ryan said in a phone interview. “If the research shows ESG risks are material for equities, then I don’t think it’s a stretch to expect it may be a material risk for government bond markets either.”
Factoring in the long-term effects of global warming on economies and fiscal dynamics is becoming a pressing issue as governments sell bonds at a furious pace to fund mammoth stimulus, and investors are desperate for income in a world where nearly $16 trillion of debt has negative yields.
Yet there is scant research on the link between climate change and sovereign risk -- at least compared to the impact of environmental, social and governance factors on stocks and corporate bonds -- even as investors become more aware that ESG factors can affect government debt valuations.
The United Nations-supported Principles for Responsible Investment has said that the sovereign debt market has been the subject of less systematic ESG consideration than other investment asset classes.
‘Demand Explosion’
Demand for ESG screening from Ardea’s clients that include large institutional investors “has exploded,” with requests flowing in every day, said Ryan, a former senior vice president of quantitative research at Pacific Investment Management Co. in Sydney.
“It’s really difficult to find sovereign bond research and this is the market that defines all of the other markets and it’s the basis off which every other asset class is priced,” Ryan said.
She doesn’t anticipate investors ever not holding U.S. Treasuries, but they might shun the debt of governments that still depend on fossil fuels and aren’t as mindful of environmental risks.
Some have already voted with their feet. Last year, Sweden’s central bank offloaded bonds issued by the Australian states of Queensland and Western Australia, and securities from the Canadian province of Alberta, both areas with high carbon-dioxide emissions.
Ardea’s flagship A$5.5 billion Ardea Real Outcome Fund was up over 5% in the year to August 31, compared to a benchmark that was little changed, according to the company.
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