Earlier this year Gavin Power and I highlighted a quiet but profound pivot underway in sustainable investing, with fixed income emerging as a crucial component in global efforts to make the planet healthier and more productive. The United Nations has already provided the framework with the 2015 Sustainable Development Goals (SDGs), and investors like PIMCO stand ready to provide much needed financing to support these targets, which include bolstering infrastructure, ending poverty and making the planet greener. But to achieve these ambitious goals, we believe bond issuers, whether they are governments or companies, have an essential part to play by aligning debt issuance to specifically support the SDGs.
We believe that formally integrating sustainability analysis across the investment community will be critical in the years ahead. This effort should help strengthen investors’ assessment of risk and return, and also help the investment community become an active participant in creating positive societal change. However, to really achieve this, we will need investors and issuers to work together to deepen and broaden the market beyond green bonds to fully support the UN Sustainable Development Goals.
At PIMCO, we have been hard at work formalizing our sustainability analysis across the fixed income asset classes (see examples of our ESG analysis of sovereign bonds, global financials and utilities). These efforts help to improve the depth and rigor of our investment analysis, but as we deepen this research we also want to be able to track the impact of these efforts over time. We believe the SDGs give us the framework to do that.
A framework for measuring impact: the UN Sustainable Development Goals
The 17 SDGs (see Figure 1) cover a wide range of sustainability issues, across poverty, inequality, access to health and education as well as dealing with the impact of climate change.
These goals are deliberately broad, which is both a strength and a potential weakness. The strength is that the SDGs encompass not just climate risks but also other key areas where progress needs to be made to create a more inclusive, sustainable society. However, by being so broad they also create a challenge – how do investors and issuers grapple with measuring such a broad array of metrics?
This is where we believe the investment community needs to come together to align solution-focused approaches. Just as we at PIMCO are embedding our impact measurement efforts under the umbrella of the SDGs, so we would look for issuers to do the same thing. One approach could be a greater focus on issuance of debt where the use of proceeds is formally aligned to one or more of the SDGs.
Just as the green bond market has made great strides in raising awareness of climate risk, so we think that the nascent SDG bond market can work to raise awareness across the broad investment community of the societal challenges we currently face – and actively address those challenges.
SDG bonds: building on the green bond framework
We fully support the development of the green bond market and are delighted to see how issuance and interest in the sector continue to rise. According to Bloomberg data, green bond issuance hit a record high of $173 billion in 2017, with $200 billion in issuance forecast for 2018.
These are impressive sums; however, the UN estimates annual financing of $3 trillion to $5 trillion will be needed to meet the SDGs, the bulk of which is to come from the private sector. It is in this context that the breadth of the SDGs becomes one of their strengths: The vast array of SDG initiatives provides issuers with many opportunities to link so-called use of proceeds bonds to a number of sustainability efforts. Different industries will find themselves more closely aligned with different initiatives, and it will undoubtedly take time for issuers to understand under which of the SDGs they can most closely align their business (and hence their issuance). The fact that this takes time should not deter the effort. Indeed, we have already seen issuance both from development banks and commercial banks under the SDGs linked to gender diversity, health and well-being, education, climate, and sustainable communities. We fully support this effort, and encourage others to follow suit.
We also believe that the banking sector is uniquely suited to leading issuance efforts under the SDGs. Development banks often work in less developed parts of the world, and it is in the developing nations where sustainability efforts can have the greatest impact. We see significant scope for collaborative efforts between the development banks and the private sector to provide sustainable finance at mutually attractive interest rates.
The commercial banking industry, with its diversified loan books, should have unrivaled capacity to take the lead in SDG-linked debt issuance. The industry also has the strength and scope to overcome barriers to SDG issuance, such as the difficulty of defining what loans fall under which specific SDG, how investors can track the use of those proceeds, and even the fundamental question of why issuers should undertake the complexity of issuing dedicated use of proceeds bonds rather than demonstrating their commitment to sustainability by other methods.
Tackling these challenges in order: With a broad loan book, there is ample scope for banks to identify sectors most closely aligned to individual SDGs, and the fact that we have seen banks issue SDG bonds is testament to this view. We also believe that the green bond market provides a framework for tracking the use of proceeds, including an external review at the time the bond is issued, and then an annual third-party review confirming that the proceeds are being used in an appropriate manner. We believe this framework can work equally well for bonds issued under any of the SDGs. We also expect the UN Global Compact to publish its own “Blueprint for SDG Bonds” to further help issuers and investors with this important initiative.
Finally, there is the question of why issuers should follow the path of SDG issuance rather than demonstrate in other ways that they are embedding a sustainability focus across the business. Here we do not believe that it needs to be an “either/or” world. Rather we believe that issuers focused on sustainability can further cement their credibility by issuing debt under the SDG framework, thereby committing themselves to a greater degree of scrutiny. Just as PIMCO has embedded our sustainability efforts across the firm as well as launched dedicated ESG strategies, we believe issuers can embed sustainability as a firmwide initiative as well as issue dedicated securities. In due course, when sustainability efforts are fully mainstreamed, the need to issue specific use of proceeds bonds may fade, but we are not at that point yet.
One more potential benefit for banks that issue under the SDGs is that by going through the process themselves, they should be in a much stronger position to support clients who want to follow suit. In this way the banks can begin a virtuous circle where the first-mover advantage could be considerable.
Key takeaways
We believe the UN Sustainable Development Goals provide the investment community with a well-structured framework for tackling long-term sustainability challenges. The breadth of the goals should not be a barrier, but instead a fantastic opportunity for investors and issuers alike to come together and address long-term issues in a clear and coherent manner. As investors we believe that bonds issued under the SDGs will be a key part of the fixed income market in the years ahead, and we call on issuers to be at the forefront of this exciting opportunity.
DISCLOSURES
Socially responsible investing is qualitative and subjective by nature, and there is no guarantee that the criteria utilized, or judgment exercised, by PIMCO will reflect the beliefs or values of any one particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and PIMCO is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful. Past performance is not a guarantee or reliable indicator of future results.
Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investors should consult their investment professional prior to making an investment decision.
This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world.
©2018, PIMCO.
© PIMCO
Read more commentaries by PIMCO
