Note: This article was amended on October 15 to correct the returns target for the new fund.
Fixed income giant PIMCO recently launched an ESG version of its $19bn GIS Global Investment Grade Credit Fund, an open-ended value-based strategy investing primarily in global corporate and credit instruments.
Both funds are benchmarked against the Bloomberg Barclays Global Aggregate Credit Index, have a shared emphasis on risk management and – according to a favourable Morningstar report on the original fund – benefit from the “tenacity of its veteran lead manager”, PIMCO Global Credit CIO, Mark Kiesel.
The ESG fund targets returns of 75 to 125 basis points over the benchmark.
“Having the same people who talk about profit forecasts talk about issues such as renewables sends a powerful message to issuers” – Pimco’s Mike Amey
It is the latest in a series of products aimed at growing PIMCO’s share of the SRI market since it established a dedicated ESG platform and framework – ‘Exclusion, Evaluation, Engagement’ – early last year.
As with other PIMCO ESG strategies, the GIGC ESG fund will have a dual exclusionary approach when considering potential investments: core and dynamic. Core exclusions are permanent and include companies that derive more than 10% of revenue from coal, weapons & armaments, tobacco and pornography; sovereign issuers ranked among the bottom 15% of on transparency and corruption indices; and issuers who have violated UN human rights and sustainability principles. Dynamic exclusions, on the other hand, are a temporary list of issuers who are “currently misaligned with ESG principles” or have not responded satisfactorily to engagement efforts.
Exclusions are not applied across PIMCO’s general products.
The remaining universe is then evaluated on ESG factors and assigned a proprietary score formulated using data from MSCI and Reprisk, for corporates, and Freedom House for sovereigns.
PIMCO says it has integrated the ESG scores into all credit analysis since 2016, with 2,300 individual issuers scored on ESG performance to date.
According to PIMCO’s Head of ESG, Mike Amey, who manages the new fund along with the original GIGC Fund team, the firm’s ESG products are concerned primarily with positive impact and would prefer exclusions and negative impact to “not dominate the conversation”.While PIMCO ESG strategies will naturally overweight best-in-class issuers, it will also invest in those “on an improving trend” to target “greater societal impact as they improve their business practices” – alongside financial criteria.
PIMCO aims to facilitate the transition to sustainability by engaging with companies and sovereigns via its credit and analyst teams, using its size to gain “access and influence with company management”.
Describing the process, Amey said that it was important not to have a separate engagement protocol for ESG issues.
He said: “Having the same people who talk about profit forecasts talk about issues such as renewables sends a powerful message to issuers that ESG analysis is part of our day job”.
Amey believes that although engagement is often regarded as the domain of the equity investor, large bond investors can play a role in influencing issuers because of the relationships built up with repeat issuers.
One of the ways PIMCO is hoping to leverage this influence is by widening the market for bonds linked to the UN’s SDGs. Amey believes that while investors and issuers have attempted to grapple with the challenges of climate change through the green bond market, engagement with wider social priorities has been lacking. He says the framework of the 17 Goals provides opportunities for issuers to tap into SRI finance with clear social outcomes. PIMCO has been directly engaging issuers – with banks as the “natural starting point” – to encourage them to sell SDG-linked debt, and claims to have already worked with unnamed big issuers to help develop appropriate labelled products. Banks, Amey says, have diversified lending books to help them identify SDG-aligned assets more easily, and are better positioned to track the use of proceeds.
These efforts are being driven by an increasingly large ESG team at PIMCO, peppered with big-hitters in the space. In 2017 and 2018 alone, the firm brought in Niamh Whooley, former Director of ESG Equities Investing at Societe Generale to head up its engagement work; Samuel Mary, ex- Senior Sustainability Research Analyst at Kepler Chevreux, to lead on internal ESG integration; and Gavin Power from the UN Global Compact to support SDG alignment.
Amey anticipates that the next five years will see further growth in sustainability bond issuance and points to the recent moves from the Credit Ratings Agencies as a sign of ESG ‘mainstreaming’. And in a further five years, ESG will have crept so far up the investment agenda that the industry may no longer need dedicated products, as these considerations become accepted as a baseline market standard.
“Maybe 10 years is an optimistic timeframe… but there’s no point in not having ambition.”