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    Responsible investment in fixed income quarterly update

    Responsible investment in fixed income quarterly update

    19 January 2021 Responsible investment, Fixed income
    Q4 2020

    Highlights

    • Election of Joe Biden as US president changes the outlook for ESG issues
    • Another record year for impact bond issuance, with a notable surge in social bond issues
    • Only 30% of impact bonds Insight analysed in Q4 2020 fully met our minimum sustainability requirements

    The trend of divergence between the US and Europe on environmental, social and governance (ESG) factors paused in the final quarter of 2020 as the election of Joe Biden led to a focus on the president’s policy platform with regard to ESG issues. In many areas, including a recommitment to a proactive stance on climate change, the new US administration is expected to implement policies that may have an impact for responsible investors. In Europe, progress on sustainable finance regulations continued apace, and the UK followed in the wake of other sovereigns in committing to issue a green government bond in 2021. Growth in impact bonds continued, with 2020 another record year for issuance. Insight continued to engage with issuers over ESG matters, and to analyse impact bonds. For more information on our approach to responsible investment, please visit our dedicated responsible investment microsite.


    Index


    Regulatory and industry news

    • Election of Joe Biden as US president changes the outlook for ESG issues: President Joe Biden’s policy platform highlights several ways in which a Biden administration might impact the outlook for responsible investors, including a recommitment to a proactive stance on climate change. A shift in priorities could affect corporate issuers of bond and equity securities, governments and potentially even asset-backed securities. The shift in the balance of power in the Senate in favour of the Democrats has increased the extent to which a Biden administration might be able to progress these initiatives. Read our analysis in our paper on the topic.

    • US Department of Labor (DOL) publishes final rule on financial factors in selecting plan investments: In June 2020, the DOL proposed rules to clarify the duties of Employee Retirement Income Security Act (ERISA) plan fiduciaries for selecting and monitoring investments. At the time, the DOL said the proposed rules reflected concerns around ESG investments and strategies, fearing that “plan fiduciaries may be making investment decisions for purposes distinct from the exclusive purpose of providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan”, thereby breaching their fiduciary duty. The DOL received thousands of comments and submissions in response, with its focus on ESG strategies receiving substantial coverage. The final rule was published in October, and while the rule refers to “pecuniary factors and non-pecuniary factors” in defining fiduciary investment duties, there is no use of the term ESG.1

    • European companies are unprepared for the Taxonomy Regulation: The first European Sustainable Finance Survey found that of the largest publicly listed companies in Europe, there was a low level of alignment with the taxonomy. For example, of companies in the Euro Stoxx 50 Index, while 20% of their activities by revenue are “taxonomy-relevant”, only 2% are “taxonomy-compliant”.2 The news came as the European Commission issued sets of technical criteria to determine which activities qualify as environmentally sustainable under its Taxonomy Regulation. The taxonomy should be established by the end of 2021, and will apply by the end of 2022.3

    • Institutional investors call for many of Europe’s largest companies to improve climate disclosures: A group of leading global investors, including Insight, wrote to 36 of Europe’s largest companies through the Institutional Investors Group on Climate Change (IIGCC), to call on firms to properly reflect the implications of global commitments to limit temperature increases to well below 2°C. Companies receiving the letter were selected due to their exposure to decarbonisation risks, and included the largest listed European firms by revenue across the energy, transport and materials sectors. Examples included Anglo American, BASF, BMW, BP, Deutsche Lufthansa, EDF and Shell.4

    • UK announces plans for green debt issuance and environmental projects: The UK government announced it will issue its first green government bond, in 2021, subject to market conditions. We expect issuance before the 2021 United Nations Climate Change Conference (also known as COP26) in November 2021. Chancellor Rishi Sunak said the issue is planned as the first in a series of issuances as the government looks to “build out a ‘green curve’ over the coming years helping to fund projects to tackle climate change, finance much-needed infrastructure investment, and create green jobs across this country”. We believe this could enable pension schemes to achieve their broader environmental objectives while investing prudently to reach their financial targets. Read more in our paper.

    • Sovereign debt issuers under increasing scrutiny over ESG issues: A World Bank survey found that over 90% of debt managers at sovereign issuers are specifically asked for ESG-related information by investors, with 60% saying such questions had become more frequent over the last 12 months. Notably, a third of sovereign debt issuers said they had “made changes to their issuance plan or funding strategy to accommodate impact/ESG investors”. This marks growing interest in ESG issues with regard to government debt. Information about Insight’s sovereign ESG ratings is available on our responsible investment microsite.

    Another record year for impact bond issuance

    • 2020 was another record year for impact bond issuance
    • Social bond issuance surged, driven by sovereigns seeking to raise finance to offset the impact of the COVID-19 pandemic
    • In Q4 2020, the European Union issued over €45bn of social bonds to support member states5
    A note on responsible investment and impact bonds: Investing responsibly means taking ESG risks into account across all portfolios. Impact bonds may bear similar ESG risks to traditional bonds. Investing in them does not mean you are necessarily taking a more responsible approach, but they can be an effective way to have a positive environmental or social impact with your investments.


    Total issuance (USD) by sector and by year6 

    Impact bond issuance by sector and by year

     

    Impact bond issuance by sector and by year - chart 2


    Largest impact bond issues in Q4 20207

    Issuer Issue type Size of issue Bond type
    European Union (five issues) Supranational €46.9bn Social (pandemic)
    Germany Government €5.9bn Green
    Caisse d'Amortissement de la Dette Sociale (two issues) Government agency €9.5bn Social
    Société du Grand Paris (three issues) Government agency €7.3bn Green
    UNEDIC (two issues) Government agency €6.5bn Social


    Insight impact bonds ratings in Q4 2020

    Only 30% of impact bonds Insight analysed in Q4 2020 fully met our minimum sustainability requirements:

    bonds were rated green, indicating the bond meets Insight’s minimum sustainability requirements
    bonds were rated amber, indicating there are weaknesses in the bond with regard to sustainability
    bonds were rated red, indicating the bond does not meet Insight’s minimum sustainability requirements


    Sample of Insight Investment's impact bond analysis in Q4 2020

    Name Bond type ESG performance met? Bond framework criteria met? Impact criteria met? Traffic light score
    European Union (government) Social Yes Yes Yes

    Analyst assessment: The bonds’ proceeds will be used to fund the European Union’s SURE (Support to mitigate Unemployment Risks in an Emergency) programme, which offers finance to member states to help them manage the impact of the COVID-19 pandemic.8 The European Commission (EC) has had extensive discussions with member states to understand if actual and planned expenditures are eligible social expenditures and to confirm there are “severe increases” in public expenditures. The EC will track use of proceeds via regular reporting from member states, which will be required to open special accounts with their national central banks to manage the financing received.

    The EC intends to report within six months of first issuance and every six months thereafter. An allocation report will include aggregate a breakdown of SURE proceeds. Impact reporting will be subject to the quality and granularity of information reported by beneficiary member states. Key performance indicators will include, for example, the number of jobs and companies covered or supported.

     

    Name Bond type ESG performance met? Bond framework criteria met? Impact criteria met? Traffic light score
    Union Electric (utilities) Green Yes No No
    Analyst assessment: The bond’s proceeds can be used for general corporate purposes, including loan funding. The allocation of proceeds will be reported annually with attestation from an external third-party verifier, but there is no information on whether there would be any impact reporting. Various departments will be involved in selecting relevant projects to receive funding, but there is no information on this process nor for management of the proceeds. Given these facts we rated the bond red.

     

    Name Bond type ESG performance met? Bond framework criteria met? Impact criteria met? Traffic light score
    Stora Enso (materials) Green Yes Yes No
    Analyst assessment: The issuer is rated best-in-class under our internal ESG framework, but the bonds’ use of proceeds statement does not match the amount they are intending to borrow. We believe there will be a limited additional impact from the specific use of proceeds as they are buying a forest – rather than, for example, using the funds to plant additional trees.

     


    1 https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/final-rule-on-financial-factors-in-selecting-plan-investments

    2https://sustainablefinancesurvey.de/sites/sustainablefinancesurvey.de/files/documents/european-sustainable-finance-survey-2020_bf.pdf

    3https://ec.europa.eu/info/law/sustainable-finance-taxonomy-regulation-eu-2020-852/amending-and-supplementary-acts/implementing-and-delegated-acts_en

    4https://www.iigcc.org/download/iigcc-letter-to-european-companies-on-paris-aligned-accounts/?wpdmdl=4006&masterkey=5fabc9c5af24f

    5https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/financial-assistance-eu/funding-mechanisms-and-facilities/sure_en

    6Source: Insight Investment. Bloomberg data as at 30 September 2020.

    7Source: Bloomberg. Selected by Insight according to absolute value of local currency.

    8For more information on SURE, please see https://ec.europa.eu/info/business-economy-euro/economic-and-fiscal-policy-coordination/financial-assistance-eu/funding-mechanisms-and-facilities/sure_en#

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