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    Responsible investment quarterly update

    Responsible investment quarterly update

    12 July 2021 Responsible investment, Fixed income

    Highlights

    • Ambitious climate change targets were announced by governments and global asset managers, with strong momentum towards net zero emissions by 2050
    • Significant progress was made towards mandatory climate-related disclosures in many jurisdictions, applying to both companies and investors in different contexts
    • Impact bond issuance in the first half of 2021 outpaced full year 2020 – but only 22% fully met our sustainability expectations in Q2

    News highlights: Q2 2021

    Ambitious commitments to climate targets were published by governments and investment managers to coincide with the G7 Summit and ahead of the COP26 conference later this year. Pressure increased for concrete emission-reduction plans to be established given pledges to achieve net zero carbon emissions by 2050 or earlier. Notably, energy companies came under particular pressure as activist investors achieved several victories.

    In the US, President Joe Biden made further commitments to tackle climate change in his proposed 2022 budget and by signing an executive order focusing on, among other issues, financial climate risks. Details also emerged hinting at the direction of future Securities and Exchange Commission (SEC) regulations on environmental, social and governance (ESG) disclosures.

    In Europe, the far-reaching Climate Law achieved provisional approval, and details of the carbon border adjustment mechanism (CBAM) – which will apply tariffs to some imports – were leaked. Germany also announced a sustainable finance strategy alongside an ambitious target to achieve net zero emissions by 2045.

    In the UK, there was progress on several fronts with regard to climate change legislation. The Department for Work and Pensions (DWP) updated its guidance for climate disclosures for larger pension schemes, for which rules are expected to apply from October 2021. The Pensions Regulator (TPR) also issued its climate change strategy, and the Financial Conduct Authority (FCA) issued two consultations on ESG disclosures.

    For more information on our approach to responsible investment, please visit our dedicated responsible investment microsite.

    Impact bond issuance continues to surge

    • Impact bond issuance in the first half of 2021 outpaced full year 2020
    • Governments and financials continue to lead the way in impact bond issuance
    • Only 22% of impact bonds Insight analysed in Q2 2021 fully met our minimum sustainability requirements

    A note on responsible investment and impact bonds: Investing responsibly means taking all risks, including ESG risks, into account when designing a solution. Investing in impact bonds is one way to encourage a positive environmental or social impact with your investments, but we believe it is more effectively done when considered alongside other relevant ESG factors within the framework of a responsible investment policy and approach.

    Figure 1: Total issuance (USD) by sector50

    Total issuance (USD) by sector and by year


    Figure 2: Total issuance (USD) by year50

    Total issuance (USD) by sector and by year


    Table 1: Largest impact bond issues in Q2 202151

    IssuerIssuer typeSize of issueBond type
    European Union (two issues) Supranational €17.3bn Social (pandemic)
    Caisse d'Amortissement de la Dette Sociale (four issues) Government agency €12.8bn Social
    International Bank for Reconstruction and Development (two issues) Supranational €8bn Sustainability
    German government Government €7.3bn Green
    UNEDIC Government agency €3.5bn Social


    Insight impact bonds ratings in Q2 2021

    Our analysis of 54 impact bonds issued in Q2 2021 resulted in the following ratings:

    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

     

    Industry Bond type ESG performance met? Bond framework criteria met? Impact criteria met? Traffic light score
    Utilities Green Yes Yes Yes

    Analyst assessment: This issuance focuses on financing projects to increase the transmission of renewable electricity from offshore wind power plants to the electricity grid and to enhance the transmissions capacity of renewable energy. There are strong processes in place to mitigate ESG risks. The rest of the framework is aligned with the ICMA Green Bond Principles.

     

    Industry Bond type ESG performance met? Bond framework criteria met? Impact criteria met? Traffic light score
    Utilities Green Yes Yes No

    Analyst assessment: This was rated amber due the majority of proceeds being used for the acquisition of a 'pure player' company (90%+ of revenues related to circular economy/eco-efficient activities) as opposed to new financing. It is unclear whether the acquisition will lead to a scaling up of the eco-efficient business practices and activities.

     

    Industry Bond type ESG performance met? Bond framework criteria met? Impact criteria met? Traffic light score
    Utilities Traditional No Yes Yes

    Analyst assessment: The use of proceeds from this issuance focuses on improving the energy efficiency of gas, which is a fossil fuel. This maintains the status quo of a high-carbon energy system and does not contribute towards driving the change to a low-carbon economy based on renewable energies. A more impactful bond would focus on renewable energy.


    Insight’s ESG-related investment decisions in Q2 2021: corporate bond highlights52

    IssuerIssuer typeESG issue typeAction taken
    Global telecommunications Environmental The issuer’s Prime climate risk rating highlighted significant risks given the reliability of some diesel generators at its telecom towers in emerging markets. We prefer other names in the sector which do not have this risk flagged by our analysis and still offer a significant spread premium relative to this issuer. SELL
    US energy company Environmental The company scores well in terms of emissions relative to US peers, but poorly in terms of carbon intensity relative to global peers. We sought to understand whether the company has a carbon reduction plan in place, but management did not respond. We sold the position in a portfolio that requires companies with a specified level of carbon intensity to have such a plan. SELL
    European delivery company Environmental The company delivers parcels through fixed hubs, reducing distance travelled, and therefore both emissions and packaging required. We bought the bonds of this company in June in a portfolio that seeks to deliver a positive environmental impact. BUY
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