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ESG Trends: Progress Over Perfection

March, 2020

While sustainability is the destination, transition is the way to get there.

Now, more than ever, there is a greater need to include sustainable analysis into a portfolio decision-making process, leading to more consistent integration of Environmental, Social and Governance (ESG) factors in investment practices. The call to action at the 2020 United Nations Climate Change Conference was for the financial sector to support the shift to a net-zero carbon economy. 

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Moving away from crude distinctions between “brown” and “green”

In order to achieve sustainability goals, investing in green bonds is not the only approach. Green bonds only apply to companies that have assets and projects that can qualify as green, and as such, you would be investing in a company that is already (somewhat) green. A debate surrounds whether there is larger impact in focusing on the transition from brown to green in the world of sustainability.

As ESG factors become increasingly important to investment decisions, the focus has moved away from the binary distinction between brown and green bonds, to concentrating on incentivizing the transition from brown to green at the company level. However, this transition is often more challenging than it appears and certainly does not happen in a day but can be helped by financial institutions globally.

Recent examples of transition bonds

In recent months, a new kind of bond has been introduced to the credit markets, potentially allowing investors to participate in creating positive incentives for companies to move in the right direction from an ESG perspective. This is a new and evolving market, which we are following closely:

  • Multinational energy giant, Enel Group issued its first ever SDG-linked bond to help achieve its sustainability goals. Upon review of the bond’s KPI in 2021, the coupon will increase by 26 bps if the objectives have not been accomplished.
  • JetBlue signed a new $550mn sustainability-incentivized loan that is linked to the company’s public commitment to become net carbon neutral on its flights in the US. Essentially, the rate on this borrowing facility falls if JetBlue meets certain criteria and sustainability objectives and increases if they fail to do so.

ESG is becoming increasingly important as an addition to traditional credit analysis

At RPIA, we have been a United Nations Principles for Responsible Investment (UN PRI) member since 2018. In line with the six principles, our approach is to incorporate ESG factors into the investment process rather than limiting ourselves to investing in green bonds. Our Credit Research team regularly meets with and talks to management teams of the companies we already invest in, or in which we are considering an investment, and includes ESG in their line of questioning, with appropriate timelines for follow-up discussions where relevant. 

At AIMA’s Trends in ESG & Responsible Investing event, the Head of Client Portfolio Management, Liam O’Sullivan, spoke on the panel about how positive incentives are critical to influencing real change. Divesting could simply lead to a loss of dialogue on ESG factors, whereas more change may be driven by an ongoing dialogue over an appropriate time frame.

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AIMA Trends in ESG & Responsible Investing Panelists

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