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ESG Integration in Fixed Income Market
2020-12-10

​COVID-19 the Pandemic brought bond market unprecedented opportunities and challenges powered by the successive proclamations on green recovery and carbon neutrality pledges in a number of nations and regions. How to integrate ESG considerations into the traditional credit rating system? How to assess the impacts of ESG factors when allocating fixed income assets? Rating agencies, investors, issuers and various stakeholders in the market are exerting great efforts in exploring solutions.


At the 8th China SIF Annual Conference held on Dec. 1, professionals from credit rating agencies, pension funds, global asset managers and industry associations shared their ideas regarding topics such as the discrepancies between China and global fixed income markets in terms of ESG integration, and the respective driving forces.

Brian Cahill, Managing Director of Global ESG of Moody's Investor Services, introduced six major themes published by Moody's that the global credit system may face in 2021: uneven recovery, policy challenges, rising debt burdens, digital transformation, environmental impact, and social trends, two of them are ESG. It is expected that the ESG performance of the issuer may greatly affect its financing ability and financing costs in the future. Brian spoke about the integration of ESG analysis. The importance of this conference grows each year as we approach the tipping point for the integration of ESG analysis into mainstream fixed income markets, and the subsequent need to have a systematic approach to that integration.

Brian Cahill, Managing Director – Global, Environmental, Social and Governance, Moody’s Investor Services

Dr. Wu Ruojun, the co-founder of Nine Martingale Investment Management, subsequently released the STFG-9M China SDG Bond Index. This index selected constituents by their use of proceeds, which fits into the United Nations Sustainable Development Goals and SDG Finance Taxonomy (China) developed by UNDP. The index series cover the whole market, local government bonds, bonds issued across different industries and ratings, pivoting around SDG taxonomy. Research and analysis showed that China’s SDG bonds provide issuers of relatively lower credit ratings with the financing sources for SDG projects. At the same time, China’s SDG bonds have a better quality than vanilla bonds with above average risk-adjusted return, which creates a win-win situation for both issuers and investors.

Dr. Wu Ruojun, Co-Founder, Deputy GM, Nine Martingale Investment Management

Jasmine Qu, Senior Manager of Global Investors Services at E Fund Management Co, moderated the panel discussion. Guest speakers from home and abroad shared the driving forces of their respective institutions to implement ESG integration in fixed income products and asset allocations, as well as the challenges they encountered in the integration process, and their views on future trends.

Parallel Forum B1: ESG Integration in Fixed Income Market

Peter Mannerbjork, Fixed Income Quantitative Investment Manager of AP2, said that the primary motivation for ESG integration comes from the Swedish Law, and their practices have showed that ESG strategies can bring higher returns and lower risk. However, the establishment of comprehensive quantitative models is a major challenge in quant investment, then ESG factor can fit into the model as any other factor.The second challenge is to define and understand ESG factors fully. Overall, ESG integration could become a competitive advantage.

Elaine Gu, Client Portfolio Manager of E Fund’s Fixed Income Investment, introduced China responsible investment fixed income strategy developed by E Fund and APG last year. The strategy is based on their common view that “ESG is no longer an option. It's a must-have for all portfolios”. Elaine expressed her optimism about China bond market, which is becoming an important asset class for global investors as China is further opening the market to foreign capital. Yet, investors are still confronted with challenges of the lack of awareness and motivation from issuers, and the lack of data availability and high quality data.

Andrew Brown, Director and Portfolio Manager of Fixed Income for EMEA at BMO, shared BMO’s evolution of ESG integration practices. About 7 or 8 years ago, clients and investors become much more aware of the social impacts of their investment portfolios, which was the driving forces of ESG integration at the early stage. He predicted that ESG would be considered as part of any investment in the future, no longer just niche parts of the credit market. Anyone that is not involved in the process would be left behind.

Ricco Zhang, Senior Director of Asia Pacific of ICMA, introduced that financial regulators in various countries are gradually strengthening ESG policies, such as the latest EU Taxonomy, Sustainable Bond Grant Scheme in Singapore and the stricter disclosure standards for funds’ non-financial information in Hong Kong. The regulators from the leading regions are promoting the development of global ESG investment.

Esther Law, Senior Portfolio Manager of Emerging Markets Debt at AMUNDI, said ESG will become an even more important investment theme for global fixed income investors going forward, especially with the recent regulatory developments in Europe and the intention to re-join the Paris Climate Accord by the incoming U.S. Administration. It is very likely that we are to see a catch up from the U.S. investors universe on the ESG front at a time when Emerging Countries are also increasingly issuing various Social/Green/Covid bonds to access the capital market. Combining the ESG and the EM FI perspectives discussed above, I believe there will be exciting potential in the China FI ESG space as the framework continues to establish.

For future trends, all guest speakers agreed that the integration of ESG in the fixed income field is developing rapidly around the world. However, the lack of a standardized ESG disclosure framework and rating system, and the availability of ESG data currently remain as the major challenges in this process. Therefore, raising investor awareness, enhancing the disclosure via policies, and increasing the transparency of ESG data would be the primary driving forces for the future ESG integration strategies in fixed income investment.

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