Elements of our RI approach in Fixed Income are innovative:
- We have developed proprietary bottom up ESG integration processes as part of our assessment of ESG-related risks and opportunities across our government and semi-government holdings. This has been in response to lack of coverage by third party ESG research providers and so we have developed our own processes to complement other research and fill gaps.
- Our Fixed Income engagement leverages off the corporate access afforded to Pendal via our large Australian Equity team. This enables us to better engage with corporate issuers and lead managers of issuers across various ESG thematics and RI industry issues (e.g. management of company specific ESG issues, Green and Social Bond issuance pipelines, structures and reporting).
We have continued to enhance our Asset Allocation process to incorporate ESG factors as one of the secular themes providing qualitative insights that inform the capital markets assumptions within the overall Multi Asset Strategies investment decision framework in order to further enhance the product. Issues identified to date include:
- Enhanced income inequality leading to social discord, more extreme populist political parties, more protectionism and nationalistic policies.
- This primarily reflects technology advancement and globalisation hollowing out developed market middle class as lower value-add labour is either moved to emerging markets or phased out via technology.
- Climate change is likely to reduce global growth and increase costs to business, while also creating new investment opportunities in some areas.
- Dirtier commodities, mines, and energy production processes are likely to be reduced over time resulting in lower supply and marked down asset valuations. Current resources could be left in the ground.
- Renewables are gaining economies of scale and thus increasingly substituting fossil fuels.
Related Investment Strategy & Asset Allocation implications may include:
- Increased chances of geopolitical systemic risk and spiking correlations suggest a focus on diversification and downside protection strategies.
- ESG issues should be considered in terms of the potential to detrimentally affect asset allocation and security selection.
- Re-assessment of domestic (Australia) vs offshore asset allocation weightings based on elevated climate-related risks that are deemed to be not priced into market valuations.
- Consideration of more use of ESG-aware investment processes across entire framework.
The process outlined above draws on comprehensive quantitative and qualitative assessments of the relevant ESG factors across different asset classes, geographies and time horizons.