ESG & Sustainable Investing

The inexorable growth of sustainable investing during the last decade is likely to continue without interruption given the experience of COVID-19 has only intensified investor and regulatory focus on environmental, social and governance (ESG) issues globally.

TwentyFour Asset Management launched its first sustainable fund in January 2020 and I would like to share some of the lessons we have learned from our first year of sustainable bond investing.

As long as coal usage is not illegal, a private buyer of any origin will be able to purchase these assets cheaper and run them for as long as possible with no regard for ESG matters.

Tobacco company bond spreads were volatile last week on news that the Biden administration is exploring a ban on menthol cigarettes and may pursue a policy to reduce nicotine levels in all cigarettes to non-addictive or minimally addictive levels. Rumours about an increased tobacco tax also surfaced, further shaking up the industry.

ESG conscious investors, ourselves included, of course, are applauding this brave decision by Barclays to put their conscience before profit, but they are not the first to do so.

TwentyFour Asset Management partner and portfolio manager, Chris Bowie, looks at the specific challenges faced by investors wanting to invest sustainably in the bond markets and considers two controversial examples in Tesla and Coca-Cola.

There are many other aspects of SFDR to discuss and we expect the market to take some time to fully adjust.

In terms of execution, it is difficult to assess any ‘ESG premium’ in Brass 10 given the overall strong demand, and in our view it’s still early to weigh the importance of a ‘social’ label for ABS investors.

Fixed income investors increasingly desire their investments to have a positive societal impact, but in the rush to scrutinise the Environmental, Social and Governance (ESG) credentials of government and corporate bond issuers, we believe the natural ESG advantages of asset-backed securities (ABS) have so far been overlooked.

This deal, backed by a £472m pool of owner-occupied mortgages partially securitised in a previous transaction, drew over £1.2bn of orders and was printed 10-30bp tighter than initial price guidance depending on the tranche, reaching pre-COVID tights.

Ultimately, the fact that the Klockner deal is not marketed as a green loan but still includes ESG-related covenants is proof that ESG needs to be integrated into an investor’s credit work as a matter of course, something we have been arguing for years.

ESG investing was tipped to be the biggest theme of 2020 for financial markets, but was swiftly superseded by the COVID-19 pandemic, which has dominated investors’ thoughts since Q1. We thought it was important to revisit this topic and explore if and how the pandemic has changed the world of ESG.