The environmental, social and governance (ESG) consequences of the COVID-19 pandemic have focused attention on sustainable investment strategies to not only mitigate the volatility of oil markets, but also to capture the opportunities created by more green and equitable recovery packages across the globe.
As ESG-oriented investing gains ground among fixed income investors, PIMCO has been at the forefront of integrating ESG analysis into its investment process. The GIS Global Investment Grade Credit ESG Fund is an established part of PIMCO’s ESG platform, offering investors access to the firm’s leading global investment grade credit strategy while also focusing on environmental and social impact. Product Strategist Philipp Nowak and Portfolio Managers Jelle Brons, Mark Kiesel and Mohit Mittal discuss the fund’s potential benefits and the team’s investment approach.
Q: WHAT IS THE PIMCO GIS GLOBAL INVESTMENT GRADE CREDIT ESG FUND AND WHAT IS DRIVING INVESTOR DEMAND FOR THE FUND?
Nowak: The PIMCO GIS Global Investment Grade Credit (GIGC) ESG Fund seeks to maximize total return by investing in high quality investment grade credit while delivering positive environmental and social benefits. Our investment style combines top-down and bottom-up analysis, driven by cyclical as well as secular trends, and emphasizes diversification.
We decided to launch the Fund in 2018 in response to investor demand for dedicated fixed income ESG strategies, as more investors look to align their portfolios to their values. More recently, we have seen the social consequences of the COVID-19 pandemic and focus on climate risk driving investors’ interest in ESG. Over the last few years, as more investors have sought to achieve their financial objectives while influencing positive ESG change, we have invested in and built out our global ESG platform. PIMCO is committed to leading the way in ESG.
Q: HOW ARE YOU POSITIONING THE FUND IN THE CURRENT ENVIRONMENT?
Brons: We continue to be selective on generic credit and look to apply bottom-up ideas to emphasize ‘bend-but-don’t-break’, corporate positions.
In particular, we continue to like financials, given strong credit fundamentals paired with attractive valuations, and we are finding value in select longer dated bonds, favoring non-cyclical defensive sectors such as issuers in the wireless sector as well as select utility and technology companies, when adding exposure. Conversely, we maintain a cautious approach in cyclical sectors that are less defensive and more exposed to global supply chain disruptions, including commodity-related sectors, manufacturing, chemicals and retail.
As an ESG-dedicated strategy, we emphasize green and SDG (Sustainable Development Goal) bonds, and favor issuers with strong ESG practices. We avoid sectors that form part of our exclusions list (such as coal and tobacco among others) or that tend to score poorly in our ESG process, including many emerging markets and integrated oil companies.
Q: HOW DOES THE FUND EMPHASIZE GREEN BONDS AND ENSURE A FOCUS ON CLIMATE ACTION (SDG 13)?
Brons: In this portfolio, we will typically not lend to energy companies or utilities unless they are moving into renewable energy and mainly invest via green bonds (bonds that raise capital for new and existing projects with environmental benefits). When a new green bond comes to market, our analysts will include its proprietary PIMCO green bond score in the new issue write-up that goes to all portfolio managers.
By investing in green bonds that pass our comprehensive green bond scoring framework and investing in companies with strong environmental practices, GIGC ESG is able to significantly lower investors’ portfolio carbon footprint relative to the broad market. For example, as of 31 August 2020, the Fund’s average corporate issuer emits 4,928,974 less tons of CO2 than the benchmark’s, which is equivalent to:
- 187,413,471 Incandescent lamps switched to LEDs, or
- 82,149,571 Tree seedlings grown for 10 years, or
- 1,064,573 Passenger vehicles taken off the road in one year, or
- 568,509 Homes powered by clean energy for one year in the U.S.
Q: WHAT ARE THE SIMILARITIES AND DIFFERENCES BETWEEN THE EXISTING GIGC AND THE NEW GIGC ESG FUNDS?
Kiesel: First, both funds are managed consistently with respect to broad risk factors and share the same benchmark (the Bloomberg Barclays Global Aggregate Credit Index). Second, they share the same forward-looking investment process, including the investment themes and top-down views formed at PIMCO’s secular and cyclical forums, and have the same emphasis on risk management. Third, they both seek issuers with the highest potential for credit improvement over the long term and attractive characteristics such as strong barriers to entry, pricing power, superior growth and experienced management.
The key difference is that GIGC ESG also incorporates the three building blocks of PIMCO’s ESG process − exclusions, evaluation, and engagement (see Figure 2).
Beginning with exclusions, PIMCO’s GIGC ESG Fund will not invest in issuers who we believe are fundamentally misaligned with sustainability principles. This is realized through core exclusions − issuers we will not buy at any price (in sectors such as tobacco, munitions, oil and coal) – and dynamic exclusions, a temporary list of issuers that may be excluded due to their current business practices or because they have not effectively responded to PIMCO’s engagement efforts.
The second pillar of our process consists of issuer evaluation: PIMCO’s team of more than 60 credit research analysts assigns a proprietary ESG score to issuers within their respective sectors. Analysts’ relative weighting to the “E”, “S” and “G” components vary by sector; for example, within banking, we place greater emphasis on governance; within pharmaceuticals, social factors are key; and in the energy sector, environmental factors assume greater prominence. In all sectors, the evaluation process excludes “worst-in-class” companies and identifies both “best-in-class” issuers and those on an improving trend.
The final building block of our process emphasizes engagement with issuers in a constructive and collaborative way to positively influence their ESG practices over time. PIMCO’s size is an advantage in this process, helping to provide us with access and influence with company management. By allocating capital toward issuers willing to improve the sustainability of their business practices we believe we can have a greater impact than through exclusions and evaluation alone.
As a result of this process, PIMCO’s GIGC ESG Fund is likely to overweight not only issuers with best-in-class ESG practices but also those who demonstrate a clear willingness to move toward better ESG-related practices.
Q: CAN YOU PROVIDE EXAMPLES OF HOW YOU ENGAGE WITH ISSUERS?
Mittal: We believe it’s important for a fixed income investor to have a fixed income-oriented engagement process. By adding this increased level of scrutiny, we are seeking to identify better-managed and more forward-thinking companies that are adept at anticipating and mitigating risk and are focused on the long term. For example, in the utilities sector, the objective of our engagement is to determine which companies are best at managing regulatory and operational changes toward clean power. Companies that are slow to make the low-carbon transition are more likely to face higher compliance costs and potentially higher operating costs as the price of carbon rises.
Through engagement, we encourage issuers to assess and report on which SDGs are most relevant to their business and, although still a nascent market, PIMCO stands ready to support the issuance of debt where the use of proceeds is formally aligned to one or more of these global goals.
Finally, our engagement process highlights ESG areas in which issuers are lagging so that credit analysts and portfolio managers can raise these points during their regular interactions with issuers’ senior management. This is particularly important when an issuer has been identified as a fundamental top pick, but has poor reporting on their management of sustainability risk factors.
For example, in 2019 we actively engaged with a large industrial conglomerate company’s senior executives to emphasize the need for asset sales, debt repayment and substantially improved disclosures. PIMCO also encouraged the issuer to support science-based targets and to set ambitious energy efficiency and carbon reduction targets. The company later completed more than $20 billion of deleveraging actions in 2019, sold a majority stake in its energy and oilfield services subsidiary, and substantially improved its disclosures, albeit with additional progress to be done.
Q: WHAT IS THE PORTFOLIO MANAGEMENT TEAM’S EXPERTISE IN THIS TYPE OF STRATEGY?
Nowak: The strategy is managed by the same team as the PIMCO GIS Global Investment Grade Credit Fund which was launched in 2003 and is led by Mark Kiesel (PIMCO’s CIO, Global Credit) who was named Morningstar Fixed-Income Fund Manager of the Year in 2012 and a finalist in 2010 and 2017. Mark, Mohit and Jelle have all worked together since 2007. Since its inception in 2003, the PIMCO GIS Global Investment Grade Credit Fund has outperformed its benchmark by a cumulative total of more than 56% before fees.
As such, the team has a proven long-term track record in global investment grade credit and is well positioned to manage the strategy, applying their deep and broad investment experience within PIMCO’s ESG framework.
Indeed, since its inception in 2018 the GIGC ESG Fund has been off to a strong start, outperforming its benchmark by a cumulative total of 2.8% before fees, building on the team’s deep expertise in global investment grade credit while focusing on environmental and social benefits.
Visit the PIMCO GIS Global Investment Grade Credit ESG Fund webpage for more information. GLOBAL INVESTMENT GRADE CREDIT ESG FUND