Asset Owners: Fixing Sustainability in Fixed Income

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In Sweden, how long have asset owners come regarding fixed income integration? Three experts help us understand what they have achieved so far, where they are hoping to go, and what challenges they have encountered.

In general, all agree that integrating sustainable investment practices in fixed income makes sense. “We think better sustainability practices and products would enhance the quality of a company or project, and reduce the operational risks. That would also lower the financial risk for us, and create more value for the real economy and society at large,” Gunnela Hahn, Head of Sustainable and Responsible Investment at the Church of Sweden.
“We believe that integrating sustainability aspects into the investment decision will affect the risk-return profile of the investments,” says Tobias Fransson, Head of Strategy & Sustainability at AP4.

“We strive increasingly to identify attractive investment opportunities and avoid sustainability-related risks,” says Per Lindgren, Head of Manager Selection at Skandia. “Skandia initiated responsible investing in equities in the mid-1990’ies and invested in the first green bond issued by the World Bank in 2008,” he adds.

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For Fransson, however, “integrating sustainability into fixed income portfolio management is less straightforward than doing so for an equity portfolio. Various types of issuers must be viewed differently from a sustainability perspective. For corporate bonds, the application is fairly clear. AP4 screens corporate bond issuers in the same way as we screen equities for violations of international conventions that Sweden has ratified as well as against tobacco companies in which we do not invest. We were also early investors in the green bond market in 2013, and we have supported the development of that market ever since.”

Gunnela adds: “As a responsible owner we have the view that all our holdings should adhere to our investment beliefs including sustainability and ethics. So we have outlined in our investment policy the same ESG requirements for fixed income as for equities. However, sometimes the ESG scores are not applicable or available, such as for Swedish government bonds or some corporate bonds.”

“It is hard to measure the exact degree of sustainability of our fixed income holdings,” Hahn continues. “Since we mostly have Swedish exposure (apart from some clear climate impact funds) and screen all our holdings, I would dare say that all our fixed income assets have low ESG and sustainability risks.”

“The proportion of sustainable investments in our fixed income allocation is very difficult to assess,” Fransson concurs. “The AP-funds must invest at least 30 percent of the portfolio in liquid investment grade fixed income. This implies a significant portfolio allocation to government bonds, mortgage bonds and supra-nationals, all issues where we see difficulties assessing the sustainability aspects. We are continuously working to enhance the way we view sustainability in the portfolio, within fixed income as well as other asset classes and the portfolio as a whole.”

AP4, Fransson says, does not use any external managers within the fixed income allocation. However, even for those who do, the task of selecting the right strategies is not the most straightforward. “The financial markets pose challenges for fixed income strategies to balance sustainability risks and return opportunities,” says Lindgren.
For Hahn, the offering is not as good as it should be: “We have seen a very limited supply of funds offering ESG and sustainability corporate bonds. Moreover, the market should shed much more light to mainstream credit funds since they make a much stronger link between the owner and the company than listed equity. It should, in theory, be easier for an investor to have a real influence on corporates when they ask for money than when trading their stocks on a secondary market. So the total credit market needs to transform if we are to reach for instance a two-degree world. 99% of the bond market is not green! For other assets we hold in the fixed income spectrum, such as green bonds or microcredits, their whole rationale is sustainability, so the main challenge would be that these markets are still too small and the product diversity too limited.”

As per the latest report, out of the SEK 8.7 billion the Church of Sweden manages at the national level, the fixed income portion accounts for 25.1%. In addition, alternative investments, which account for 7.2% of total holdings, also include alternative sustainable fixed income products such as microfinance and other impact- or SDG-related credit strategies. At AP4, 31% of a total of SEK 367 billion in assets are classified as fixed income. At Skandia, out assets totaling SEK 456 billion, 43.7% is invested in bonds.

This article is part of our Handbook “NordSIP Insights – Sustainable Fixed Income”

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