ESG mandates come in different shades of green with some excluding even the most popular asset classes. One high-impact exclusion zone is the $14.4 trillion US treasuries market. With European sovereigns largely offering negative yields, their higher-yielding US equivalents are often a preferred holding.
However, some ESG investors are asking asset managers to remove the sector from portfolios. Underpinning this stance are red flags such as the fact that some US states still have the death penalty, as well as the US government’s stance on climate change and its relatively high military budget.
Are selectors facing similar dilemmas when picking funds? It seems a rather touchy subject as at least five of those approached didn’t want to comment. As often is the case with ESG, Nordic investors tend to be more outspoken on the subject than many.
Per Haldén, a portfolio manager and fund buyer at Swedish firm Navigera, says you can definitely argue for an exclusion of treasuries based on the country’s ESG stance, especially as there is room for interpretation and a lack of consistency when it comes to sustainable investing.
When asked if there are any feasible alternatives to US treasuries in the bond space, Haldén says they cannot be replaced easily as many investors use the asset class as a diversifier to equity risk.
‘To date, the supply of pure ESG paper such as green bonds issued by states is very limited although this may well change in coming years,’ he says.
‘Sweden, for example, will issue its first green bond in 2020, and earlier this year the Dutch government became the first European country to issue a green bond with an AAA credit rating,’ he adds.
Speaking about his own approach, Haldén says Navigera’s team currently takes a softer stance on ESG in fixed income and initiates a dialogue with fund companies in question instead of outright exclusion.
‘Hard exclusion criteria would probably impact us quite a lot, as we would need to rethink our portfolio construction,’ he says.
Daniel Knörr takes a similar line selecting funds for multi-asset portfolios at German firm Talanx. He favours a dialogue and asks managers to outline their ESG strategy in Talanx’s RFPs to ensure they take sustainability seriously.
Several portfolios at Talanx already exclude US treasuries, but those make up less than 5% of the overall managed assets. However, he says clients have an opportunity to exclude countries that, among other things, practice the death penalty.
Not all investors think US treasuries are irreplaceable. Martin Cech, a senior ESG fund manager at Erste Asset Management, says his team mostly manages euro-denominated mandates and as a result US treasuries are not really relevant for the team.
‘Nevertheless, substitutes can be issuers like IFC, IADB, EBRD, other supranationals and agencies. They mostly provide a premium to treasuries while being top-rated,’ he adds.
Henrik Pontzen, head of ESG at Union Investment, says his company excludes the sector due to high reputational risks for its sustainably-managed mandates, which cover €48 billion of assets.
In order to get alternative yield, he says, you need to find a suitable proxy for the excluded issuer. ‘For instance, US treasuries could be replaced by building a basket of US dollar-denominated government bonds of neighbouring countries or even other developed markets,’ he says.
However, Jane Ambachtsheer, global head of sustainability at BNP Paribas, says the asset manager doesn’t exclude US treasuries in any of its funds and this is not something clients have asked them about.
‘If we were to use our temperature pathways to create a two degrees-aligned bond fund, then it wouldn’t have the US in it, it might have certain US cities though if you had muni debt,’ Ambachtscheer said.
According to Ambachtsheer, if you focus on the climate aspect, legally the US is still party to the Paris Agreement and its continued presence there depends on the next election.
She also highlights America’s pledge, where cities, states and companies that constitute half of the US GDP, came together to deliver on all the climate-related emission reductions under the Paris Agreement.
‘It’s led by Michael Bloomberg and Jerry Brown, the governor of California, and together they have amassed this group that is doing annual reporting to ensure the US is still on track to deliver what it had committed to. 70% of emissions come from cities so if you have mayors and companies on board you can do a lot,’ she adds.
Source Citywire Selector