03 Jun 2021
02 June 2021 | Jonathan Platt, Head of Fixed Income
How we position our fixed income and cash funds to reflect their ESG, ethical and sustainability characteristics has been debated internally for several months. In light of the EU’s Sustainable Finance Disclosure Regulation, we have designated funds which fall under this regime as either Article 6, Article 8 or Article 9.
It is not yet clear how UK regulators will approach ESG and sustainability and it would not be right to apply the EU requirements to our UK funds, or communicate fund categorisations to clients at this time. However, what is clear is that our clients want more information on ESG, ethical and sustainability policies within funds. We want to be open on this and on the labelling of our funds, and when we go live, we will be clear and set out what our funds are aiming to achieve.
One report that caught my attention last week was the “The Big Smoke: the global emission of the UK financial sector”. Written by Greenpeace and WWF, its main proposition is that that UK’s financial sector, through its financing of companies involved in fossil fuels and other high carbon industries, is one of the UK’s most significant contributions to climate change.
This got me thinking about how ethical and sustainable investors think about exposure to lending institutions. To be clear, in our ethical and sustainable funds, we hold banks and building societies and they play a core part in the promotion of economic growth and the provision of mortgages. In my opinion it would not be possible to offer a diversified credit portfolio without exposure to the banking sector. However, I do think that banks have had a relatively easy ride. This reflects the box-ticking mentality that, unfortunately, is becoming more pervasive in the pursuit of ESG recognition amongst asset managers.
From a box-ticking approach, the focus at present is on scope 1 and 2 emissions. As is pointed out in “The Big Smoke” this fails to recognise the wider impact of lending institutions. How do we address this for our sustainable strategies? Frankly, it is difficult. Some big banks fail our criteria but we do try and compensate, from a sector perspective, by having higher exposures to building societies and other mutual institutions. What we definitely don’t do is allow the box-ticking approach to dominate our sector allocations. Because, at present, it is relatively easy to get a “green ESG flag” in the banking sector, asset managers should resist the temptation to go overboard and load up on the optical easy wins.
Sustainable investment is about offering true diversification, looking more widely than a tick-box approach and seeking out companies that can help society with its present and future challenges.
Sterling gained further ground during the week against both the US dollar and euro; cash rates were broadly unchanged.
Global bond yields fell over the week, with 10-year US treasury yields hovering around 1.6%. In the UK yields fell back below 0.8% despite signs of more inflationary pressures. In the Euro area there was a similar pattern with 10-year Spanish yields, for example, falling below 0.5%.
There were no significant changes in implied inflation which remained close to highs for the year in all markets.
I still think long-dated yields look vulnerable and see little value in 50-year gilts at just above 1.1%.
Investment grade credit spreads went sidewards during the week but remain near year-to-date lows. Sustainability bonds continue to be a theme with a new sterling issue from University College London (UCL). Our universities continue to be world leading and it is great to see that capital is being raised, which should allow for further investment in teaching and research. However, from our perspective, strong demand pushed the final yield to a level which we did not think offered enough attractions given our views on long-term rates.
High yield bonds continued to perform well with several indices near highs for the year. We got involved in a new offering from Vocus, which owns and manages Australia’s second largest fibre network. We liked the companies recurring revenue base and its low exposure to the retail sector. Performance across our global range continues to be good and there remain plenty of opportunities given the macroeconomic backdrop.
It is important that asset managers do not fall into the trap of offering the same thing – choice and variation propel innovation. I think this is especially applicable to responsible investment. Whilst regulators want consistency to give consumers a clear understanding of what is available it is impossible to satisfy everyone and I am concerned that we may end up with strategies that tick boxes but don’t address key issues. Our long-established sustainable philosophy, backed up by experienced people working collaboratively, will in my opinion allow us to offer meaningful choice and avoid box-ticking.
Past performance is not a reliable indicator of future results. The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are the author’s own and do not constitute investment advice.