Outlook for sustainable fixed income in Asia

What is your outlook for sustainable fixed income in Asia?

In the next few years, we expect very rapid growth in sustainable fixed income in Asia.

Indeed, we are at a tipping point right now. Close to 20%* of gross issuances in Asia so far this year have been in Green, Social, Sustainability and Sustainability-linked bonds, and now Asian issuers are the largest source of ESG bonds across emerging markets.

We expect ESG bond issuances to continue to increase. This development will offer more choices for investors who want to allocate their capital not only to produce financial return, but also put their money to achieve certain objectives, such as diversity or greening the economies.

We see opportunities from the renewable energy sector and green bond issuers from property companies.

One of the investment opportunities is to identify names with improving transparency and governance, as well as those with a thoughtful approach to transit and manage their climate risks. For example, as it will become harder for coal-mining companies to secure funding going forward, credit risks will increase. In comparison, energy companies with a proper transition framework will be more competitive.  

When we look at an investment, we evaluate the overall ESG quality of a company. There is limited correlation between the issuance of a green bond and the overall sustainability of the company. These considerations are now part of our DNA in our credit investment analysis.

What are investors’ key challenges in measuring performance, as well as social and environmental impacts?

At the portfolio level, it is not straightforward to attribute the effects of Environmental, Social and Governance factors to financial return. E, S and G drivers are somewhat related, and there are many variables in a portfolio’s financial performance.

We developed SustainEx to tackle this. SustainEx is our proprietary tool that identifies a company’s sustainability impacts on society and translates them into financial terms.

For example, SustainEx will be able to quantify and tell us a company’s “social value” as a percentage of revenue. If a company has a score of +5%, it means that for every $100 of sales the company is making, it is making an overall positive impact on society equivalent to $5.

This is now a key decision-making tool for our portfolio construction.

As an asset manager, we are committed to sustainability. As a partner to our investors, we are here to help them understand the ESG data points for individual holdings, as well as their sustainability contribution from their investments.

*Source: Schroders, April 2021.

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