Engaging in Green Bond Markets
Jelle Brons: A classic PIMCO ESG portfolio, will have basically no fossil fuel exposure. So we won’t lend to the typical energy companies. We’ll have no coal exposure, no oil sector exposure.
The most important exception is utilities that are moving away from coal into renewable energy. And we typically would then invest in those green bonds. And those companies, we also engage with.
So there are some large energy companies that unfortunately have not yet issued green bonds, but we are engaging with them that they’re able to issue green bonds that will fit with their strategic goals moving into renewable energy. So that’s the type of engagement that we do.
How to Avoid Greenwashing
Jelle Brons: Greenwashing is a very important topic, and there have been examples in the past where some of the green bonds that have been issued by companies were questionable.
So at PIMCO, not only do we assign an ESG rating to every single issuer, we also rate green bonds.
So every single green bond, when it comes to market, in our new issue writeup that goes to all the PMs, it’s accompanied by the green bond scoring framework.
We want to make sure the green bonds adhere to certain standards. So first of all, when we’re assessing green bonds, we assess the so-called strategic fit. In other words, do the green bonds’ objectives and the use of proceeds actually align with the ESG strategy of the company?
Second of all, we also really need evidence of a significant positive outcome. So if, for example, a large U.S. utility has not issued a green bond for a long time, mainly because they haven’t been going into renewable energy, it’s a $50 billion to $100 billion company, and they’re issuing a $300 million green bond in the market, where actually some of the proceeds actually go into natural gas, well, that’s an example of not such a good green bond.
First of all, the use of proceeds is partly going into natural gas, and looking at the size of the proceeds and the size of the company, it’s probably not making a significant impact.
And if that issuer also has not come forward with a plan of moving into renewable energy in a very substantial way, that would raise some flags. And talking about flags, we really look at certain red flags, so any controversies. So if the green bond, for example, misaligned with the green bond principles.
Just because a green bond comes to the market – we may even like the issuer fundamentally, from a pure credit perspective, but if the green bond is not structured well, if it doesn’t have a good strategic fit with the company’s policy, we won’t buy it.
There will be enough other green bonds for us to buy. We set the bar high, and we pride ourselves for that.
Olivia Albrecht: We invite you to download your own copy of our ESG investing report on PIMCO.com/esg for more detail and to read some of our engagement stories from the past year.
Please note that the following contains the opinions of the manager as of the date noted, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.
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