Understanding Investing

How Green Bond Markets Drive Climate Action (SDG 13)

ESG Miniseries 3 of 3: The rapidly expanding ESG bond market allows investors to target the UN’s Sustainable Development Goals (SDGs) and drive the transition to a net zero carbon economy.

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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.

Disclosure


IMPORTANT NOTICE

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.

All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed.

Socially responsible investing is qualitative and subjective by nature, and there is no guarantee that the criteria utilized, or judgment exercised, by PIMCO will reflect the beliefs or values of any one particular investor.  Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and PIMCO is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices.  Socially responsible norms differ by region.  There is no assurance that the socially responsible investing strategy and techniques employed will be successful.  Past performance is not a guarantee or reliable indicator of future results.

There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517) and PIMCO Europe Ltd - Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The Italy branch is additionally regulated by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act. 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