Bruce Murphy

BNY Mellon’s Insight Investment has introduced a research rating system to assess issuers against a set of proprietary environmental, social and governance [ESG] risk metrics. More than 6,500 issuers covering 850,000 respective subsidiaries have been assigned an Insight ESG rating since its introduction late last year. It has been applied to c.99% of companies in euro-denominated investment grade indices, c.95% of those in global investment grade indices.

The rating is a quantitative risk-analysis tool which provides a fresh feed of data into Insight’s credit research hub, alongside non-ESG inputs. It aggregates and assesses external data against a set of 29 ESG risks, creating a bank of information for Insight’s team of 47 credit analysts to review while forming their qualitative evaluations. Analysts’ decisions are also based on direct engagement with companies, a critical part of Insight’s approach to ESG risk analysis. Eighty-two percent of Insight’s meetings with sovereign and corporate debt issuers covered ESG topics in 2019, up from 54% the previous year.

Joshua Kendall, Senior ESG analyst at Insight Investment, said: “Our credit analysts find many holes in externally-available information and poor agreement among data providers about what constitutes an ESG risk. Also, for many smaller issuers, particularly emerging market or high-yield companies, the availability of relevant non-financial data lags information from larger issuers. We’ve responded by creating a series of ESG risk analysis tools to enhance our delivery of the research-led strategies our clients require. This rating is the latest innovation in that series. The earlier climate and sovereign risk models are also being updated.
“The rating is also effective in deepening our analysis of the nascent but fast-developing market for impact bonds, where issuance recently passed the USD$1trn mark.  This market is ripe with opportunities, yet large parts remain obscured by low levels of disclosure, creating challenges around comparability and concerns of ‘impact washing’. Of the 126 new impact bonds analysed in 2019, only 33 satisfied our expectations.”

Bruce Murphy, Director, Australia and New Zealand, Insight Investment, said: “Recent research has shown Australian’s appetite for impact investing has tripled over the past two years, a trend we see continuing. As impact investing becomes mainstream, the key for Australian investors is to ensure they are investing into areas that are genuinely making the positive social or environmental impacts they claim.”

Insight seeks to use its derivatives risk management expertise and influence in bond markets to give a voice to its clients and the millions of investors they represent. We regularly engage with policymakers and regulators on reforms that impact our clients. Our aim is to foster the development of sustainable financial markets that work for them and the members they represent, the ultimate beneficiaries. Insight has led the national conversation around proposed reforms to the Retail Price Index inflation measure, contributed to the interest-rate benchmark reform process, and advocated for pension funds on a series of significant industry consultations. These and other initiatives are outlined in Responsible Horizons, Insight’s annual responsible investment report.

Read the report

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Joshua Kendall

A record $234bn in green bond issuance was added to the market in 2019, an increase of more than 50% on the $150bn issued in 2018. While issuance in 2018 and 2017 was relatively flat, 2019 saw a significant jump up in issuers joining the market, when compared to previous years. This watershed moment marks a turning point in the depth of opportunities available to investors, according to Insight Investment, a leading asset manager.

The core sectors for these instruments – financials, governments, utilities, energy and industrials – all experienced significant growth in issuance with financials leading the charge, adding more than $78bn in green bonds over the course of the year. Diversity improved with the telecommunication sector now part of the market. The Netherlands issued its inaugural green bond in 2019 and Germany said it intends to issue a green bond later in 2020.

Josh Kendall, senior ESG analyst at Insight Investment, said: “Green bond issuance in 2019 reached record levels, deepening the universe to more than $747bn. This strong momentum in support of climate transition indicates a turning point for investors.  We expect 2020 to be another record year for green bonds with early indications suggesting a total close to $300bn in issuance.”

Bruce Murphy, Insight Investment Director of Australia and New Zealand, said: “We hope to see increased issuance of green bonds from Australian corporates in 2020. Its issuance last year remained largely level with 2018 ($4.5bn in 2019 vs $4.3bn in 2018), which suggests issuers may be missing out on the swell of demand from a global investment community actively seeking diverse and impactful opportunities. A deeper investable universe will help speed the transition to a low carbon economy and hopefully create jobs and boost productivity along the way.”

>Social and sustainable impact bonds issuance increased, adding $35bn in 2019, which, together with green bonds, brought total issuance of impact instruments over the year to almost $300bn ($299.8bn). The market also saw the evolution of new types of impact instruments, for example Enel’s transition bond, which may present a model for further issuance from petroleum companies in 2020.

Kendall said: “The overall growth in impact instruments is encouraging but in too many instances we are finding that the targets set out by issuers lack conviction and ambition. We want to see far more attention paid to the quality of the underlying propositions. Insight has awarded ‘green flag’ status to only 27% of the more than 120 impact bonds we have reviewed. This is because the market still struggles with transparency reporting and a clear demonstration of positive impact.”

Insight Investment manages A$30 billion for Australian investors and A$1.2 trillion globally^[1].

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[1] Figures shown in USD. All data sourced from Bloomberg.

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Joshua Kendall

Insight Investment, a leading global investment manager, has developed a country rating model to explore how environment, social and governance – ‘ESG’ factors – affect sovereign debt portfolios. Insight’s rating model links sustainability and individual country risk, and responds to increased client interest in ESG portfolios.

Against a backdrop of rising political and economic uncertainty, investors are sharpening their focus on the sustainability risks of individual countries.  Yet most ESG research and ESG portfolios continue to focus on corporate issuers said Joshua Kendall, senior ESG analyst at Insight.

“Sovereign debt investors need more information to make informed decisions about the extent to which ESG factors are reflected in market prices,” said Kendall. “We developed this model in response to client interest and expect to refine it over time as the quality and quantity of third-party research and data grows.”

The model’s initial findings show most countries’ ESG performance has deteriorated and that governance in particular has been on a downward trend across more than half of developed market countries.

Read the full report, Sovereigns and Sustainability.

Initial insights include:

• Countries with higher GDP per capita typically have better ESG scores. This is generally driven by governance and social factors, not environmental scores
• More countries are deteriorating on ESG than improving – with the majority of developed markets receiving a negative ESG momentum score
• ESG momentum has a weak relationship overall with standard industry measures of sovereign credit risk, but there are outliers

Best performer: New Zealand boasts robust institutions and governance, stable social relations with a broad acknowledgement of human rights based on the rule of law, and limited exposure to environmental risks.

Worst performer: Afghanistan has suffered after many years of conflict. Politically and socially unstable, little data is available on environmental factors.

Australia: A developed market case study

Australia’s ESG performance is generally strong, driven by social and governance scores, though its environmental score is average. In terms of momentum, its environmental performance has slightly improved and its social performance has deteriorated somewhat – but momentum of its governance score is materially negative.

Australia has experienced a long period of political change. The country’s 2007 election led to the defeat of Prime Minister John Howard, who had been in power for over a decade. Since then, the country has been led by six prime ministers. This political instability has meant there is little direction on some fundamental environmental and social issues facing the country, with the influence of independent and minority-interest politicians limiting progress in political discourse. In short, policymaking has become less effective. For example, in recent years, access to housing has become more limited, but the political sensitivities around the issue have led politicians to avoid discussing potential solutions.

Aside from politics, the Australian economy has an impressive record, with almost three decades of continuous growth. This was in part enabled by a sizeable boom in the mining sector, driven by China’s continued near-double-digit growth during the global financial crisis. This more than mitigated the negative impact of the global financial crisis, making Australia somewhat unique among developed economies. However, this has had consequences. The majority of mines are foreign-owned (c.80%), resulting in income flowing out of the country. Also, workers in the industry have been somewhat reluctant to take jobs in other generally lower-paying sectors.

As a result, levels of underemployment have risen. The dominance of mining has also led to division over environmental issues. There is concern that legislation to protect the environment will add to pressure on the mining industry at a time when momentum is slowing, and so some politicians are looking to change previous environmental commitments, which would mean reducing enforcement of environmental regulations and reneging on previous laws.

Despite these political, social and environmental risks, Australia retains an AAA rating, although agencies have kept the country on negative watch. For example, in May 2018, S&P Global Ratings reaffirmed its negative outlook.

Insight’s country sustainability risk model shows that while Australia’s governance score remains among the highest in the world, it has notable negative momentum, which reflects the challenging political environment. It also aligns with our view that the country is likely to underperform on ESG performance at least in the near term, as government policymaking is unlikely to be effective; social issues – such as underemployment and deteriorating social cohesion – are likely to have a negative impact; and the lack of enthusiasm for environmental regulations suggests little will happen to support an improvement in environmental risks. We do not currently expect economic indicators or the markets to reflect Australia’s ESG performance.

However, the ESG scores from our model reinforce our view of Australia’s weak fundamentals and overall direction, and reflect positioning in our investment portfolios.

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