Laura Ryan

Governments that perform poorly in managing climate change transition may encounter difficulty finding investors to buy their sovereign debt, that is the finding of a research paper by global bond managers Ardea Investment Management and Fortlake Asset Management, along with academic researchers at the University of Technology, Sydney.

While the integration of climate change considerations in equity investing is today quite mature, the sovereign debt market has lagged considerably. However, the authors predict the reduction in carbon emissions and increased take up of renewable energy will become ever more important risk indicators for government bond investors.

The paper, “Climate Transition Risk in Sovereign Bond Markets”, published in the Global Finance Journal, shows carbon dioxide emissions, natural resources rents, and renewable energy adoption statistically impact sovereign bond yields and spread. It aims to give fixed income investors and policymakers a way to assess country transition risk that is aligned directly with the United Nations Sustainable Development Goals.

Commenting on the paper, Dr Laura Ryan, Head of Research at Ardea Investment Management, said, “Given the threat climate change poses to the global economy and the rapid rise of transition risk, we advocate that an increase in the significance of climate transition risk factors are determinants in sovereign bond markets.

“Carbon dioxide emissions and natural resources rents not only negatively affect the environment and inhibit progression toward climate goals but also increase a country’s cost to borrow in debt markets.

“Importantly, the adoption of renewable energy was found to be an economically and statistically significant mitigation strategy, as the supply and consumption of clean fuel sources could drive economic growth, counteracting any short-term financial losses from the non-renewable energy sector,” Dr Ryan said.

Developed versus Developing Markets

Assessing the transition risk factors, macroeconomic fundamentals and sovereign yield spreads across 39 countries between 1999 to 2021, the research found a strong positive association between carbon dioxide emissions and sovereign yields and spreads across advanced and developing countries.

In developed markets, natural resources rents have a strong positive association, while renewable energy has a negative association with yields and spreads.

Cheaper financing may counteract any short-term losses that industries may face from reevaluating assets. Further, the savings made on funding could be invested into renewable technologies and transitioned away from sectors in decline, such as the fossil fuel industry.

Fortlake Asset Management’s Deputy Chief Investment Officer, Kylie-Anne Richards, added, “This research shows that prioritising renewable energy supply and consumption, while forgoing the short-term opportunity cost of decreased revenue from natural resources, would benefit from lowering the cost of borrowing in the sovereign debt market.”

In contrast, in developing markets, while yields tend to rise when carbon emissions increase, they are expected to fall when earnings from natural resources rise, and perversely, yields rise when renewable energy consumption increases. This suggests that investors in developing country debt prioritise the pursuit of economic growth and profits from natural resources over climate transition goals.

“Developing economies are less likely to have the resources needed to facilitate a transition from fossil fuel reliance to renewables, and thus they seem not to prioritise climate change targets,” Dr Richards said.

“While investors seem to focus instead on short-term factors, such as a developing country’s ability to repay debt and the fact that the profits from high natural resources rents may be higher than the uncertain payoff of transition.”

A warning for policymakers

While estimates vary in terms of reducing net carbon emissions to zero, it is projected that to achieve the goals set out by the Paris Agreement by 2050, spending of $50 trillion will be required. This expenditure will be largely financed by governments, with a sizable proportion of this spending allocated to renewable technology.

The evidence presented in this paper has clear implications for policymakers given sovereign bond markets are the benchmark from which every other asset class is priced.

“The sovereign debt market is one of the largest asset classes globally and has significant exposure to the full gambit of climate risks. However, unlike equities and even corporate debt markets, the integration of climate change considerations into the investment process has lagged significantly,” Dr Richards said.

The paper provides a clear argument to request greater government transparency on specific climate risks, strategies and policies that are inherently linked to the bonds they issue.

For example, Dr Ryan and Dr Richards believe the Australian government should be more open about the direct link between our borrowing costs and climate change.

“It is undeniable that governments are exposed to transition risk. Whether it is considered through the channel of directly or indirectly influencing yields via macroeconomic variables such as GDP, investors are already starting to penalise advanced countries with poor prospects of transitioning away from fossil fuels,” Dr Ryan said.

The post Sovereign debt market demands clear transition to renewables appeared first on AdviserVoice.

New research has explored the impact of career breaks.

Women in the Australian financial services sector are less likely to be promoted due to systemic gender bias, reducing their ability to navigate their chosen career path and realise their potential.

This is a core finding from research conducted by investment management company, Ardea Investment Management’s (Ardea IM) Head of Research, Dr Laura Ryan, in collaboration with researchers from the CFA Institute (Australia) and the Australian National University.

Dr Ryan said the research was designed to examine whether there was a statistically different promotion propensity in the sector according to gender.

“Our work shows there is strong statistical evidence of behavioural differences that lead to gender bias in promotions, mostly because the prevalence of ‘gifted promotions’, those received without being requested by the employee, strongly favours males,” Dr Ryan said.

“There is an urgent need for the Australian financial services industry to develop and adopt a standardised framework for corporate promotion policies to mitigate the systemic bias in current promotion rates for all genders.”

The research found women were substantially under-represented in the pool of people receiving unsolicited promotions by 25%, despite comprising 52.8% of total employees in the sector (WGEA, 2021). This was despite objective criterion such as education and experience being equal across gender.

The Australian findings are supported by international research that has identified that social bonds between male executives and their male managers is a significant factor in explaining higher promotional rates, enhancing their perceptions of “employee potential” even in the face of female staff exceeding their potential rating in formal annual reviews.

“The much higher proportion of gifted promotions to males suggests a degree of unconscious bias, which leads to assessment of potential based on generalisations and preconceptions rather than objective parameters,” Dr Ryan said.

The research explored the impact of career breaks and found that women should stay on the front foot in asking for promotions after returning to work.

The proportion of people requesting a promotion who have not taken a career break is uniform across genders, but women who ask for a promotion are generally more successful (25.9%) than men (17.2%).

However, after taking a career break of at least six months, women showed a substantially lower propensity to request a promotion than men.

“There is no doubt that women in financial services are leaning in to request promotions, which dispenses with the myth that women are missing out due to unwillingness to put themselves forward,” Dr Ryan said.

“Their higher success rate when asking for promotion indicates that there are no objective reasons for them to not to be receiving gifted promotions at a similar rate to their male colleagues.”

Ardea IM CEO, Stephen Clout, supported Dr Ryan’s call for a better framework for promotions policy in financial services.

“The financial services industry is noted for its analytic approach to business and investment, yet it is clear that it could do so much better by applying the same principles to staff assessment and advancement.

“Women comprise over 50% of financial services employees. This obviously means that they also represent at least 50% of our potential and it is important to have mechanisms in place to ensure we all realise the benefits of this irrespective of gender,” he said.

The post Women’s ambition stymied by promotion bias in financial services appeared first on AdviserVoice.

Kylie-Anne Richards

Leading fixed income specialist Ardea Investment Management has launched a new research partnership with the University of Technology Sydney (UTS).

The Ardea + UTS Academic Program will foster innovative and impactful academic research to advance knowledge in finance and further strengthen Ardea’s research capabilities, which is expected to benefit the large boutique manager’s clients.

Through the partnership, Ardea will jointly research projects, and author thought leadership articles with UTS researchers, and will provide industry mentorship to UTS students.

Ardea Head of Research and recently appointed UTS Industry Fellow Dr Laura Ryan will lead the participation by Ardea, with UTS Finance Discipline Group academics Dr Kylie-Anne Richards and Dr Gerhard Hambusch leading UTS’ involvement in the partnership.

The partnership is already bearing fruit, with Ardea and UTS currently investigating machine learning for trade idea identification, climate change and government bond investing, and the LIBOR transition and how it may impact trading opportunities. 

Ardea CEO and co-founder Stephen Clout said, “Ardea is thrilled to have this opportunity to work with an organisation of the calibre of the University of Technology Sydney. We believe this partnership will strengthen our offering to clients and enhance our trade idea generation process. It is a key component of our strategic plan to prepare Ardea for a strong pipeline of long-term growth opportunities and ensure we maintain our highest standards of alpha generation,” Mr Clout said. 

The partnership follows the appointment of Dr Ryan earlier this year to progressively build a research team to support Ardea’s growing investment capabilities by researching and developing relative value investment strategies.

Ardea’s relative value investment approach targets reliable risk-adjusted alpha that is independent of market direction and exhibits minimal correlation to broader fixed income and equity markets.

Founded in 2008, Ardea is one of Australia’s largest fixed income investment managers, entrusted with managing over $15bn on behalf of clients, including Australia’s most sophisticated institutional investors and a growing retail and wholesale investor base. 

The firm maintains majority ownership by employees to foster both long-term alignment of interests with clients and stability of the investment team and is partly owned by leading investment manager, Fidante Partners. 

Ardea’s flagship fund, the Ardea Real Outcome Fund, is the top performing fund in Mercer’s Australian Absolute Return Fund category for one year up to 30/06/2020 in terms of gross returns. It is also the top performing fund over three and five years^[1].

The UTS Finance Discipline was one of only four finance departments in Australia to have been awarded the highest possible ranking for research by the national research evaluation framework, Excellence in Research, for Australia in the State of Australian National University Research 2018-19: ERA National Report.

———

The post Ardea and University of Technology Sydney launch research partnership appeared first on AdviserVoice.

• To determine what is driving household leverage, we statistically tested the response (the change) in household leverage against changes in several key variables including wages, unemployment, asset prices, confidence and the cost of credit.
• We found that households’ decision to incur debt is dominated by the cost of debt (the mortgage rate) and recent asset price appreciation; we also found that Australian households appear to respond quickly, needing only two quarters of favourable changes in asset prices and mortgage rates to increase leverage.
• Based on our model, if an exogenous shock sparked a deleveraging cycle in Australia, it would be expected to be quite severe given the large co-efficient for asset prices and the quick household response.
• We believe macro-prudential measures should be strengthened to address financial stability risk and give the Reserve Bank of Australia maximum flexibility when setting policy for the aggregate economy.
• Given the sensitivity of households to mortgage rates, the peak in the cash rate in the RBA’s next hiking cycle is like to be much lower than in in previous cycles. This is in accordance with PIMCO’s New Neutral view that calls for much lower policy rates for an extended period.

Click here to read the full report from PIMCO.

The post A look at rising household debt in Australia and the implications for policy  appeared first on AdviserVoice.