Pension funds and the role of the debt market in the fight against climate change

Many pension funds are starting to better understand the integration of ESG considerations into their investment practices, but it is important to note that ESG integration is more developed within the equities universe, with a slower recovery. in fixed income securities. Traditionally, pension funds have been big investors in fixed income, this asset class often representing the core investment of their overall portfolio. For example, the average UK defined benefit fund has more than half (54%) of its portfolio allocated to bonds.

While some practices can be applied from the ESG efforts of equities to fixed income, the latter have unique characteristics, which means that a nuanced or slightly differentiated approach is needed.

For example, a more multidimensional ESG investment analysis is required, potentially requiring multiple ESG perspectives for a single issuer. There are also sources of fragmented ESG data of varying quality, which can lead to inconsistent implications for market prices. Finally, there may also be issues from an engagement perspective given the different legal status of lenders versus owners (equity investors). That said, this does not mean that duty holders do not have management responsibilities or influence.

Obviously, there are still ESG challenges for fixed income pension fund assets that need to be overcome, but if addressed properly there is a huge opportunity for pension funds to assert a high level of investment. influence on the direction of capital over the next decades.

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