24 June 2019

Engaging with sovereigns on ESG issues is a challenge, says Allianz

Engagement with sovereign issuers of debt on environmental, social and governance (ESG) issues is difficult for investors,partly because of a lack of available data, according to investment management giant Allianz Global Investors.

“When looking at sovereigns, the challenging aspect is to find reliable data, especially on the environmental side,” said Nicolas Jaquier, a strategist for emerging markets debt at Allianz GI.

Allianz GI manages about €535 billion ($609 billion) in assets – of which €187 billion, or 35% of its overall assets – are in fixed income.

Jaquier said the lack of available data can make engaging with these issuers difficult, “but that doesn't mean we shouldn't do it”.

He was speaking at Environmental Finance’s ESG in Fixed Income conference in London.

“On the governance side there are plenty of publicly available indicators that you can use. On the environmental side it is trickier, and there is more of a trade-off – especially when considering aspects like air quality and pollution,” he said.

“These often come as a result of rapid industrialisation, which usually improves social scores,” Jaquier added.

This is in spite of a push by investors to better analyse how sovereigns are assessing and managing ESG risks, he said. “There is more realisation among investors that those aspects are a very important part of creditworthiness, and help us add value for investors.”

Investors might try to influence sovereigns by contacting the country’s ministry of finance: “In terms of their growth plan and development framework, you can engage with them on the carbon intensity of that agenda,” Jaquier said.

Allianz GI applies an ESG-themed exclusionary screen, in a move designed to improve the overall quality of one of its recently-launched investment portfolios dedicated to sovereign debt.

This allows the investment management giant to be less exposed to default, Jaquier claimed. Under this approach, bonds issued by Venezuela would have been excluded from the portfolio. In 2017, the country defaulted on two of its US dollar-denominated bond issues, Jaquier added.

Graham Stock, a partner and senior sovereign strategist for emerging markets at BlueBay Asset Management, speaking on the same panel as Jaquier, said investors could also look to other parts of government to improve management of ESG risks.

“The finance ministry and central bank are our main counterparts, but we would meet with other ministries where it's relevant. For example, last year we met with Argentina's agriculture ministry because the way they were planning [tax changes that were] going to fall particularly hard on the agriculture sector.

“We met opposition politicians, trade unions, various stakeholders... However, this was mainly to try and build out a picture of the social and governance factors, because the environmental [risk] plays out over a much longer time period, and often beyond the time frame of a financial investment,” Stock said.

Ann Frank Andresen, head of research for emerging markets debt at Nordea Investment Management, said the EU’s proposed taxonomy for sustainable economic activities could have a positive influence on investors’ engagement on such topics.

“The [EU] taxonomy will make it easier for us as investors to show what we want from issuers. They don’t have to follow [all parts of] the taxonomy but it’s a way of engaging, and showing what we want to see, and we can follow up on that afterwards,” she said.