The collapse of Californian utility PG&E helped focus fixed income investors on environmental, social and governance (ESG) issues, according to Hiro Mizuno, former-chief investment officer at the world's biggest pension fund, Japan's Government Pension Investment Fund.
Mizuno told Environmental Finance's ESG in Fixed Income Europe 2020 virtual conference that, historically, fixed income investors struggled to see why ESG was relevant to the asset class because the short duration of their holdings meant the risks were unlikely to materialise before their bonds matured.
But he said pressure from asset owners, such as pension funds, and the collapse of PG&E had helped to change the narrative.
PG&E — formerly known as Pacific Gas & Electric — filed for bankruptcy in 2019 after it was hit by legal claims after its equipment sparked devastating wildfires in the state.
"PG&E was one particular event, after which fixed income managers took these risks more seriously. That changed people's behaviour."
Mizuno said credit rating agencies are also increasingly factoring ESG into their ratings, as well as devising separate ESG assessment products. He argued that developing separate ESG products was the right approach, because many ESG factors are not yet material.
The quality of ESG data continues to be a challenge for the integration of ESG in fixed income, said Mizuno.
However, he suggested that this in an opportunity for active managers to generate alpha by taking advantages of inefficiencies in the market, and that the shortcomings in the data could be "solved quite quickly".
Meanwhile, Mizuno explained GPIF's approach to investing in green bonds. He said passive managers were allowed to swap US treasuries for AAA rated green bonds from multilateral development banks, such as the World Bank.
All of the sessions from the two-day event are available for on-demand replay. Click here to register for the event and view them.