By Mike Amey, Head of ESG Strategies, PIMCO
Earlier this year we highlighted a quiet but profound pivot underway in sustainable investing, with fixed income emerging as a crucial component in global efforts to make the planet healthier and more productive. The United Nations has already provided the framework with the 2015 Sustainable Development Goals (SDGs), and investors like PIMCO stand ready to provide much needed financing to support these targets, which include bolstering infrastructure, ending poverty and making the planet greener. But to achieve these ambitious goals, we believe bond issuers, whether they are governments or companies, have an essential part to play by aligning debt issuance to specifically support the SDGs.
Formally integrating sustainability analysis across the investment community will be critical in the years ahead. This effort should help strengthen investors’ assessment of risk and return, and also help the investment community become an active participant in creating positive societal change. However, to really achieve this, we will need investors and issuers to work together to deepen and broaden the market beyond green bonds to fully support the UN Sustainable Development Goals.
At PIMCO, we have formalized our sustainability analysis across the fixed income asset classes. These efforts help to improve the depth and rigor of our investment analysis, but as we deepen this research we also want to be able to track the impact of these efforts over time. We believe the SDGs give us the framework to do that.
A framework for measuring impact: the UN Sustainable Development Goals
The 17 SDGs cover a wide range of sustainability issues. These goals are deliberately broad, which is both a strength and a potential weakness. The strength is that the SDGs encompass not just climate risks but also other key areas where progress needs to be made to create a more inclusive, sustainable society. However, by being so broad they also create a challenge – how do investors and issuers grapple with measuring such a broad array of metrics?
This is where we believe the investment community needs to come together to align solution-focused approaches. Just as we at PIMCO are embedding our impact measurement efforts under the umbrella of the SDGs, so we would look for issuers to do the same thing. One approach could be a greater focus on issuance of debt where the use of proceeds is formally aligned to one or more of the SDGs.
In the same way as the green bond market has made great strides in raising awareness of climate risk, so we think that the nascent SDG bond market can work to raise awareness across the broad investment community of the societal challenges we currently face – and actively address those challenges.
SDG bonds: building on the green bond framework
According to Bloomberg data, green bond issuance hit a record high of $173 billion in 2017, with $200 billion in issuance forecast for 2018. However, the UN estimates annual financing of $3 trillion to $5 trillion will be needed to meet the SDGs, the bulk of which is to come from the private sector. It is in this context that the breadth of the SDGs becomes one of their strengths: The vast array of SDG initiatives provides issuers with many opportunities to link so-called use of proceeds bonds to a number of sustainability efforts. Different industries will find themselves more closely aligned with different initiatives, and it will undoubtedly take time for issuers to understand under which of the SDGs they can most closely align their business (and hence their issuance). The fact that this takes time should not deter the effort. Indeed, we have already seen issuance both from development banks and commercial banks under the SDGs linked to gender diversity, health and well-being, education, climate, and sustainable communities. We fully support this effort, and encourage others to follow suit.
We believe the UN Sustainable Development Goals provide the investment community with a well-structured framework for tackling long-term sustainability challenges. The breadth of the goals should not be a barrier, but instead a fantastic opportunity for investors and issuers alike to come together and address long-term issues in a clear and coherent manner. As investors we believe that bonds issued under the SDGs will be a key part of the fixed income market in the years ahead, and we call on issuers to be at the forefront of this exciting opportunity.