Environmental, Social and Governance Factors Can Be Material Risks for Fixed Income Investors, Finds World Bank Group and GPIF Report
Washington, D.C., April 19, 2018—Incorporating environmental, social and governance (ESG) factors into fixed income investment strategies can strengthen risk management and contribute to more stable financial returns, finds a new report by the World Bank Group and Japan’s Government Pension Investment Fund (GPIF).
Launched at the World Bank Group Spring Meetings, the report also finds that some of the leading investors are going beyond considering ESG factors as part of fixed income risk analysis. Increasingly, investors are combining ESG and impact considerations, for instance by measuring the impact of their fixed income and other portfolios on targeted ESG outcomes or more broadly against the Sustainable Development Goals (SDGs).
Despite this positive trend, significant constraints limit the wider adoption of ESG considerations in fixed income markets. There are no standard definitions of ESG–with diverse views, particularly in the ‘social’ area. Data–though improving and coming from increasingly diverse sources–is still wanting particularly in emerging markets. There are additional issues such as how to pursue engagement with fixed income vs. equity issuers, particularly sovereigns; the role ESG plays in credit ratings and indices; and a lack of ESG-focused products for fixed income investors.
The report, prepared by the World Bank and IFC, member of the World Bank Group focused on the private sector, makes practical recommendations to support the broadening of ESG investing across fixed income asset portfolios. These include promoting more robust research on the impact of ESG factors on fixed income investment; refining principles and metrics to allow for customized approaches by investors; and developing innovative products to accommodate the growing demand for fixed income sustainable investments as the call for green and other labeled bonds currently outstrips supply.
Findings of the report combine a study of existing research, the results of interviews with over 30 leading investors, ESG data providers, rating agencies and standard setters from around the world, and feedback from a workshop convened by World Bank Group and GPIF in Washington on April 3, 2018.
The report is part of a broader collaboration between the World Bank Group and GPIF to promote strategies for including ESG criteria in investment decisions across different asset classes.
"We estimate that it will take roughly 4 trillion dollars per year to achieve the Sustainable Development Goals, but official development assistance is only about 140 billion dollars per year,” World Bank Group President Jim Yong Kim said. “To achieve the global goals, we need the private sector—and institutional investors in particular. GPIF is a vital partner in our efforts to boost private sector investment in developing countries, and the fund is helping pave the way with its own strategy to incorporate environmental and social governance into its investment decisions. This sends a strong signal to other investors that this is a smart way to earn a higher return, ensure that developing countries have the sustainable resources they need, and help end poverty all over the world.”
Hiro Mizuno, GPIF Executive MD and CIO, said: “Our research collaboration with the World Bank Group will help encourage greater awareness and wider adoption of ESG integration in fixed income. We especially value the World Bank Group’s unique convening power and expertise to improve breadth and depth of ESG data, especially of social criteria such as human capital and healthcare, and to refine pricing and cost mechanisms for the green and other labeled bonds so that such products can become mainstream investment products. GPIF is committed to work with our external fixed income managers to integrate ESG.”
About the World Bank Group
The World Bank Group is one of the world’s largest sources of funding and development expertise for developing countries. It comprises five closely associated institutions: the International Bank for Reconstruction and Development (IBRD); the International Development Association (IDA); the International Finance Corporation (IFC); the Multilateral Investment Guarantee Agency (MIGA); and the International Centre for Settlement of Investment Disputes (ICSID). Each institution plays a distinct role in pursuing the World Bank Group’s mission to fight poverty and improve living standards for people in the developing world. For more information, please visit www.worldbank.org, www.miga.org, and www.ifc.org.
GPIF is the world’s largest pension fund with 1.37 trillion dollars and manages and invests the reserve fund of the public pension system in which all Japanese people must participate. GPIF’s goal is to achieve the investment return required for the public pension system with minimal risk solely for the benefit of pension beneficiaries from a long-term perspective and contribute to the stability of the system. Since its establishment in 2001, GPIF made the gain of 520 billion dollars by the end of June 2017. For more information, please visit www.gpif.go.jp.
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