PIMCO offers an investment platform dedicated to environmental, social and governance (ESG) considerations. Scott Mather, the firm’s CIO for core strategies discusses the philosophy, process and opportunity set for ESG investing.
Q: What is PIMCO’s approach to ESG investing?
A: It’s always been clear to us that a successful long-term investment process should consider ESG factors, and PIMCO’s process has incorporated this premise for decades through our secular forums – in which we rigorously analyze global trends and their potential impact on economies and investors – as well as through our extensive credit analysis. We formalized our dedication to ESG investing in 2011, the year we became a signatory to the United Nations Principles for Responsible Investment (PRI).
As the next natural extension of our approach, we are launching a dedicated ESG investment platform designed for the growing number of investors seeking attractive returns and positive social and environmental change. The founding belief of these new strategies is that investors in ESG portfolios should not have to sacrifice their financial objectives in order to achieve an ESG impact.
Q: What are the key features of PIMCO ESG strategies?
A: Our ESG strategies will leverage PIMCO’s robust investment process and resources employed throughout decades of managing global bond portfolios. In addition, they will incorporate three core approaches:
- Exclude issuers with business practices that are fundamentally misaligned with sustainability principles. Some business models and industries may simply be inconsistent with the objective of generating a positive impact in the long term.
- Evaluate all issuers from an ESG perspective in addition to fundamentals and emphasize those we consider to be “best-in-class.” As a result, issuers that incorporate sound ESG practices and with highest impact potential are more likely to be held in our ESG portfolios.
- Engage collaboratively with issuers to encourage them to improve their ESG practices and influence change. In our view, it’s not sufficient just to look at what firms have done in the past – we also need to look at what they can and will do in the future. We feel strongly that allocating capital toward issuers willing to improve the sustainability of their business practices can generate a greater impact than simply excluding those with poor ones to begin with.
Transparency is critical to promoting impact, and we plan to report regularly on the ESG metrics in our portfolios as well as on the impact of our engagement efforts.
Q: Why is PIMCO launching an ESG platform now?
A: PIMCO began managing socially responsible investment portfolios in 1991, launching a version of the Total Return strategy in the U.S. that excluded investments in select industries. Since then, sustainable investing has evolved. Investors have set their sights higher: It’s no longer enough just to screen out undesirable categories; they want to foster positive social change.
Proactive ESG investing requires deep, issuer-level analytics, along with an ability to engage and influence key decision-makers at issuing companies. Equity investors have engaged with issuers for some time, but it has not been commonly known practice in fixed income. We strongly believe that engagement could be just as powerful when administered by the debtholders. Having spent the last few years developing our processes and team, we are excited to invite investors to participate in what we believe is an engagement-driven, industry-leading ESG platform.
Q: What resources has PIMCO dedicated to this effort?
A: PIMCO’s ESG team leverages a broad global platform of highly specialized investment professionals, together with dedicated ESG specialists. These specialists are tasked with coordinating research efforts, spearheading issuer-level engagement and augmenting our investor reporting to incorporate ESG-oriented updates.
For decades, PIMCO’s credit analysts have engaged with issuers to encourage behavior designed to improve fundamental credit metrics. As PIMCO has broadened its investment capabilities within the ESG space, our credit analysts can now partner with ESG specialists to encourage behavior designed to improve sustainable business practices and corporate citizenship. Credit analysts produce a score for each individual factor (E, S and G) separately, and a comprehensive ESG score, where the weights of each factor depend on the materiality for that issuer’s industry. Energy companies have a larger weight assigned to “E” while banks have a larger weight assigned to “G,” for example.
Q: How are ESG considerations incorporated in portfolios?
A: PIMCO’s ESG team generates an ESG score for every potential investment. Industry-specific weightings for environmental, social and governance factors are used to determine a composite, issuer-level numeric score, along with trends and peer-based relative measures. The team also tailors individual engagement – whether companies with above-average ESG scores that can be further improved through proactive influence, or companies with less stellar scores that may offer us the opportunity to really move the needle. Portfolios are then optimized to emphasize issuers with best-in-class ESG practices, based on our assessment, as well as prime engagement candidates.
It is important to note that our ESG investment process uses the same rigorous approach to portfolio construction applied to all PIMCO portfolios. In particular, PIMCO’s ESG portfolios incorporate the same macroeconomic themes, market views and high-level portfolio targets (duration, sector positioning, etc.) as non-ESG portfolios.
Q: How does PIMCO plan to engage with issuers in the ESG portfolios?
A: Our engagement protocol differs from equity-based investor activism, and is driven by three key principles:
- Think like a treasurer – to assess companies’ ability to change
- Engage like a partner – to unlock companies’ willingness to deliver results
- Hold to account as a lender – to ensure companies’ progress
We tailor our engagement efforts to each issuer with specific objectives in mind. Before investing, we develop a core set of engagement objectives and a plan of action. Direct engagement with issuers is based on collaboration, productive dialogue and mutual agreement on objectives. This approach is similar to the way that our credit analysts engage with company management teams to encourage better balance sheet management. It simply adds another dimension that focuses on improving ESG-related business practices.
Issuer-specific engagement efforts are long-term in nature and have the scope and flexibility to evolve over time, with progress measured against pre-defined benchmarks and reported to investors.
Q: What makes PIMCO’s ESG approach different?
A: We believe PIMCO can bring several important benefits to the ESG investment community:
- Process: We have developed a highly robust approach that combines PIMCO’s time-tested investment process with a best-in-class ESG-based investment protocol.
- Scale: For investors seeking to drive positive social change, size matters. As a meaningful participant in the fixed income markets, PIMCO is well-suited to successfully partner with investors to deliver meaningful, lasting social impact.
- Active investing approach: By its very nature, impact-oriented investing requires an active approach. Successful ESG managers must be prepared to implement out-of-the-box solutions to drive change. That also includes key partnerships with industry leaders, such as PIMCO’s partnerships with the Sustainability Accounting Standards Board (SASB), MSCI and the UN PRI, as well as academia – PIMCO is a member of the Investment Leaders Group (ILG) facilitated by the Cambridge Institute for Sustainability Leadership.
- Platform: ESG investing is heavily data-driven and analytics-intensive. Since the launch of our first socially responsible investment strategy in 1991, PIMCO has made a significant investment in building out our ESG capabilities.
- Fixed income expertise: A fixed income–oriented ESG approach requires highly specialized resources and expertise. Many ESG data providers and ratings methodologies utilize equity-based metrics that are of little relevance to fixed income portfolios. PIMCO has invested heavily in developing a specialized ESG optimization process focused on fixed income instruments.
Q: How does PIMCO determine what social values will guide its investment decisions?
A: The values underlying PIMCO’s ESG approach are not based on the beliefs of PIMCO as an organization or the views of portfolio management teams. Rather, exclusions, evaluations and engagement goals are guided by globally accepted sustainability norms, such as the UN Global Compact Principles, the UN Guiding Principles on Business and Human Rights, the International Labor Organization Conventions and the UN Sustainable Development Goals.
While there is no one-size-fits-all approach to socially conscious investing, we believe there is a need for a robust platform able to accommodate customized client objectives but also reference broadly accepted international standards in pooled public vehicles.
Q: How has PIMCO incorporated ESG factors into its day-to-day culture?
A: Evolving our own business practices is a journey of continuous improvement, where one innovation leads to another. We have for years held internal education campaigns for all employees aimed at reducing unconscious bias. We also benefit from insights from thought leaders such as Anne-Marie Slaughter (a member of our Global Advisory Board), an expert in foreign policy and international affairs as well as a leading advocate for effective work-life integration.
Just last quarter we created a new dedicated position to lead PIMCO’s Inclusion, Diversity and Culture (IDC) initiative. At a broad level, the goal of PIMCO’s IDC initiative is to foster a culture of greater cognitive diversity and inclusiveness, which we believe will lead to better business outcomes. Culturally, this initiative is intended to facilitate an environment that enables employees to 1) better understand the perspectives of those colleagues with varying life experiences, 2) develop skills that enable better team collaboration and 3) optimally engage at work in the context of broader life circumstances. PIMCO IDC also partners closely with the PIMCO Foundation on initiatives that help accomplish mutual objectives such as gender equality.
Another example of our firm’s dedication to ESG practices is our global headquarters, which is silver certified by the U.S. Green Building Council, a measure of the building’s Leadership in Energy and Environment Design (LEED).
We know the journey doesn’t end here; and we will continue to move toward better ESG practices with every passing year.
Q: Do you have any final thoughts that investors should consider as they think about integrating ESG into their overall portfolios?
A: Many ESG investment options exist in the equities space, as well as in venture capital or project finance. However, investors should consider the extraordinary potential to drive positive change via their fixed income allocation, without sacrificing the potential for superior risk-adjusted returns.
This investment universe consists of thousands of issuers that collectively affect the lives of billions of people. The vast majority of these issuers could benefit from adopting better ESG-related business practices, ranging from better energy efficiency to supply chain improvements to addressing inequality. By influencing business practices at this level, we believe that investors will be able to drive positive impact while still generating attractive return potential and securing capital.