#WellSaid

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Global ESG debt issuance is growing exponentially, now topping US$3 trillion outstanding. While it took more than a decade to reach the first US$1 trillion, it’s taken just six months to add the latest.1 This growth was accelerated by the pandemic, the race to net-zero emissions, global green fiscal stimulus plans, and record-low interest rates.

The trend continues as 2021 issuances are roughly 90% of 2020’s record already, including the rapid expansion of the loan format as well as increases in social, sustainability, and sustainability-linked bonds to complement the original green bonds. Notably, the growth of loans may be somewhat misleading as the figures are based on the size of companies’ loan programs rather than what they are actually borrowing (which is often much smaller).

In this blog, we explore the potential benefits of this growing market and highlight the importance of avoiding greenwashing…

Broadly speaking, at least in the US and other developed markets, the COVID-19 picture has improved tremendously over the past year or so. In early to mid-2020, the global pandemic was at its fiercest, ravaging nearly every corner of the world in swift, frightening fashion. Infection rates and death tolls were rising rapidly, many economies were locked down and at a virtual standstill, and progress toward safe, effective vaccines was slow and halting at best. There was still much we still didn’t know about our deadly foe.

Fast forward to July 2021: Multiple vaccines have been approved for use and successfully administered to millions of people worldwide this year, bringing the global case-count, hospitalization, and fatality numbers down dramatically. Many economies have fully or mostly reopened and are growing at a strong clip as they rebound from the COVID shock. In short, despite some ongoing trouble spots, the developed world is on a path to recovery from the unprecedented health and economic crisis.

But not all of the news is good. The pandemic continues to wreak havoc in many emerging markets. And even in developed markets, it has experienced somewhat of a resurgence of late, as the so-called “Delta variant” — a dangerous mutation of the virus that causes COVID-19 — has spread across the world, having been found in more than 80 countries since…

MACRO
THEMES
Wen Shi
PhD, CFA
Global Industry Analyst
Boston, MA

Our ESG philosophy for short-duration investing

Environmental, social, and governance risks have always been key considerations in our research and investment process. These factors are particularly critical given the core objectives of a short-duration portfolio: to maximize liquidity and preserve capital while achieving attractive total return.

Importantly, adverse ESG factors increase the risks of credit deterioration and illiquidity. We believe that there are areas where these risks are not currently compensated by valuations. In our view, heightened global scrutiny of issuers from an ESG lens will eventually drive up the cost of capital for many issuers with outsized ESG risks. In addition, we think it will potentially lead to lower liquidity in their bonds as more investors avoid these issuers. As an example, the tobacco sector already has a higher cost of debt and less demand for issuers on average versus…

A key pillar of my largely favorable outlook for China, including potential asset-price outperformance, lies in my directional view on the Chinese yuan (CNY). I continue to believe the CNY is likely to appreciate, or at least remain stable, over the next 12 to 18 months and beyond. Indeed, I think one of China’s challenges over the next few years will be how to contain its ongoing currency strength, rather than how to defend against currency weakness.

Here are the five reasons why I’m still bullish on the CNY.

1. China’s relative interest-rate differential is near the top of its historical range and may stay elevated going forward. For example, the spread between China’s 10-year government bond yield and that of the 10-year US Treasury note was recently at a decade-long high. As a result, I expect Chinese fixed income assets to…

MACRO
Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong

Two recent developments — the accelerating focus on ESG and more aggressive policy interventions — could well change the way we invest in years to come. My perspective is that of a fixed income manager, but I believe these developments will impact all asset classes.

ESG focus

A growing societal and market focus on environmental, social, and governance (ESG) issues has kickstarted a reallocation of capital, which creates new opportunities and risks for fixed income and other investors.

  • Higher inflation

In my view, the increased focus on ESG may contribute to higher inflation, at least in the short-to-medium term. Implementing environmental considerations, for instance, while desirable from a societal perspective, may involve short-term cost adjustments. This seems particularly relevant in the context of…

MACRO
SUSTAINABILITY
THEMES
Marc Piccuirro
Marc Piccuirro
CFA
Fixed Income Portfolio Manager

The outperformance over the past 18 months of some “green” equities, or those with direct or obvious climate solutions (such as renewable energy), has left investors wondering whether climate transition risks are already priced in. A new study by MSCI finds that transition-risk pricing differs by region and by a company’s greenness, as measured by its greenhouse gas (GHG) emissions and proportion of “green” revenues.1 Even after normalizing for industry effects, equities with low GHG emissions and a higher share of revenues from “green,” low-carbon activities commanded higher valuations than equities with more “brown,” high-carbon-intensity revenues.

While we recognize the strong performance of certain green equities, we believe the lack of reliable emissions data makes it…

SUSTAINABILITY
Erika Murphy
CFA, CAIA
Investment Director
Boston

Wellington’s Climate Research Team works with Woodwell Climate Research Center to integrate climate science into the investment process for our impact strategies. We increasingly leverage reports, quantitative models, and investor tools to identify impact assets with exposure to these risks and companies whose products we believe minimize the human and environmental toll of climate-related events.

Water scarcity

One key climate-related trend that overlaps with impact investing — particularly our clean water and sanitation theme — is water scarcity. We believe chronic water shortages in many regions are a critical issue. Solutions to prevent or alleviate water scarcity will likely attract more investor attention and trigger significant capital spending as governments and public/private partnerships invest in water infrastructure and technology. And because water scarcity is still underappreciated by the market, impact investors have opportunities to…

SUSTAINABILITY
Tara Stilwell
Tara Stilwell
CFA
Equity Portfolio Manager
Boston
Campe Goodman
Campe Goodman
CFA
Fixed Income Portfolio Manager
Boston

It’s been a volatile ride for the US fixed income market through the first half of 2021. After interest rates seemed to be more or less “renormalizing” in their climb back to pre-pandemic levels, the US Treasury market rallied: In the span of three months, the yield on the 10-year note dropped from 1.74% on March 31 to 1.45% on June 30.

To many market participants, this downward move may seem counterintuitive. US economic activity has continued to pick up with the widespread, successful rollouts of the COVID-19 vaccinations. Accommodative monetary policy along with generous fiscal policy should be a strong tailwind to economic growth into the second half of 2021 and beyond. And inflationary pressures have clearly increased over the past few months.

In theory, all of this should translate into higher interest rates, but that hasn’t…

MACRO
MARKETS
Amar Reganti
Amar Reganti
Investment Director
Boston
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