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SUSTAINABILITY

Sustainable investing is no longer the exclusive domain of equity investors. Indeed, there is a growing consensus that sustainability can be just as critical to investment outcomes in fixed income markets. Although environmental, social, and governance (ESG) integration and adoption have historically been slower in fixed income as compared to equities, investor demand for “green bonds” and other sustainable fixed income solutions has risen rapidly in recent years, particularly since the onset of COVID-19. Accordingly, the pace of new product innovation and proliferation has picked up as well.

Case in point: The booming global market for green/sustainability bonds has now expanded to convertibles — hybrid bonds that can be converted from debt into equity. While European debt issuers have thus far comprised most of the volume in these green, sustainability-linked, and/or social bonds, US and Asian issuers have become increasingly active in the space. The recent uptick of issuers selling green/sustainability convertible bonds includes companies focused on…

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SUSTAINABILITY
Raina Dunkelberger
Raina Dunkelberger
CFA
Investment Specialist
Boston
Michael Barry
Michael Barry
Fixed Income Credit Analyst
Boston

In a June 2021 white paper, A source-based approach to managing inflation risk, co-authored by our colleague Adam Berger, we laid out what we believe are the five most likely sources of higher inflation over the coming decade. One of them was climate risk or, more specifically, the potential for input price shocks caused by the ongoing trend of global climate change. Since this inflation source may not be on many investors’ radar, we’d like to revisit why we think climate change is inflationary and suggest strategies to help reduce the threat to client portfolios.

The relationship between climate change and inflation

  • Overview: A price shock to a systemically important input price will tend to spur higher inflation as businesses pass it on to consumers, leading to “cost-push” inflation. While this has historically been due to geopolitical forces driving oil prices, we believe the impact of climate change on a range of commodities will be…
MACRO
SUSTAINABILITY
Samouilhan_Nick
Nick Samouilhan
PhD, CFA, FRM
Multi-Asset Strategist
Singapore
Joy Perry
Joy Perry
Investment Director
Boston, MA

Our ongoing climate research shows that various global regions and asset classes will face significant and growing climate risks in the coming years. We hold the view that asset allocators seeking optimal long-term results should thoughtfully factor climate change into their structural investment planning. In fact, we believe allocators can build climate resilience into their portfolios today to pursue the potential return opportunities arising from climate change.

Mounting risks and implications of climate change

While some of the risks associated with climate change may seem too far off to matter right now, many of the environmental, social, and economic ramifications are already apparent. We believe now is the time for allocators to begin thinking about how to incorporate climate change and related considerations into their strategic asset allocation (SAA) plans.

Record-setting heat, floods, wildfires, and hurricanes have repeatedly wrought massive, costly destruction and ensuing…

SUSTAINABILITY
Erika Murphy
CFA, CAIA
Investment Director
Boston

The SEC’s recent approval of new Nasdaq board diversity requirements will affect not only the 3,000+ public companies currently on the exchange, but also private companies hoping to someday be listed. Members of our Private Investments team explain the new rules, why they matter to company performance, and how private companies can prepare.

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SUSTAINABILITY
Hillary Flynn
Hillary Flynn
Director of ESG, Private Investments
Celi Khanyile-Lynch
Celi Khanyile-Lynch
Sustainability Analyst

As part of our recent climate investment roundtable, Director of Climate Research Chris Goolgasian and Global Industry Analyst Alan Hsu discuss why and how the physical and transition risks of climate change are driving investment opportunities. They also share insights on why they believe solutions that help society adapt to the effects of climate change are undercapitalized and could see significant upside in coming years.

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SUSTAINABILITY
Chris Goolgasian
Chris Goolgasian
CFA, CPA, CAIA
Director of Climate Research
Boston
Alan Hsu
Alan Hsu
Global Industry Analyst
Boston

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…

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…

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
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The challenges of the past year have highlighted the potential for environmental, social, and governance (ESG) factors to become even more relevant to the investments we make on our clients’ behalf and have underscored the increasing importance of stewardship by fiduciaries and active investors. In 2020, an unprecedented number of our corporate engagements included ESG topics, a trend we think will continue in 2021 and beyond. In particular, we expect many conversations to address executive compensation and climate change, along with diversity, equity, and inclusion (DEI).

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SUSTAINABILITY

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Carolina San Martin Headshot
Carolina San Martin
CFA
Director, ESG Research

The US military defines a “complex catastrophe” as a “natural or man-made incident […] which results in cascading failures of multiple, interdependent, critical, life-sustaining infrastructure sectors and causes extraordinary levels of mass casualties, damage, or disruption severely affecting the population, environment, economy, public health, national morale, response efforts, and/or government functions.”1

Working with Wellington’s Climate Research Team, our Global Macro Team is studying the macro, market, and geopolitical implications of climate change. We see climate change as a complex catastrophe in the making, with the potential to exacerbate geopolitical instability and multiply threats to economic and national security. Governments, including the US, China, and European Union, are beginning to treat climate change as a structural peril. Under the Biden administration, climate change has…

MACRO
SUSTAINABILITY

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Thomas Mucha
Thomas Mucha
Geopolitical Strategist
Boston

I’ve always liked this quote from the movie The Incredibles and finally have a work-related context in which to use it. From an environmental, social, and governance (ESG) investment standpoint, its logical extension is: “When everyone’s super, no one will be. And valuations of similar companies should converge.”

What this means is that, as ESG issues become more mainstream across industries, the “uniqueness” that differentiates individual companies may begin to dim over time, which could result in more uniformity among companies in the eyes of shareholders, customers, and…

SUSTAINABILITY

ARCHIVED

Andrew Corry
Andrew Corry
CFA
Equity Portfolio Manager
Boston

Over the next 20 years, trillions of dollars are likely to be spent modernizing the global electric grid to accommodate increased “electrification” and the growing dominance of renewable energy sources.

We believe regulated electric utilities are an underrecognized way to invest in the energy transition and can be attractive investments due to their high growth potential and stable return profile. With relative valuations recently at 15-year lows, we think electric utility stocks look particularly attractive versus the broader equity market in today’s environment.

Capitalizing on the energy transition

As the world shifts toward a low-carbon economy to stem the effects of climate change, decarbonizing the global energy sector will be critical. The clean energy, clean transport, and electricity sectors may experience unprecedented…

SUSTAINABILITY

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Tom Levering
Tom Levering
Global Industry Analyst
Boston
Timothy Casaletto
Timothy Casaletto
CFA
Global Industry Analyst
Boston
ken Baumgartner
Ken Baumgartner
CFA
Investment Director
Boston

Did you know?

  • Renewables are expected to meet nearly 30% of power demand in 2023.1
  • Efficient production and use of materials could help cut CO2 emissions by 25 gigatons.2
  • The world consumed 92.1 billion tons of material in 2017.3

Amid recent natural disasters and growing awareness, climate change has become a focus of social discourse, and we believe the ranks of market participants seeking solutions are growing. Many impact issuers contribute to environmental sustainability and help society better prepare for climate change. Here we share some of the environmental and climate-related innovations we are…

SUSTAINABILITY

ARCHIVED

Tara Stilwell
Tara Stilwell
CFA
Equity Portfolio Manager
Boston
Campe Goodman
Campe Goodman
CFA
Fixed Income Portfolio Manager
Boston
Climate 101 is an ongoing series designed to enhance basic understanding of climate change, including terminology and concepts, and to communicate our current research themes.

Author and financial commentator Nassim Taleb introduced the concept of black swans, rare occurrences — often macro or market shocks — viewed after the fact as obvious or bound to happen, but that were difficult to predict or prepare for. Carbon prices may be black-swan-like for their potentially substantial impact on markets coupled with a lack of collective preparation or understanding. Let’s call them green swans.

What are carbon prices and why do they matter?

Carbon prices are costs, or taxes, placed on each metric ton of CO2 produced. The objective of a carbon price — derived via regulation or the market — is to…

SUSTAINABILITY

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Alan Hsu
Alan Hsu
Global Industry Analyst
Boston

Did you know?

  • A 10% increase in mobile broadband adoption may correlate with up to 2.8% increase in GDP.1
  • Each grade a child completes may raise his or her earning potential as an adult by 10%.2
  • Small businesses employ 50% of workers worldwide and create seven of 10 jobs in emerging markets.3
  • By some estimates, cybercrime costs an estimated US$600 billion annually, or nearly 1% of global GDP.4

In many ways, these are the modern essentials: broadband internet and mobile technology; online education and financial services; and home, workplace, and product safety. These products and services help people climb the socioeconomic ladder, become more productive and competitive, and contribute to economic growth.

Digital divide

Internet access can make getting an education or a job or accessing financial services easier by increasing users’ productivity, providing agency, lowering costs, and enabling transparency. In many countries, the digital gaps between rich and poor, and between men and women are still…

SUSTAINABILITY

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

Did you know?

  • Access to affordable housing may be one of the most cost-effective ways to reduce childhood poverty.1
  • Global demand for fresh water is expected to grow by 70% by 2050.2
  • Immunization prevents between two and three million deaths every year.3
  • One in nine people suffer from hunger, and one in three are malnourished.4

Meeting basic human needs like access to health care, affordable housing, clean water, and sustainable food sources may not seem like a compelling thesis for active investors seeking to outperform market indices. But we have found that disruptive impact issuers working to solve the world’s most pressing problems are often underappreciated market opportunities with…

SUSTAINABILITY

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Tara Stilwell
Tara Stilwell
CFA
Equity Portfolio Manager
Boston
Campe Goodman
Campe Goodman
CFA
Fixed Income Portfolio Manager
Boston
Climate 101 is an ongoing series designed to enhance basic understanding of climate change from an investment point of view, and to communicate our current research themes and areas of focus for our clients.

Carbon emissions from the production and consumption of fossil fuels are the primary cause of climate change. Increasing atmospheric concentrations of greenhouse gasses (GHGs) are changing climate patterns, warming the earth’s surface, and exacerbating physical climate risks. Signatories of the 2016 Paris Agreement named reducing heat-trapping emissions as the most important step in reaching their goals. Since then, governments, companies, and market participants have been aiming to quantify, benchmark, and track emissions associated with their activities. Here we offer a high-level description of carbon emissions and describe industry efforts to standardize their…

SUSTAINABILITY

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Chris Goolgasian
Chris Goolgasian
CFA, CPA, CAIA
Director of Climate Research
Boston
Julie Delongchamp
Julie Delongchamp
CFA
Climate Transition Risk Analyst
London
  • A town in Siberia near saw the mercury hit 38°C (100.4°F) in June.
  • May 2020 tied for the warmest May on record, globally.
  • In Florida, heat and humidity levels are breaking overnight high-minimum records.

Highs are getting higher

The assumption that the planet needs to warm by an average of 2°C before heat becomes an issue obscures the risks of extreme heat. Abnormally high temperatures during heat waves or planting and harvest seasons can be devastating. According to projections, within the next few decades, numerous regions will experience many more days with average daytime temperatures over…

SUSTAINABILITY

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Jenny Xie
Jenny Xie
Climate Physical Risk Analyst
Boston
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