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Our investment professionals share and challenge each other’s views, creating a diverse marketplace of ideas for the Wellington Blog.

Climate change will continue to be an increasingly dominant theme as global climate-related regulation accelerates, disclosures such as the CDP (formerly the Carbon Disclosure Project) and the Task Force on Climate-related Financial Disclosures become more standardized (and in some regions, mandatory), and investor focus on the climate intensifies. In this short piece, we highlight how this impacts private companies and share our top questions for companies to be prepared to address as this issue grows.

Rising climate risks and investor expectations

In our view, companies across all sectors and stages should incorporate thoughtful approaches to climate change into their business models. This includes building resilience for the accelerating transition to a low-carbon economy and the worsening physical events exacerbated by climate change. Many companies overlook and/or underreport climate-related risks and opportunities that can be…

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Hillary Flynn
Hillary Flynn
Director of ESG, Private Investments
Julie Delongchamp
Julie Delongchamp
CFA
Climate Transition Risk Analyst
London

Most people who visit Japan for the first time come back raving about just how “clean” it is compared to other countries – which, in my view, makes it somewhat ironic that Japan has never really been considered a fertile hunting ground for investors looking for “clean” (environmentally-friendly) companies. But that doesn’t mean that such companies don’t exist here. On the contrary, we have found (and continue to find) great numbers of them; it simply takes some time and effort to identify and properly understand them.

A multitude of factors go into that search and vetting process, but as an investment team focused primarily on smaller companies operating in niche markets internationally, we see Japan as a land of hidden environmental, social, and governance (ESG) gems.

Lingering assumptions about Japan

At both the government and corporate levels, many observers have characterized Japan as a country that is slow to change and adapt to the times. That perception rings true to some degree with regard to ESG, particularly on the…

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Penn Bowers
Penn Bowers
CFA
Equity Research Analyst
Tokyo

The challenges of the past 18 months or so have highlighted the potential for environmental, social, and governance (ESG) factors to become even more relevant to asset management and have underscored the ever-increasing importance of stewardship by fiduciaries and active investors alike. ESG has quickly become one of the defining investment criteria of this decade — a trend we have little doubt will endure in 2022 and beyond.

We have long believed that mounting sovereign debt burdens pose a risk to investors, even in developed markets. At the very least, investors are not being adequately compensated for investing in the most heavily indebted countries. Given the sharp rise in government debt levels in response to the global COVID-19 crisis, it’s an opportune time for sovereign bond investors to refresh their investment frameworks, the particular metrics to be applied, and their country selection methodologies, including the ESG factors underlying investment…

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Marion Pelata
Marion Pelata
Fixed Income Portfolio Manager
London

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…

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Marc Piccuirro
Marc Piccuirro
CFA
Fixed Income Portfolio Manager
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Japanese stocks have been decidedly out of favor with most investors for several years now, underperforming most recently in response to the 2020 COVID-19 crisis and Japan’s delayed economic recovery from it this year. (For more on that and related equity opportunities in Japan these days, please see Revisiting Japan from a contrarian perspective, co-authored by my colleagues, Jun Oh and Takuma Kamimura.)

Meanwhile, on a more upbeat note, the trend toward Japanese corporate governance reform is steadily proceeding apace. With Japan’s revised Corporate Governance Code calling for further improvements to the functioning of corporate boards of directors, as well as strategies for addressing global climate change, Japanese equity returns to shareholders have in many cases rebounded lately amid stronger business performances. This is an encouraging development that we broadly expect to…

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Katsuhiro Iwai
Katsuhiro Iwai
CFA, CMA
Equity Portfolio Manager
Tokyo
Soda Yuichiro
Yuichiro Soda
CFA, CMA
Equity Research Analyst
Tokyo

Four climate specialists, including Director of Climate Research Chris Goolgasian, discuss where they perceive market wrong-headedness on climate change. Learn how they look beyond consensus to uncover climate-related opportunities for our clients.

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Chris Goolgasian
Chris Goolgasian
CFA, CPA, CAIA
Director of Climate Research
Boston

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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Dunkelberger, Raina
Raina Dunkelberger
CFA
Investment Specialist
Boston
Barry, Michael
Michael Barry
Fixed Income Portfolio Manager
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…
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Samouilhan_Nick
Nick Samouilhan
PhD, CFA, FRM
Multi-Asset Strategist
Singapore
Joy Perry
Joy Perry
Investment Director
Boston, MA

Plagued by a combination of disappointing returns, heightened volatility, global trade wars, and (most recently) the COVID-19 crisis and regulatory uncertainty, emerging markets (EM) equities have been decidedly unpopular with many investors for years now. But during that time, the EM investment opportunity set has grown and expanded significantly, making EM equities fertile ground for investors seeking enhanced portfolio diversification and strong performance potential.

We believe differentiated actively managed investment strategies rooted in fundamental research are best positioned to access and capitalize on this attractive, but often-inefficient, asset class. In fact, we think investors who adhere to passive, benchmark-driven EM equity allocations may be missing out on full exploitation of the available opportunity set.

Here are seven reasons why, in our view, EM equity investors should favor active management, in spite of…

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Andrew Sharp-Paul
Investment Director
Singapore

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…

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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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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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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…

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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…

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Balaji Venkataraman
Balaji Venkataraman
Investment Specialist
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