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

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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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
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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…

MARKETS
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…

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…

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THEMES
Marc Piccuirro
Marc Piccuirro
CFA
Fixed Income Portfolio Manager

At Wellington, we have long believed that strong environmental, social, and governance (ESG) ratings and characteristics can generate value for shareholders and improve a company’s long-term investment performance. We believe this applies broadly across market sectors and have established frameworks — what we call “research playbooks” — for evaluating companies within each sector based on various ESG criteria that we deem to be of material importance.

Here we look at the health care sector, to be followed by other market sectors in future blog posts by our ESG team.

Key ESG issues for the health care sector

ESG is of course just one input into our investment team’s multi-pronged fundamental analysis of…

SUSTAINABILITY
lindsay blitstein
Lindsay Blitstein
CFA
ESG Analyst
Boston
Carolina San Martin Headshot
Carolina San Martin
CFA
Director, ESG Research
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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

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

Earlier this summer, I virtually participated in an institutional conference with about 100 other asset managers and prominent asset owners from the US, Canada, Europe, Australia, and New Zealand. It was well worth my time. Here are my main takeaways, along with some personal observations on the post-COVID-19 industry landscape.

1. Economic assumptions and forecasts were more dire than I’ve seen internally. While Chinese gross domestic product (GDP) is expected to reach pre-COVID levels this year, the US may not get there until mid-2021 and likely only on the strength of “50% of the economy in steep recovery,” according to one conference participant. The other half of the US economy may..

THEMES

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Mark Mandel
Mark Mandel
CFA
Equity Portfolio Manager
Boston

In our view, engagement with portfolio companies can enhance positive social and environmental impact and create lasting value for shareholders. We see material environmental, social, and governance (ESG) issues as strategic business issues that can affect a company’s financial performance, competitiveness, and sustainability. The better impact investors understand material ESG issues, the more informed their investment decisions.

Hands-on approach

We believe in taking a hands-on approach to engagement, meeting in person with boards and management teams, writing letters, or hosting calls multiple times each year. Further, we think productive engagements should aim for…

SUSTAINABILITY

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Tara Stilwell
Tara Stilwell
CFA
Equity Portfolio Manager
Boston
Louise Kooy-Henckel
Louise Kooy-Henckel
Associate Director of Investment Products and Strategies
London

We believe good corporate stewardship and positive environmental, social, and governance (ESG) behavior can help create business resiliency, enhance competitive advantages, and sustain economic growth. Through this lens, climate change is a growing point of friction. Can carbon-intensive companies that are otherwise models of stewardship — with quality management teams that consider all stakeholders, track records of capital allocation that add long-term value, and engaged independent boards — measure up for portfolios like ours, which aim to balance financial returns and responsibility? Increasingly, our answer is no. If a business is categorically negative for the environment (E), it is difficult for positive S and G behaviors to outweigh the growing financial challenges and other risks to the company.

Central to our investment philosophy is belief in a flywheel effect: Companies that reinvest returns to improve competitive position and strengthen ties to key stakeholders may ultimately…

SUSTAINABILITY

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Mark Mandel
Mark Mandel
CFA
Equity Portfolio Manager
Boston
Yolanda Courtines
Yolanda Courtines
CFA
Equity Portfolio Manager
London

When market participants lack, discount, or ignore relevant data, the resulting information gaps create asset mispricing that active managers may exploit to generate alpha for clients. We believe sustainable investing is a particularly inefficient market segment, and in a recent series, we address several key inefficiencies and explain how we believe investors can take advantage of them. First up:

Inefficiency #1: The market’s focus on short-term growth

Over the past 40 years, the average equity holding period has declined from three years to less than one (Figure 1). While many market participants focus on quarterly earnings guidance, profit margins, or growth rates, sustainable investors can explore longer-term, sustainable growth opportunities.

Figure 1

Short-termism has taken hold

SUSTAINABILITY

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Wendy Cromwell
Wendy Cromwell
CFA
Vice Chair, Director of Sustainable Investment, and Portfolio Manager
Boston
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