Fixed income

Data collection for SFDR compliance was a another challenge, but one that the team embraced by joining the internal SFDR working group and contributing views and guidance to tackle the reporting challenges. Data collection and reliability, coupled with unclear guidance from the regulation itself were particularly challenging. The result was, however, positive with the majority of managers that received high scores on our ESG and IMP scorecard aligning well with SFDR Article 8.

With equal measures of interest and scepticism, we are watching the market develop when it comes to strategies or managers focusing on specific sustainable themes or frameworks like the SDGs. Some observations are that higher-quality issuers are more advanced than lower quality ones, and in emerging markets a general rule is that all high-quality managers have a strong focus on democracy and sovereign governance already. 

One area we are particularly interested in is the progress made on sustainable bonds in Europe. The top-down actions coming from the EU is driving innovation and transparency, and it’s an area of research we are currently exploring. Moving forward, the environment of higher interest rates and cautious signs of inflation peaking provide a benign market backdrop for investors to shift attention to solutions of long-term, sustainable yields.

 
In practice, we find that the rigour of our ESG and IMP scorecard assessment makes it a powerful and distinguished tool to engage both current and prospective managers on their alignment with international standards, trends and frameworks like the SDGs, the energy transition, human rights, and governance. 

In the wake of the Russia/Ukraine crisis in emerging market debt markets, our emerging market debt portfolio significantly outperformed. With markets expressing uncertainty and volatility, we decided to reduce our active risk by half by adding a passive fund to the portfolio. 

Whilst this was a positive for performance and risk management, it brought down the ESG and IMP scores because passive funds typically do not hold strong ESG credentials as they merely replicate a standard benchmark. This explains the increase in assets that ‘May/Does cause harm’ from 2.2% last year to 17.7% in 2022. 

Elsewhere in our ESG scores from 2021 to 2022, our allocation to leaders increased from 17.5% to 21.7%, to professionals increased from 72.1% to 77.4%, and we continued to hold no managers considered a ‘Novice’ or ‘Laggards.’ 

In terms of IMP scores, we described the reason why there was a higher allocation to funds that may or do cause harm. Elsewhere, our allocation to funds that act to avoid harm slightly increased from 69.4% to 71%, to funds that benefit stakeholders increase from 5.7% to 10.3%, and we have not yet invested in any funds that contribute to solutions by the IMP’s standards.