How AIIB finds credit plays in emerging markets using an ESG lens | Fixed Income | AsianInvestor

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Introduction

Institutional investors recognize the importance of Environment, Social, and Governance (ESG) and climate action investing. However, they face challenges due to ‘legacy’ situations and a smaller investment universe, particularly in developing markets. This report emphasizes the Sustainable Development Goals (SDGs) and explores how investors can navigate these challenges.

Challenges in ESG and Climate Action Investing

According to Dong-ik Lee, Director General of Investment Operations at the Asia Infrastructure Investment Bank (AIIB), most institutions and sophisticated investors understand the significance of ESG and the climate agenda. However, issues arise when financial structures created for net-zero goals involve legacy portfolio companies that do not meet current ESG requirements.

Pragmatic Approach

Investors need to be pragmatic in their approach, especially in developing markets. Flexibility in interpreting and handling situations is crucial to understanding market realities.

AIIB’s ESG Initiatives

The AIIB has demonstrated leadership in ESG investing. In 2018, it appointed investment manager abrdn to manage a $500 million bond portfolio with a sustainable investment policy.

AIIB Asia ESG Enhanced Credit Managed Portfolio

• Focuses on bonds issued by corporate and quasi-sovereign issuers in infrastructure-related sectors.
• Emphasizes labelled bonds directed towards sustainable infrastructure and other sector projects.

This initiative has proven successful and sets a precedent for future mandates.

Engagement with Investee Companies

Investment managers must understand ground realities when engaging with investee companies to make sustainable investing work, particularly in developing markets.

Opportunities for Engagement

Adam McCabe, Head of APAC Fixed Income at abrdn, views mandates as opportunities to engage with companies, understand their policies, and help them take suitable actions to align with ESG goals.

Transition Finance

The emergence of transition finance presents new opportunities for sustainability-minded investors. However, many transition projects in Asia are unviable for commercial capital due to political, currency, and credit risks. There is an urgent need to de-risk projects and realize the value of environmental benefits to improve commercial viability.

Emerging Market (EM) Fixed Income

Investors remain cautious about EM fixed income despite its potential for high gains. EM debt has evolved significantly over the last two decades, with substantial growth in both conventional and sustainable debt issuance.

Growth of EM Debt

• The EM debt universe has nearly tripled in size, expanding to $26 trillion from around $10 trillion.
• Sustainable debt issuance has grown to over $400 billion.
• Sustainable debt includes green, social, sustainable, and sustainability-linked bonds.

Underrepresentation in Global Bond Markets

Despite the rapid increase in EM’s share of global bond markets, they remain underrepresented in global bond indices and investors’ portfolios. The caution among investors is understandable given the risks involved.

Opportunities in Asian Hard Currency Fixed Income

The options in Asian hard currency fixed income are limited. Only very established state-owned enterprises or big corporations can issue US dollar bonds in emerging markets in Asia. These entities are familiar with the credit market and often have high credit ratings, making them attractive investment options.

Encouraging Other Institutions

AIIB hopes its ESG credit mandate will inspire other institutions to follow suit. According to Vivian Tang, Head of Institutional Business Asia Pacific at abrdn, collaboration aims to facilitate crowding in investors more efficiently.

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SDG Analysis of the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 7: Affordable and Clean Energy
• SDG 9: Industry, Innovation, and Infrastructure
• SDG 13: Climate Action
• SDG 17: Partnerships for the Goals

2. What specific targets under those SDGs can be identified based on the article’s content?

• SDG 7: Target 7.2 – By 2030, increase substantially the share of renewable energy in the global energy mix.
• SDG 9: Target 9.1 – Develop quality, reliable, sustainable, and resilient infrastructure, including regional and transborder infrastructure, to support economic development and human well-being.
• SDG 13: Target 13.2 – Integrate climate change measures into national policies, strategies, and planning.
• SDG 17: Target 17.3 – Mobilize additional financial resources for developing countries from multiple sources.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

• SDG 7: Indicator 7.2.1 – Renewable energy share in the total final energy consumption.
• SDG 9: Indicator 9.1.1 – Proportion of the rural population who live within 2 km of an all-season road.
• SDG 13: Indicator 13.2.1 – Number of countries that have communicated the establishment or operationalization of an integrated policy/strategy/plan which increases their ability to adapt to the adverse impacts of climate change.
• SDG 17: Indicator 17.3.1 – Foreign direct investments (FDI), official development assistance and South-South Cooperation as a proportion of total domestic budget.

4. Table of Findings from Analyzing the Article

Copyright: Dive into this article, curated with care by SDG Investors Inc. Our advanced AI technology searches through vast amounts of data to spotlight how we are all moving forward with the Sustainable Development Goals. While we own the rights to this content, we invite you to share it to help spread knowledge and spark action on the SDGs.

Fuente: asianinvestor.net

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