A HILL Generally there is good intent but the language, measurement, metrics and expectations are changing very, very rapidly and can sometimes be challenging. There have been a couple of headline cases that have heightened awareness.

The issue is that there is no clearly set definition across, or even within, asset classes so measurement is happening on different bases. We think about ESG [environmental, social and governance] issues on an earnings before interest and tax basis so we include debt, but a lot of equity managers don’t. Trying to ensure consistent measurement across managers and to achieve consistent definitions can be challenging.

Even though the intent is there, to me this is all about risk and whether it is being priced appropriately. Undoubtedly there are also opportunities in certain areas. The bar is being lifted on a regular basis and this is a very good thing.

WARD We bought our first labelled bond back in 2014. The risk that we would buy a deal that was greenwashed and so would risk our clients’ money has kept us awake at night, so we put a labelled bond investment standard in place that outlines minimum structural requirements when we are looking at a deal.

These are common sense steps for the kind of structures we should be looking for and the frameworks a bond should be aligned with. This has guided us well and kept us in good stead.

A HILL Labelled products serve a purpose but institutional investors need to go beyond this to ensure ESG is part of every assessment in every asset class. It is a risk that needs to be considered – if it is not, investors are likely not pricing the opportunity appropriately.

An enormous amount of capital is pledged to net zero globally, so getting data and understanding how investors are incorporating ESG – whether or not a bond is labelled – is becoming a heightened expectation.

WARD We won’t move away from the requirement to have ICMA [International Capital Market Association] Principles or CBI [Climate Bonds Initiative] alignment. This is because, at the end of the day, we are financial experts who understand financial structures, not engineering or environmental experts.

However, we have recently removed the requirement to have a second-party opinion – although it is still a preference. We have done this because it is within our skillset to have our own opinion on alignment and bond structures, and because we would prefer to see verified reporting on asset pools.

A HILL The natural-capital platform we have created focuses on the fact that land diversity, biodiversity and even reef diversity are incredibly important in ensuring a sustainable transition pathway. 

This is an emerging asset class and the team we have put together is exploring diverse opportunities. It has made two investments already, one of which is a cattle property with a very strong existing programme decarbonising the farm as well as potentially creating carbon credits.

The other is a sugar cane property where the ambitions are for sustainable farming and to provide opportunities to earn returns not only from the farmland but also from the generation of carbon credits.
Our focus is on the broader sustainable ecosystem in the sense that, for instance, reforesting areas also increases biodiversity. Many attributes are really appealing to investors because they are quite different in risk and return characteristics from more traditional asset classes.

WARD The creation of the TNFD [Task Force on Nature-Related Financial Disclosures] framework will increase the investor lens on natural capital risk in portfolios. From a bond investor perspective, it will start with screening.

Some screening looks at whether the companies we are investing in or financing via bond markets are operating in biodiversity-sensitive regions or in sectors or geographies of high water stress, for example.
At this stage we are screening to examine these risks. We ascertain which companies might be exposed and then undertake deeper analysis to understand the risks of capital needing to be redeployed, as well as potential spread or reputational risk. For the bond investor, it is very much risk-based at the moment.

TIERNAN It varies. Some companies pay lip service while others are thinking about it structurally and for the longer term. These latter companies know that the business operating environment in five, 10, 15 or 20 years will be fundamentally different from now, for all the reasons we have been discussing.

This is definitely a factor when we think about investing in companies for the longer term. On the credit side, we are much more biased toward understanding risks rather than opportunities.

WARD It also depends on the risk of the industry and what it might be exposed to. On the point about lip service, the risk with things like the TNFD framework is that companies will use it to talk about their ecological credentials when we still want these businesses to demonstrate they are thinking about where their key risks lie. For example, whether they need to be talking about their biodiversity impact when they are not physically exposed to it.