Amid an evolving global economy, many investors are interested in incorporating sustainability goals along with traditional portfolio objectives, such as income. PIMCO has developed a specialized platform that supports ESG (environmental, social, governance) investment solutions that aim to deliver on investors’ financial goals. One of these solutions is the PIMCO ESG Income Strategy. In this Q&A, two of the strategy’s portfolio managers – Josh Anderson, whose primary focus is income and related strategies, and Jelle Brons, whose primary focus is ESG-related credit sectors – along with Gordon Harding, a strategist on the multi-sector bond team, discuss the strategy’s investment approach and potential role in a broader portfolio.
Q: What is the PIMCO ESG Income Strategy?
Harding: The PIMCO ESG Income Strategy is a benchmark-agnostic portfolio with flexibility to invest across global fixed income markets, while focusing on ESG investment considerations and delivering attractive, stable income distribution. The strategy invests in income-focused securities with strong ESG credentials based on PIMCO’s proprietary research, and seeks to limit industries and issuers misaligned with responsible investing.
With the goals of investing in assets more focused on sustainability, delivering consistent income, and building a resilient portfolio that can weather volatility, this flexible strategy utilizes a diversified and opportunistic approach, with access to multiple sources of potential return.
Q: How does the ESG Income Strategy embed its sustainable investing approach?
Brons: The ESG Income Strategy leverages PIMCO’s established and disciplined ESG investing approach, honed over the 30 years since PIMCO began managing socially responsible portfolios. PIMCO’s ESG team is fully integrated into PIMCO’s broad research process, and material sustainability-focused factors have been incorporated in our top-down and bottom-up investment process for many years: These factors are important considerations when evaluating long-term investment opportunities and risks, and ESG considerations vary across asset classes. ESG integration does not mean putting ESG objectives ahead of financial ones.
PIMCO’s ESG approach includes three elements: We exclude investments fundamentally misaligned with sustainable principles, we evaluate investments from an ESG perspective, and we engage with issuers to help them improve ESG-related business practices.
From a bottom-up perspective, PIMCO has developed robust ESG research frameworks that span corporate, sovereign, securitized, and municipal sectors, in addition to a unique green bond scoring system to evaluate the attributes of each green bond issuance. Our proprietary ESG scoring model offers enhanced insights that help portfolio managers make investment decisions, and ensures we have a thoughtful and independent view on securities from an ESG lens. PIMCO’s investment process is also informed by our rigorously researched top-down views on broad macro trends and transformations, including ESG-related themes such as climate change and inequality.
Proactive and collaborative engagement with fixed income issuers is also a key component of PIMCO’s ESG investment process. As a global leader in fixed income investing, PIMCO is able to leverage its scale and relationships with senior management in an effort to drive positive change, improve potential returns, and reduce risks for our clients. PIMCO credit research analysts engage regularly with the companies they cover; their discussions include ESG-related topics such as climate change targets and environmental plans, human capital management, and board qualifications and composition.
Q: What sectors are the focus of the ESG Income portfolio?
Anderson: The ESG Income Strategy utilizes a flexible approach across the global bond market and seeks to remain diversified across sectors. The strategy balances exposure to higher-quality assets, such as U.S. Treasuries and agency mortgage-backed securities (MBS), with higher-yielding sectors, such as securitized credit, corporate credit, and emerging markets. We can take a multi-sector approach while also focusing on sustainability because we analyze each sector from an ESG perspective.
Within securitized asset markets, for example, we can encourage home ownership through investing in residential mortgage-backed securities (RMBS) that finance first-time buyers rather than investment properties, and at the same time focus on loan-to-value (LTV) rates and mortgage rates that promote responsible lending. Similarly, within the commercial mortgage-backed securities (CMBS) market, we can target deals backed by environmentally friendly buildings (e.g., LEED certification). Within corporate credit, we may invest in up-and-coming, higher-yielding green energy companies, for example, and in financials that serve underbanked populations. In emerging markets, we may invest in sovereigns with sustainable social and governance practices.
Q: How do the ESG Income and Income strategies differ?
Anderson: The ESG Income Strategy seeks to leverage PIMCO’s time-tested “bend-but-don’t-break” approach to targeting consistent income. However, the goal is not to mimic the Income Strategy with an ESG screen. The ESG Income Strategy is built from the ground up, and will seek to emphasize securities with strong ESG credentials as well as attractive income potential across the portfolio. Importantly, over time the strategy is likely to have a lower carbon footprint; an allocation to green, social, and sustainability-linked bonds; and a focus on issuer engagement. While there may be some similarities in the Income Strategy’s sector exposures and macro risk factors – a natural outcome of being informed by PIMCO’s top-down, bottom-up investment process – there is no intention to mirror these key factors across the two portfolios.
Q: What strengths does PIMCO offer when managing an income-focused solution with an emphasis on sustainability?
Brons: The ESG Income Strategy combines two areas of expertise at PIMCO – ESG and income investing – in a solution for investors looking for a sustainable, multi-sector, flexible bond portfolio with an income orientation. The strategy benefits from PIMCO’s 50-year history of innovative bond investing, its influence within the industry, and a seasoned product line, including the largest active multi-sector fixed income strategy.Footnote[i]
As an industry leader, PIMCO takes an active role in shaping the conversation of ESG integration in fixed income. One example is our collaboration with the United Nations, which asked PIMCO to use its bond market expertise and influence with CFOs around the globe to help design and participate in investment awareness activities that help finance the UN’s Sustainable Development Goals (SDGs).
Q: What role could PIMCO’s ESG Income Strategy play in an investor’s broader portfolio in today’s market?
Harding: We believe the ESG Income Strategy could be an attractive solution for investors seeking a benchmark-agnostic and flexible approach to generating attractive income within an ESG framework. The strategy aims to deliver a consistent income stream in a responsible way, without taking excessive risk and emphasizing impactful partnerships with sustainable bond issuers.
The ESG Income Strategy will continue to focus on liquidity and quality, holding securities that fit with our bend-but-don’t-break philosophy. The strategy’s broad guideline flexibility allows the portfolio to access multiple sources of return and target opportunities as economic and market conditions change.
Learn more about PIMCO’s approach to ESG investing.