Delivering financial outperformance while achieving ESG objectives: Introducing the Manulife Sustainable Asia Bond Fundi By Manulife Investment Management (Singapore) 6 April 2021
Sustainability is emerging as an important economic driver of investment performance, finding favour among global and Asian investors alike.
Asia is finding a new momentum around Environmental, Social, and Governance factors (ESG), and recent trends show optimism among investors in the space. With numerous Asian countries already committed to becoming carbon neutralii, and other governments likely to follow suit, we expect to see an increase in ESG-related fixed income products. Indeed, the number of green bonds coming to the global market grew by 13% in 2020 compared to 2019, meanwhile social bonds increased more than 8 times to respond to the pandemic, and the worldwide trend is supportive of further growth in the green and sustainable-labelled bond segmentiii.
Although a relatively new concept in Asia, ESG has been integrated into Manulife Investment Management’s investment processes (including fixed income) for over a decade. While many global investors tend to focus on the “G” component of ESG, and some focus on the “E”, we consider each to be equally important for achieving sustainable outcomes. Either way, we think it’s important to consider a more holistic approach to ESG issues, particularly for fixed income.
This article will explore why investors should pay attention to the growing interest in ESG fixed-income products and their social benefits and understand the potential financial benefits that can accrue over different periods.
Sustainable fixed income investing does not compromise financial returns
From an investor’s perspective, we believe there’s a growing recognition within Asia of the benefits to be gained from investing in sustainable fixed-income products.
One of the key questions that Asian sustainable-bond investors ask is: will these ESG objectives compromise returns? Even from a strictly financial return perspective, many research and academic studies support that ESG analysis adds to portfolios. For example, a recent paper examined over 1,000 studies written between 2015 and 2020 and found that only 14% showed negative financial resultsiv. This is supported by evidence in our market that suggests sustainable investing does not compromise returns (see Chart 1v). We also say that another reason to favour opportunities in this space is their ability to generate genuinely holistic returns beyond just traditional financial metrics.
Outperforming a benchmark is now more multi-faceted than simply looking at the differences in returns. It also includes an analysis of ESG factors, such as carbon intensity (E), the ability to provide ageing population support (S) or more robust governance structures (G). If a particular sustainable portfolio matches the benchmark, but does so with significantly fewer carbon emissions, this could support climate objectives.
For instance, the cumulative risk-adjusted return for the J.P. Morgan ESG Asia Credit Index (JESG JACI) from December 2012 to November 2020 is on par with the JACI (left chart). But from a carbon intensity standpoint, JACI’s corporate bond constituents emit roughly 411 tons of carbon dioxide (CO2) for every US$1 million of revenues generated. In contrast, constituents of the JESG JACI emit only 171 tons of CO2 per US$1 million of revenues.
Chart 1: Asian bond indices and portfolio with contrasting ESG footprintsvi This reinforces our belief that sustainable investing can enhance future returns, and the performance of ESG-related issues will likely resonate with investors concerned about sustainability.
Introducing the Manulife Sustainable Asia Bond Fundi
Manulife Investment Management launched its Sustainable Asia Bond Fund (SABF) in August 2020. We believe that the SABF boasts several critical advantages for investors interested in sustainable investing. These include our stated commitment to ESG bond exposure and ESG-related investment themes. Since its inception, the Fund has outperformed the benchmark by 73 basis points the portfolio’s overall security selection was the main contributor to relative returnsvii.
Our commitment to ESG bonds
We are committed to a “true-to-label” ESG fixed-income fund. We show this in two ways.
First, the SABF is benchmarked to the JESG JACI, which tracks Asian issuers with strong ESG practices. We utilize normative and positive screens as tools in our process. Ultimately we are focused on achieving positive ESG outcomes.
Second, we have voluntarily established a minimum threshold, whereby 15% of the SABF’s invested capital must be in ESG-related bonds. We also review all ESG and green bonds to ensure that they are true to the label. This commitment is essential, as investors need to be careful of ESG-related funds that potentially invest in corporate or sovereign bonds that overpromise (known as “greenwashing”) to boost yield or fund performance.
Chart 2 below shows that, since inception, the SABF has significantly exceeded our own minimum threshold and the holdings of the fund’s benchmark for ESG-related bond exposure.
Chart 2: Manulife Investment Management SABF’s ESG Bond Exposure Since Inceptionviii Our thematic approach to ESG investment
Manulife Investment Management’s SABF is built on three main investment themes: climate change mitigation, ageing population support, and superior corporate governance promotion. We see significant opportunities for companies and governments that seek to address issues related to these themes.
Theme 1 - Climate change mitigation:
The opportunity: Climate change has risen in importance for governments and corporations around the globe. The opportunity is particularly large in Asia, which is responsible for roughly 50% of global carbon emissions,ix and likely most of the world’s energy demand as it continues to grow. Meanwhile China, Japan, South Korea, and Hong Kong have committed to mid-century carbon neutrality. In response, many Asian markets have increased regulatory pressure on sectors and companies that are heavy polluters and emitters.
Our approach: We believe that companies with better ESG performance will ultimately face less regulatory pressure. They will also have better commercial prospects, as new products and services that facilitate the change to a cleaner, low-carbon economy may unlock business opportunities. In contrast, we do not invest in sectors that are likely to face punitive regulation (e.g., thermal coal mining). We also talk to high-emitting companies so we can understand how they plan to reduce their carbon and pollution footprints.
Theme 2 - Aging population support:
The opportunity: Many countries are facing the challenge of rapidly ageing populations. Asia is arguably at the forefront of this profound social change, with Japan having the world’s oldest population- Korea, Taiwan, and Singapore are set to experience rapidly ageing populations over the next few decades. This challenge, however, also offers opportunities for governments and companies to provide innovative products and services for the elderly to improve their health outcomes and overall quality of life.
Our approach: We believe that exposure to social trends, such as demographic factors and changing consumer behaviour, can be problematic for companies to manage. However, we look carefully at how companies understand these social challenges and align their current business model to adjust for expected developments over the medium and long term. From an allocation perspective, we expect to maintain an overweight exposure to dedicated “social” bonds that provide critical financing for these issues. We tend to avoid businesses that may harm health and savings and exclude sectors related to gaming.
Theme 3 - Superior corporate governance promotion:
The opportunity: Although gradually improving, corporate governance standards in many Asian markets remain lower than those in other economiesx. A patchwork of different legal requirements, coupled with lower transparency and disclosure quality, pose challenges to investors. That said, diverging corporate governance standards also provides an opportunity, particularly for seasoned credit analyst teams that utilise rigorous research and due diligence to identify well-governed companies.
Our approach: With our extensive on-the-ground presence in Asia and robust proprietary credit resources (see the next section), we are well-positioned to identify potential governance issues long before they become public. We focus on best-in-class companies with transparent, high-quality governance structures and those firms that boast higher levels of gender diversity and independence. In contrast, we assiduously search for “red flags” in corporate governance that might indicate deeper problems, such as frequent related-party transactions, opaque business models, and weak governance structures.
Manulife Investment Management’s competitive advantage in ESG
We boast several advantages with the unique way we invest in sustainable bonds. Our long history in Asia, coupled with extensive on-the-ground resources and robust proprietary credit research methods, form the foundation of our approach. In addition, a steadfast commitment to implementing ESG practices globally has resulted in our participation in major global and regional organisations and the receipt of ESG-related awards.
i. Strong Asian footprint and extensive proprietary research network with award-winning investment managers
Manulife Investment Management is a leading global financial institution that has had a presence in Asia for over 100 years. Our Asian fixed income team boasts over 80 dedicated professionals who manage more than $65 billion in Asian fixed income assetsxi. They are strategically based across 11 markets in the region.
Our strong Asian footprint serves as a vital competitive advantage. Our extensive on-the-ground network can collect information and provide unique insights that allow us to make quicker, more well-informed decisions.
ii. The pan-Asian bond team, the same investment management team as the ASBF and the Manulife SGD Income Fund, has won numerous awards including the Asian Bonds (10 years) category at the Asia Asset Management “Best of the Best Awards 2021”; “Best-in-Class” and “Outstanding Achiever” in the Asian fixed income category (Hong Kong,Taiwan and Singapore) at the “Benchmark Fund of the Year Awards 2020”xii Manulife Investment Management’s steadfast commitment to ESG
Manulife Investment Management’s steadfast commitment to ESG practices in fixed income has received numerous awards and allows us to participate in well-known global and regional ESG organisations and initiatives.
Manulife Investment Management’s ongoing commitment has resulted in developing the people, the technology, the data, and the culture to support a robust sustainable investing program.
Conclusion
Some investors think that while ESG investing may be good for society, it may not be good for their pocketbook. We believe this understanding is incomplete. We think that committed ESG investing, such as Manulife Investment Management’s SABF, can not only ameliorate complex problems such as climate change, aging, and weak corporate governance, but also serve as a key pillar for investors’ short- and long-term financial goals.
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Sources i The full name of the Fund is Manulife Global Fund-Sustainable Asia Bond Fund ii “Asian giant’s carbon pledges boost global climate action, says UN climate chief”, The Straits Times, 4 November 2020. By 2050, “Singapore wants to halve the amount of emissions it produces from its 2030 peak, with the aim of achieving net-zero emissions "as soon as viable in the second half of the century", 29 February 2020, The Straits Times. iii1H 2021 Sustainable Finance Market Outlook, 21 January 2021, Bloomberg NEF ivWhlan, T. Atz, U. Van Holt, T. Clark, C. (2021) ESG and Financial Performance: Uncovering the Relationship by Aggregating Evidence from 1,000 plus studies published between 2015-2020. Rockefeller Asset Management and NYU Stern vBloomberg, 30 November 2020. Figures shown are in gross USD terms. Past performance is not indicative of future results. Investment involves risk. The J.P. Morgan ESG Asia Credit Index (JESG JACI) tracks the total return performance of the Asia ex-Japan USD-denominated debt instruments across the Asian Fixed Income asset class, including floating, perpetual, and subordinated bonds issued by Sovereign, Quasi-Sovereign and Corporate entities. The index applies an Environmental, Social and Governance (ESG) scoring and screening methodology to tilt toward green bond issues or issuers ranked higher on ESG criteria, and to underweight or remove issuers that rank lower. *Carbon intensity data sourced via Trucost ESG Analysis. Carbon intensity refers to Scope 1 & 2 Tons CO2 equivalent emissions per million USD revenues. viSource: Bloomberg, Manulife Investment Management, as of 28 February 2021. viiSource: Manulife Investment Management, as of 28 February 2021. Class AA (USD) MDIST (G), NAV to NAV basis. Since inception on 6 August 2020, the class returned -4.20 on offer-to-bid basis. The Offer to Bid performance includes the effect of an assumed 5% front end load, which the investor might or might not pay. viiiSource: Manulife Investment Management, as of 28 February 2021. ixBP Statistical Review of World Energy 2019. xFinancial Times, Governance remains a risk for Asia-Pacific investors, April 2018. xiAs of February 2021, includes assets of our joint venture in China- Manulife-TEDA. xiiManulife Investment Management, as of March 2021. AAM Awards: Asian Bonds (10 years) category ---- The Asia Asset Management Best of the Best Awards is issued by Asia Asset Management, reflecting performance of each fund ending September 30, 2020. (Source) Benchmark --- Benchmark Fund of the Year Awards 2021 is organized by WealthAsia Media, the results are based on the performance data of each fund between October 1, 2019 and September 30, 2020. (Source) Manulife Investment Managements' Disclaimer Manulife Global Fund (the “Company”) is an open-ended investment company registered in the Grand Duchy of Luxembourg. The Manulife Global Fund - Sustainable Asia Bond Fund (“the Fund”) is recognised under the Securities and Futures Act of Singapore for retail distribution. The Company has appointed Manulife Investment Management (Singapore) Pte. Ltd. as its Singapore Representative and agent for service of process in Singapore.
The information provided herein does not constitute financial advice, an offer or recommendation with respect to the Fund. The information and views expressed herein are those of Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) and its affiliates (“Manulife”) as of date of this document and are subject to change based on market and other conditions. Manulife expressly disclaims any responsibility for the accuracy and completeness of, and the requirement to update, such information.
Investments in the Fund are not deposits in, guaranteed or insured by Manulife and involve risks. The value of units in the Fund and any income accruing to it may fall or rise. Past performance of the Fund is not necessarily indicative of future performance. Opinions, forecasts and estimates on the economy, financial markets or economic trends of the markets mentioned herein are not necessarily indicative of the future or likely performance of the Fund. The Fund may use financial derivative instruments for the purposes of investment, hedging or efficient portfolio management. Investors should read the Singapore prospectus and the product highlights sheet and seek financial advice before deciding whether to purchase units in the Fund. A copy of the Singapore prospectus and the product highlights sheet can be obtained from Manulife or its distributors. In the event an investor chooses not to seek advice from a financial adviser, he should consider whether the Fund is suitable for him.
Distributions are not guaranteed. Investors should refer to the Singapore prospectus for the distribution policy of the Fund. The Directors of the Company shall have the absolute discretion to determine whether a distribution is to be made in respect of the Fund as well as the rate and frequency of distributions to be made. Distributions may be made out of (a) income, or (b) net capital gains, or (c) capital of the Fund, or (d) gross income while charging all or part of the fees and expenses to capital, or (e) any combination of (a), (b),(c) and/or (d). Past distribution yields and payments are not necessarily indicative of future distribution yields and payments. Any payment of distributions by the Fund is expected to result in an immediate decrease in the net asset value per share of the Fund.
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