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Why ESG Matters to Bond Investors

Christian Stracke, Global Head of Credit Research, explains how and why PIMCO analyses Environmental, Social and Governance (ESG) factors in our investment process.

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Christian Stracke, Global Head of Credit Research: Over the years there have been enough examples of where ESG has made all the difference in the world to bond investing.

Shots of an oil spill on the ocean and people cleaning up oil on a beach.

Probably the best example and the one that focused the mind the most was the Macondo incident in the Gulf of Mexico, where that was such an environmental disaster.

The company that was responsible for that had a long-term track record of workplace safety incidents. And so understanding that track record really did help to inform how that company was taking risks that could become catastrophic in nature.

And it's only natural that a good credit analyst would look at all of the risks that a company is taking, and understand if there is an environmental risk to what the company's doing, if the company is actively overly-aggressive on the social front.

Then governance in particular, whether there's good or bad governance, whether there's full or weak transparency. Those are the kinds of things that naturally any good credit analyst would look at.

Text on screen: Robust credit research includes analysis of ESG risks

  • Environmental impact
  • Climate change planning
  • Supply chain practices
  • Business conduct
  • Governance structures
  • Reporting transparency

In more recent years we've made it more of a formal and explicit approach.

Shots of PIMCO employees working.

An actual extra part of our research notes is dedicated to ESG, to really concentrate and focus the analysts to make sure that they are explicitly thinking about these risks and then expressing and summarizing those risks for portfolio managers so they can understand that themselves.

Shots of PIMCO employees working.

And as that has evolved over time we've hired a number of credit analysts dedicated to ESG

Text on screen: PIMCO has hired dedicated ESG credit analysts and engagement specialists

Shots of an oil rig and workers working on it.

and also, importantly, to then do outreach and engagement with companies, to say to companies, "These are the things that we're looking for. These are the changes we want to see you make to make us more confident in lending to you."

We have rolled out a scoring system of companies by their ESG risks, so that not only do we have a PIMCO internal credit rating, but we also have an ESG score, so that PMs can understand, portfolio managers can understand not just what is the risk that this company pays me back or not, but also in what way is the company taking ESG risks, and how does that inform the investment decision.

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