Climate Change Income Responsible Investing (ESG) Fixed Income Blog

Responsible Lending: The Myth of the Perfect Investment

Jun 09, 2022
3 min read
Within an emerging green fern frond are several even smaller and more perfect fronds.
| Chief Responsibility Officer

If building a sustainable bond portfolio sounds tidy and straightforward, it isn’t. The auto industry illustrates the difficulty of finding a perfectly sustainable private sector investment.

General Motors and Ford Motor have made significant commitments to building out their electric vehicle lines in recent years. Electric vehicles are responsible for about 65% less greenhouse gas emissions than gasoline-powered cars annually.1

That percentage could rise as renewable power continues to grab market share from coal-fired electric utilities, thereby playing a greater role in fueling electric cars. Yet General Motors and Ford Motor also currently rely heavily on sales of relatively fuel-inefficient trucks and SUVs.

Why not just invest in Tesla Motors, which makes only electric vehicles? Tesla’s products are great for the environment, but the company has struggled with its manufacturing process and confronted some well-publicized governance issues. The company itself presents some ESG risks that many long-term investors would want to think carefully about, even though Tesla’s products further some of the United Nations’ Sustainable Development Goals (SDGs).

In other words, no automaker is perfect from a sustainability perspective. Ultimately, we think it’s worth supporting traditional car companies’ transition to electric vehicles, even if they don’t overhaul their entire vehicle lineups overnight. In fact, we believe it’s imperative to invest in companies that are trying to make progress toward sustainability.

Engaging with Management Is Crucial

But that doesn’t mean bond issuers hold all the cards. Companies regularly need fresh injections of capital. And bonds are a major source of funding for the auto industry and a more stable funding source than equity, making it crucial to issuers on the road to sustainability.

By engaging with companies and bankers on ESG matters and bond structures, investors can be clear about the types of objectives and key performance indicator (KPI) targets they believe reflect best practices. Even if a company fails to set acceptable terms with a current bond issue, a continuing engagement program can secure better terms in future. And asset managers must engage frequently with management about ESG issues to ensure that leadership teams abide by their promises in developing products, services and practices that support the SDGs.

Fixed-income asset managers don’t need to stand alone in holding bond issuers accountable. It’s helpful to rely on multiple partners, including industry organizations that engage and advocate for changes, and in-house resources such as partners in equities portfolio management and responsible-investing experts who span asset classes.

Asking companies to participate in building a greener, more just world isn’t easy—but the more voices that demand change, the sooner a sustainable future will arrive. It’s up to investors to ensure that it arrives on time.

1The figure includes only emissions during the owner’s operation of the car. US Department of Energy, “Alternative Fuels Data Center: Emissions from Electric Vehicles,” Energy Efficiency & Renewable Energy (website) (May 20, 2022), https://afdc.energy.gov/vehicles/electric_emissions.html.

The views expressed herein do not constitute research, investment advice or trade recommendations, and do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

About the Authors

Erin Bigley is a Senior Vice President, AB’s Chief Responsibility Officer, and a member of the firm’s Operating Committee and Women’s Leadership Council. In this role, she oversees AB’s responsible investing strategy, including integrating material environmental, social and governance considerations throughout the firm’s research, engagement and investment processes. Bigley joined the firm in 1997 and previously served as a portfolio manager and trader for the global and Canadian bond strategies. She spent two years based in London as the global head of Fixed Income Business Development for institutional clients. Bigley served as a fixed-income senior investment strategist for over a decade, and as head of the strategist team from 2018 to 2021. Prior to taking her current role, she served as head of Fixed Income Responsible Investing, overseeing the Fixed Income team’s responsible investing strategy. Bigley holds a BS in civil engineering from Villanova University and an MBA from the Massachusetts Institute of Technology’s Sloan School of Management. She is a CFA charterholder. Location: New York