On the other hand, merely screening out bonds in the most obviously problematic industries creates an investable universe that’s too large to be meaningful for investors who truly want to build a more sustainable future. Rejecting companies that produce weapons, alcohol and tobacco products, gambling establishments and services, and pornography leaves companies that cover a very wide spectrum of behavior.
The Myth of the Perfect Investment
If building a sustainable bond portfolio sounds tidy and straightforward, it isn’t. The auto industry illustrates the difficulty of finding perfectly sustainable private sector investments. But it also underscores the imperative of investing in issuers that are trying to make progress toward sustainability.
General Motors, Volkswagen and Ford Motor have all made significant commitments to building out their electric vehicle lines in the past several years. Electric vehicles are responsible for between 10% and 24% less greenhouse gas emissions than gasoline-powered cars over a 100,000-mile lifetime. That percentage could rise as renewable power continues to grab market share from coal-fired electrical utilities, thereby also playing a greater role in fueling electric cars.
Yet, General Motors and Ford Motor also rely heavily on sales of relatively fuel-inefficient trucks and SUVs. 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. We believe fixed-income funding—a major source of funding for the auto industry and a more stable funding source than equity—is crucial to enabling this transition.
So why not just invest in Tesla Motors, which makes only electric vehicles? Here’s where nuance and fundamental research come into play. Tesla’s products are great for the environment, but the company has struggled with its manufacturing process and confronted some well-publicized governance issues of late. The company itself presents some ESG risks that many long-term investors would want to think carefully about, even though the company’s products certainly further the SDGs.
Holding Issuers Accountable
For most companies, sustainability is a work in progress. That progress is often uneven, and companies that are making great strides in one area can stumble into serious scandals in other parts of their operations.
That’s why sustainable investing does not stop with the initial investment decision. Asset managers must engage frequently with management about ESG issues to ensure that leadership teams do what they promise in developing products, services and practices that support the SDGs.
In engaging with companies, it’s helpful for asset managers to be able to rely not only on a lone fixed-income product, but on multiple partners. These can include industry organizations that engage and advocate for changes, as well as in-house resources, such as a responsible-investing platform that spans asset classes. A sustainable bond fund manager who can walk into a management meeting with a partner running a sustainable equities portfolio has more leverage than either manager on his or her own. (And if those managers share information and perspectives frequently outside meetings, so much the better for investors.) Asking companies to participate in building a greener, more just world isn’t an easy ask—the more voices that demand that world, the faster change can occur.
1 Bill Schlesinger, “Life-Time Side-by-Side Comparison: Electric vs. Gasoline Automobiles” (June 25, 2018). https://blogs.nicholas.duke.edu/citizenscientist/life-time-side-by-side-comparison-electric-vs-gasoline-automobiles/ The figure includes emissions during both the manufacturing process and the owner’s operation of the car.
