Sustainable investing has caught the eyes of investors around the globe with both the demand and issuance of ESG bonds rising across the board. US-based investment management firm PIMCO believes that ESG bonds in emerging market local currencies can offer investors attractive real yields in the context of sustainability.
“While the market for ESG-labelled bonds in EM local currencies is still in the early stages of its development, we believe the secular growth of EM local markets and rising supranational issuance will create attractive opportunities for investors to participate in the development of this nascent asset class,” writes Pramol Dhawan, Head of Emerging Markets Portfolio Management at PIMCO.
PIMCO’s analysis shows that ESG is key to determining sovereign credit risk in EMs. The investment management firm suggests evaluating ESG along with macroeconomic factors to assess the risk involved in sustainable investing in EMs.
For emerging markets, ESG bonds can be a boon as they are the worst affected by climate change. Sustainable investing can provide the much-needed funds for EMs to meet the UN Sustainable Development Goals.
PIMCO says that emerging economies have been building a strong ecosystem for ESG by setting up frameworks and taxonomies for ESG bonds. “ESG-labelled bonds may be a natural vehicle for ensuring that the capital required to address EM’s most pressing ESG issues is allocated appropriately,” says Dhawan.
Within emerging markets, ESG bond issuance was via US dollars or British pounds, but local currency issuances are on the rise. Compared to 2015, local currency issuance has made up 55% of the total EM ESG bond issuance. Another interesting factor that PIMCO’s analysts note is the rising diversification of local currency ESG bond issuance across EMs, compared to a concentration in Asia previously.
“An allocation to emerging market local bonds may make sense for a wide range of investors given the potential for compelling valuations of EM currencies and attractive real yields versus developed markets,” writes Lupin Rahman, Head of EM Sovereign Credit at PIMCO. “Given the ongoing development of the ESG-labelled EM local bond market, investors have another tool to access the sector in a sustainability-conscious way.”
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