AIIB’s ESG credit mandate with abrdn to 'expand opportunities'
A sustainabiilty-focused debt investment mandate from Asian Infrastructure Investment Bank (AIIB) to asset manager abrdn has proven successful and lays the ground for similar mandates in the future, a senior executive at the bank said.
“With our debt focus, and this ESG concept mandate, I believe we are expanding our business while also showing the world how it can be done,” said Lee Dong-ik, director general, investment operations at Beijing-headquartered AIIB.
“Fixed income is an integral asset class for us and with abrdn, we’ve created a very interesting product offering. It has won recognition internally as well as with external stakeholders,” Lee told AsianInvestor.
The multilateral development bank appointed abrdn to manage a $500 million bond portfolio with an agreed-upon investment policy in 2018.
POTENTIAL FOR MORE
The AIIB Asia ESG enhanced credit managed portfolio aims to promote the development of Asia’s debt capital market with a specific focus on infrastructure-related bonds.
The ESG portfolio focuses on bonds issued by corporate (including quasi-sovereign) issuers operating in infrastructure-related sectors, as well as labelled bonds where proceeds are directed toward sustainable infrastructure and other sector projects.
“I think this mandate with abrdn could evolve into an interesting platform and the structure can be duplicated with other thematic priorities,” said Lee, noting that as a sustainable bank, ESG considerations come naturally to AIIB.
A large proportion of the portfolio is invested in infrastructure-related issuers, Adam McCabe, head of APAC fixed income at abrdn, told AsianInvestor.
Every security in the portfolio had undergone two key tests, McCabe noted.
“One is the standard credit and financial analysis and the other is ESG assessment, through which we exclude issuers that are laggards, such as those exposed to controversial activities.”
About 78% of portfolio is currently invested in primary issuance. A key reason for that is one of the portfolio’s objectives was to sponsor capital market development in emerging Asia, especially in fixed income.
About 59% of the portfolio is currently invested in labelled bonds. “At inception [of the mandate] that share was only 19%,” McCabe added.
“That demonstrates the journey the markets are undergoing in terms of initiatives. Finally, since the focus is primarily Asia, we have invested in issuers from AIIB member countries.”
IMPROVING ESG METRICS
The portfolio has evolved over time, with ESG scores and ratings for the portfolio improving between 20% and 30% since inception.
“One big reason is companies are improving their activities. A lot of companies have been working with us and other managers and other market participants to improve their disclosures,” said McCabe.
abrdn
There has been an overall improvement in the ESG ecosystem, according to abrdn and AIIB.
ESG scores are assessed via a mix of external data providers and an external benchmark.
“We also have an internal house score that we developed by looking at several key factors that drive our ESG assessment,” abrdn’s McCabe said.
“We are forward looking and consider how these ESG factors might evolve for these issuers and also on future opportunities in the marketplace.”
This evolutionary process also offers investors the opportunity to benefit from a positive transition when companies embark on their sustainability journey.
AIIB’s Lee, meanwhile, said the development bank looks at ESG via several lenses, including gender, climate, green bonds, and other important issues.
“We are keen on tapping other areas with this [ESG] concept,” he said.
OPPORTUNITIES GROWING
Lee noted that when picking external managers, AIIB looks at several ESG guidelines including its internal requirements as well as global protocols such as the Paris Agreement.
The 2015 Paris Agreement is a global treaty that aims to keep global warming below 2 degrees Celsius above pre-industrial levels and pursue efforts to limit it to 1.5 degrees Celsius above pre-industrial levels.
“We are careful to ensure these mandates are in line with our internal policies and guidelines,” he added.
Apart from ESG-friendly credit, decarbonisation is expected to create a lot of opportunities for sustainability-minded investors.
“There is significant demand within the region for sustainable infrastructure, particularly in renewables. Financing that [infrastructure] will be a key consideration,” added abrdn’s McCabe.
There is a role for both private and public capital, according to both Lee and McCabe.
“The gap is so large at this point that the key question is how to mobilise private capital to fund infrastructure. That exposes a role for public institutions to crowd in investors via blended finance opportunities,” said McCabe.
“Investors like us have a catalytic role to play to bring in more capital,” added AIIB’s Lee.