How AIIB’s new mandate aims to boost ESG infra credit
Asian Infrastructure Investment Bank (AIIB) intends to use its new $500 million infrastructure fixed income mandate to encourage long-term fixed income capabilities in the region, while also encouraging environmental, social and governance (ESG) considerations.
On Friday (July 12), the three-year old multilateral bank announced that it had settled on Aberdeen Standard Investments (ASI) to manage the mandate following a careful due diligence process, according to Dong Ik Lee, director general of AIIB.
In an interview with AsianInvestor, Lee said that ASI will take a buy-and-hold approach towards bonds issued by infrastructure corporates and state-owned enterprises in emerging Asia for the five-year duration of the dollar-denominated mandate.
“We will try to lock in as a buy-and-hold and not to be exposed to the interest rate risks,” said Lee, who is a former corporate adviser for Singapore state fund Temasek.
This long-term investment strategy fits with the official purpose of the investment mandate, which ASI said was to “develop debt capital markets for infrastructure, drive responsible investing in fixed income and build a sustainable ESG ecosystem in emerging markets in Asia” in its announcement last week.
Earlier this year, the multilateral bank highlighted the bottlenecks in infrastructure financing in its inaugural Asian Infrastructure Finance 2019 report. It has pledged to invest $4 billion during 2019 to accelerate funding for the asset class.
SEEKING GOOD RETURNS
While AIIB is seeking to encourage more infrastructure market development, it aims to make a good return from doing so. Lee noted the bank was targeting several hundred basis points over equivalent US Treasuries, and that the bottom-up method Aberdeen Standard will use should allow the fund house to identify appealing bond valuations among established companies in Asia.
The most obvious candidate countries for investment are China and India, both of which have seen large-scale infrastructure investment and subsequent fund-raising via dollar-denominated bond issues. Lee said the mandate could end up tilting towards these two countries, but noted the new mandate is not intended to be overly concentrated in a single country.
“We don't want to be too exposed to a single country, so we work with them [ASI] and provide them some personalised allocation benchmark [where] we put some country-exposure needs.” Lee said.
AIIB appears particularly keen to help cultivate a deeper fixed income market in India. It has dubbed the country as its “priority market”, and has been largely optimistic about the growth of locally issued infrastructure investment trusts.
A new budget from Prime Minister Narendra Modi’s government has also been touted as an effort to increase infrastructure spending, according to US television channel CNBC.
ESG ADDITIONS
The combination of ESG, fixed income and infrastructure would appear to heavily limit the investing universe available to AIIB.
However, Lee stressed that the mandate will be comprised primarily of infrastructure related bonds, including both green and unlabelled issuances, while ASI incorporates ESG factors in the investment process and portfolio management. This includes integrating a complex set of metrics into the mandate, he added.
Paul Lukaszewski, head of corporate debt of Asia and Australia for ASI, told AsianInvestor the AIIB ESG-enhanced credit portfolio “features a robust ESG framework which covers both pre-investment and post-investment time periods”.
“Pre-investment will begin with exclusion criteria that is both top-down (product based) as well as bottom-up (internal and third-party scoring),” he said, while the post-investment phase involves engaging with the issuers - some will be prioritised if they show deteriorating signs of ESG risks.
Following the mandate, AIIB and ASI will launch the Sustainable Capital Markets Initiative, which aims to improve ESG standards and disclosure, while strengthening responsible investing capacity in emerging Asia.
CATALYSE INFRASTRUCTURE INVESTMENTS
The overall aim of the mandate is part of AIIB’s broader plan to shore up more support for region’s infrastructure investment requirements. These stand at $1.7 trillion a year, according to an estimate from the Asian Development Bank, yet there has been a big lag in capital inflows to help meet this need.
Lee said AIIB is trying to take up the role to mobilise investments and structure the market for “long term and like-minded investors to channel capital in the Asian infrastructure space”.
In addition to awarding the mandate to ASI, the bank priced its debut global bond in May this year. It ended up issuing $2.5 billion in bonds after attracting over $4.4 billion in orders from over 90 investors worldwide. The five-year bonds offer a 2.25% coupon. The funding from the bonds will be used to invest in sustainable infrastructure, develop cross-border connectivity and promote ESG investments in emerging Asia.
On the private-market side, AIIB has approved financing on July 12 for the Asia Investment Fund – a private equity vehicle with a target size of $3 billion – to invest in infrastructure companies and sectors such as telecommunication, transportation and energy. AIIB alone has committed $75 million to the fund.