How bond indices can take the grunt work out of identifying greenwashing

For smaller asset owners with limited internal capacity, bond indices can serve as a good proxy for fixed income ESG screening.
How bond indices can take the grunt work out of identifying greenwashing

To ensure that bond investment - in particular impact-focused bond investment - is free from greenwashing, investors need to do a lot of homework. But following up on the use of proceeds requires bandwidth and the question for smaller Asian asset owners is whether they have the capacity to conduct such heavy due diligence throughout the whole investment cycle.  

Debt experts, however, say that utilising bond indices is a simple, and above all free, way of crunching the numbers. There's even the option of having an index tailor-made to ensure investments are in line with ESG objectives.

Angus Hui, head of Asian and emerging market credit with Schroders in Hong Kong, said each investor needs a way to measure the impact of a bond issuer’s sustainability efforts during their holding period, which can be quite long.

In practical terms, articulating and isolating the environmental and social impacts of an investment will require comparable data, he said.

Angus Hui, Schroders

In the latest Schroders Institutional Investor Study published in July, 64% of 750 global institutional investors surveyed believe engaging on environmental issues such as climate change or the use of fossil fuels are the most important stewardship topics, while over half of them found greenwashing, and the lack of transparency and data, the biggest challenges in sustainable investing.

“In Asia, disclosure requirements are still very different among countries. That remains a challenge to source, which is a message that is consistently heard through our global asset owner studies. This is more so for smaller asset owners who lack the internal capacity to perform due diligence,” Hui told AsianInvestor.  


“ESG activities don’t come without a cost. It costs a lot in expenses, personnel, and internal procedures,” one chief investment officer at an Asia-based public pension fund told AsianInvestor.

The fund currently relies on third-party authentication institutions to monitor the appropriateness of money used by issuers of their ESG bond investments.

Jang Dong-hun, Poba

“More active screening across all asset classes is the ultimate goal,” the CIO said, adding that with a staff of just dozens, the fund needs more resources to do ESG research internally.

Similarly, Korea’s $15.2 billion Public Officials Benefit Association (Poba) outsources most of its fixed income positions to external managers for indirect investments, which account for about 10% in the portfolio.

As far as ESG practice is concerned, it will first state its ESG standards and targets to external managers. Based on their feedback, Poba will weigh all the controllable and uncontrollable factors before deciding whether to proceed with the original investment plan. 

Even though ESG regulations and investment guidelines, both internally or those released by professional institutions, can be helpful, Poba’s CIO Jang Dong-hun noted that each investment has different characteristics and that it is hard to streamline them throughout the whole investment cycle.  

For example, one needs to monitor the carbon emission of a company regularly to make sure it has lived up to its reduction promises.

“But do they (external managers) have the exact capacity to examine and measure the emission quantity? How can they make sure there’s a reduction?” Jang told AsianInvestor.

Jose Garcia-Zarate, 

Noting that external managers might bring in other service providers to monitor the outcome, Jang said: “There are lots of layers to certify the ESG results. It is quite a complicated process, and it's really difficult to control and monitor.”



Typically, issuers of green or social bonds will be legally required to report (usually annually) on the use of proceeds and whether the projects are meeting their environmental or social impact goals, said London-based Jose Garcia-Zarate, associate director of passive strategies at Morningstar.

“This may call for stringent due diligence, and not all investors are in a position to do that,” Garcia-Zarate said. “Investors who do not have the capacity to carry out their own research, or the financial means to pay for third-party sources, could use ESG bond indices as something of a proxy,” he said.

Index providers may do the investigative work as a requirement for these bonds to become eligible, and subsequently remain in the index, he told AsianInvestor.

Carmen Nuzzo, PRI

“But it all comes with caveats. One should at least try to understand how the indices are constructed and what ESG analysis is carried out to select bond issuers as index constituents. This can be a bit of a minefield as ESG means different things to many investors. But at least it is, by and large, a free source of information,” Garcia-Zarate said.

Carmen Nuzzo, head of fixed income at Principles for Responsible Investment, said asset owners could choose to have tailor-made indices that accurately reflect their investment objectives.

“For example, if you want to have an index with one or two countries excluded, you could ask for it, as opposed to just buying the index and being forced to invest in whatever is included in the index,” Nuzzo told AsianInvestor.

PRI has over 4,000 signatories across the globe, with about 650 asset owners.

Thu Ha Chow, 
Loomis Sayles

“[Asset owners] should be very clear in their mandates about what they want to achieve [in ESG], which countries they want to invest in and for which reason, when they appoint asset managers,” she said.

Thu Ha Chow, a Singapore-based portfolio manager and senior credit strategist for the emerging markets debt team at Loomis Sayles, a Natixis affiliate, believes regulators can serve as facilitators in setting up goals and ground rules.

Rating agencies, meanwhile, which almost every asset owner buys a service from, could be the conduit to basic research.   

“But the hard work would probably ultimately have to get done by the bigger asset owners, because it requires a lot of expertise in many complex issues to make those goals a reality and not end up in greenwashing. But you could put principles to help people navigate," she told AsianInvestor.

“Once that hard work is done, maybe there could be some consensus or standards in ESG practices, as right now there are too many different bodies with differing standards.”


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