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Written by: Erin Bigley
If building a sustainable bond portfolio sounds tidy and straightforward, it isn’t. The auto industry illustrates the difficulty of finding a perfectly sustainable private sector investment.
General Motors and Ford Motor have made significant commitments to building out their electric vehicle lines in recent years. Electric vehicles are responsible for about 65% less greenhouse gas emissions than gasoline-powered cars annually.1
That percentage could rise as renewable power continues to grab market share from coal-fired electric utilities, thereby playing a greater role in fueling electric cars. Yet General Motors and Ford Motor also currently rely heavily on sales of relatively fuel-inefficient trucks and SUVs.
Why not just invest in Tesla Motors, which makes only electric vehicles? Tesla’s products are great for the environment, but the company has struggled with its manufacturing process and confronted some well-publicized governance issues. The company itself presents some ESG risks that many long-term investors would want to think carefully about, even though Tesla’s products further some of the United Nations’ Sustainable Development Goals (SDGs).
In other words, no automaker is perfect from a sustainability perspective. 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. In fact, we believe it’s imperative to invest in companies that are trying to make progress toward sustainability.
Engaging with Management Is Crucial
But that doesn’t mean bond issuers hold all the cards. Companies regularly need fresh injections of capital. And bonds are a major source of funding for the auto industry and a more stable funding source than equity, making it crucial to issuers on the road to sustainability.
By engaging with companies and bankers on ESG matters and bond structures, investors can be clear about the types of objectives and key performance indicator (KPI) targets they believe reflect best practices. Even if a company fails to set acceptable terms with a current bond issue, a continuing engagement program can secure better terms in future. And asset managers must engage frequently with management about ESG issues to ensure that leadership teams abide by their promises in developing products, services and practices that support the SDGs.
Fixed-income asset managers don’t need to stand alone in holding bond issuers accountable. It’s helpful to rely on multiple partners, including industry organizations that engage and advocate for changes, and in-house resources such as partners in equities portfolio management and responsible-investing experts who span asset classes.
Asking companies to participate in building a greener, more just world isn’t easy—but the more voices that demand change, the sooner a sustainable future will arrive. It’s up to investors to ensure that it arrives on time.
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1The figure includes only emissions during the owner’s operation of the car. US Department of Energy, “Alternative Fuels Data Center: Emissions from Electric Vehicles,” Energy Efficiency & Renewable Energy (website) (May 20, 2022), https://afdc.energy.gov/vehicles/electric_emissions.html.