Strategy Spotlight

The Evolution of PIMCO’s GIS Emerging Markets Bond ESG Fund

The story of this fund is also the story of PIMCO’s sustainable investment capabilities – an evolution from solely using an exclusion method, to the present, dynamically scoring and engaging directly with issuers on ESG factors.

As demand for sustainable investing continues to grow, we are committed to develop a range of environmental, social and governance (ESG) solutions for clients. In August 2019, PIMCO’s existing GIS Socially Responsible Emerging Markets Bond Fund joined our suite of ESG products as the GIS Emerging Markets Bond ESG Fund. Beyond the name change, the fund now fully leverages PIMCO’s growing platform of ESG investment resources and is benchmarked to an ESG index. The story of this fund is also the story of PIMCO’s sustainable investment capabilities – an evolution from solely using an exclusion method, to the present, dynamically scoring and engaging directly with issuers on ESG factors.

Q: WHAT IS THE GIS EMERGING MARKETS BOND ESG FUND AND WHY HAVE YOU CONVERTED THE FORMER SOCIALLY RESPONSIBLE INVESTING (SRI) OFFERING?

A: PIMCO’s GIS Emerging Markets Bond ESG Fund is an actively managed Emerging Markets (EM) debt portfolio that combines PIMCO’s time-tested EM investment process with our internal ESG platform. Our aim is to encourage positive change in EM issuers’ behaviour on environmental, social, and governance matters.

Converting PIMCO’s former EM SRI offering to a full ESG fund felt like a natural evolution, in line with the overall market shift from SRI to ESG. Sustainability factors are gaining attention from EM investors as radicalism, political polarisation and the growing impact of climate change are felt around the globe, particularly in developing nations. We are now excited to offer traditional EM investors an EM product with an ESG filter, and ESG investors an EM product, offering our decades-long experience in the sector.

Q: WHAT ARE THE BENEFITS OF INCORPORATING ESG CONSIDERATIONS IN EM INVESTING?

A: Emerging markets are usually an inefficient and information-intensive asset class. ESG risk analysis looks at EM issuers from this additional sustainability angle and we believe more informed decision making is always a benefit in traditionally opaque markets. While the research on ESG in fixed income is relatively nascent, there is no conclusive evidence that investors have to give up returns to maintain higher ESG quality in EM. In fact, the historical performance of the fund’s new JPMorgan ESG Emerging Market Bond Index (EMBI) Global Diversified is comparable to the baseline JPMorgan EMBI Global Diversified index. They find that during periods of low or negative returns, the ESG index has been more resilient. For example, the maximum drawdown for the ESG index was 46 basis points (bps) lower than that of the baseline index1.

The Evolution of PIMCO’s GIS Emerging Markets Bond ESG Fund 

Q: WHAT IS DIFFERENT FROM WHEN THE FUND ORIGINALLY LAUNCHED IN 2010 AS AN SRI FUND?

A: The original product did not go beyond excluding select issuers, while applying PIMCO’s EM approach within this constrained universe. But we soon started evolving: in 2011, we consistently incorporated a range of social and governance indicators in PIMCO’s internal sovereign credit ratings. More recently, we have established a fully integrated ESG investing process for EM investors looking to influence positive change. Therefore, the main enhancement since the fund’s launch in 2010 is the addition of ESG evaluation and engagement.

Q: IS THIS PROCESS CONSISTENT ACROSS ALL DEDICATED ESG STRATEGIES?

A: Yes, the three phases of our ESG approach are: exclusions, evaluation and engagement:

1. Exclusions still underpin the portfolio, as the ESG benchmark avoids issuers with derived revenue from thermal coal, tobacco or weapons, as well as issuers that violate the United Nations Global Compact (a principle-based framework for businesses, stating ten principles in the areas of human rights, labour, the environment and anti-corruption). After that, we go beyond the benchmark to exclude any issuers that are not up to PIMCO’s standards due to poor environmental policies, weak governance, or unacceptable labour practices.

2. Evaluation is the next step in portfolio construction, where we optimise the portfolio based on a proprietary PIMCO sovereign ESG score. This score covers an extensive range of variables that supplement our PIMCO sovereign rating. We then assess valuations and risk contributions of each issuer to the overall portfolio.

3. The final building block of our process emphasises engagement with issuers in a constructive and collaborative way to positively influence their ESG practices over time. PIMCO’s size is an advantage in this process, as it enhances our access and influence with issuers. By investing in businesses and sovereigns willing to improve their sustainability practices, we believe we can have a greater impact than through exclusions and evaluation alone.

The Evolution of PIMCO’s GIS Emerging Markets Bond ESG Fund 

In addition to our investing framework for dedicated ESG strategies, we have developed tools and processes to help integrate ESG factors into the portfolio construction and management process. PIMCO’s proprietary green bond score is one example of how we are seeking to gain an informational and analytical edge in security selection, allowing for stronger differentiation among green bond issuers and potentially better outcomes for clients. Similarly, our internal system for tracking engagement allows analysts to efficiently measure sovereign and corporate progress towards sustainability goals and then note meaningful changes in their recommendations to portfolio managers.

Q: HOW DO YOU APPROACH ENGAGING WITH EM ISSUERS, IN PARTICULAR THE GOVERNMENTS OF SOVEREIGN NATIONS ON ESG TOPICS?

A: Our approach is collaborative. We identify issuers that can benefit from engagement; then, we develop a set of core engagement objectives. Successful engagement is based on cooperation, a productive dialogue and mutual agreement on clear objectives. Once we define these objectives, we measure progress against a predetermined benchmark, agree on planned remedies if there is material underperformance, and divest as necessary. Our engagement principles are to think like a treasurer, engage like a partner, and finally hold to account as a lender.

The Evolution of PIMCO’s GIS Emerging Markets Bond ESG FundThe Evolution of PIMCO’s GIS Emerging Markets Bond ESG Fund 

Engagement with issuers willing to improve their practices is a key differentiator in our approach to sustainable investing. We engage with all sorts of bond issuers, including sovereigns, which are uniquely complex given their need to balance multiple objectives. Here we believe our size and influence are an advantage. As one of the largest bond investors in the world with a long history in EM lending, we are able to meet directly with senior government officials to discuss a wide range of issues, such as fiscal and monetary policy, politics and governance, and social and environmental goals. Crucially, the same PIMCO analysts that recommend specific sovereigns for our portfolios and regularly discuss material financial factors with sovereign issuers are also the ones raising questions on ESG factors. This means that the full force of PIMCO is behind every ESG conversation.

We also have regular interactions with sovereign issuers beyond country visits. These include frequent one-on-one meetings, roadshows, videoconferences, calls with government officials and local leaders, as well as communication via email and Bloomberg chat. Our engagements include detailed discussions on credit and macroeconomic topics as well as ESG factors, such as politics and governance, social dynamics and government welfare spending, and environmental policies. In addition, we also meet with local business leaders, banks, consultants, trade unions, journalists, non-governmental organisations and members of civil society to get a holistic sense of developments in the country. Although the timeline for successfully engaging with sovereign issuers is much longer than with corporates, we believe we are able to impact change over time. More broadly at the industry level we continue to collaborate with other fixed income managers on material credit and ESG drivers, befitting all EM investors.

Q: HOW ARE YOU POSITIONING THE GIS EMERGING MARKETS BOND ESG FUND IN THE CURRENT ENVIRONMENT?

A: Barring a major reversal in financial or trade globalisation, EM countries should continue to benefit from increased diversification by global investors, driving ongoing flows into the EM asset class. In the EM ESG Bond Fund we are focusing on select opportunities including:

  1. Limiting exposure to countries at risk of sanctions or trade war escalation.
  2. Excluding countries with controversial social and governance practices.
  3. Significantly underweighting carbon-intensive industries, such as fossil fuels.
  4. Identifying EM corporates and sovereigns that show signs of strong ESG momentum.
  5. Emphasising green bonds as approved by PIMCO’s proprietary green bond scoring tool. For example, upon converting the fund to join our suite of ESG products in August 2019, we had over three times the green bond exposure than the ESG benchmark.

For investors looking to achieve both attractive financial returns and positive change, emerging markets may provide a unique opportunity as they are not only drivers of global growth, but also home to a growing share of the global population. ESG factors are evolving rapidly in emerging markets, allowing today’s EM investors to influence ESG outcomes in a positive manner.

The Evolution of PIMCO’s GIS Emerging Markets Bond ESG Fund

Visit the PIMCO GIS Emerging Markets Bond ESG Fund webpage for more information, or meet the team to get in touch.



1 JPMorgan, “ESG Investing Goes Mainstream,” JPMorgan Perspectives, May 2018, 32.
The Author

Lupin Rahman

Head of EM Sovereign Credit

Yacov Arnopolin

Portfolio Manager, Emerging Markets

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