“The USA’s new [lack of] climate policies will have an impact on the Country Rating,” said Oekom, a Munich-based sustainable investment rating agency, in an official statement released earlier this week.
Oekom expects “a mid-term deterioration” in US performance regarding greenhouse gas emissions and the implementation of climate-protection policies. “In the Energy section of the rating, long-term negative consequences are expected for the energy mix rating as compared with other countries in the Oekom Universe.”
But what should get ESG fund manager who currently invest in US Treasuries worried, is the fact that a US exit from the Paris Agreement will trigger “the exclusion criterion ‘Non-Ratification of The Paris Climate Agreement’,” said Oekom. This means the rating agency will recommend its clients to disinvest from US government bonds once the country has officially exited from the agreement.
Accelerate climate change
RobecoSAM, an asset manager specialised in sustainable investing, doesn’t immediately go as far as Oekom, but notes that Trump’s decision to cancel the Paris climate deal will “accelerate climate change, downgrade the country’s performance in the environmental area and affect the US country sustainability profile”, said Max Schieler, senior country risk specialist at RobecoSAM.
The US currently ranks 15th in RobecoSAM’s sustainability index, right between Germany and France, and the country’s withdrawal from ‘Paris’ alone will probably not result in a massive fall down the ranking. This is because environmental factors only have a 15% weighting in determining the sustainability score, with governance factors having a much bigger impact.
Ambivalent asset managers
Though asset managers have condemned Trump’s decision to withdraw from the global climate agreement, perhaps the relatively minor importance of the ‘E’ in ESG helps explain the lack of response from ESG bond fund managers.
There are actually only a handful of global ESG bond funds that have a mandate to invest in US Treasuries. Currently, the Candriam SRI Bond Global fund, the LGT Sustainable Bond Fund Global and the Pimco Global ESG Bond Fund are the only Ucits bond funds with an explicit sustainability mandate that are invested in US Treasuries, according to Morningstar.
A spokesperson for LGT, a German investment manager, acknowledged to our sister publication Expert Investor that the US withdrawal from the Paris Agreement “undermines the global efforts to mitigate climate change”.
However, it would be inappropriate to exclude US government bonds from ESG mandates based solely on the country’s decision to withdraw from the Paris Agreement, according to LGT.
The asset manager based its position on the (contestable) assumption that the decision would “probably have a very limited impact on greenhouse gas emissions by the US”.
Pimco took a similar line, branding the decision to withdraw from the Paris Agreement as “just one element”.
“We acknowledge what happened, but it doesn’t warrant exclusion,” a spokesperson said.
Reality check
It’s perhaps too much to ask from fund managers to immediately move to exclude US Treasuries following the US announcement to withdraw from the Paris Agreement. After all, the decision will probably only take effect by November 2019.
More importantly, not being anymore able to invest in the world’s largest and most liquid bond market could severely handicap fund managers, and impact their performance.
Notwithstanding these potentially negative implications, fund managers should face up to reality: by deciding to exit the Paris Agreement, the United States have transformed themselves into an international climate pariah, joining the ranks of Syria and Nicaragua, the only two countries that did not join the agreement.
In order to retain a credible sustainability profile, fund managers can ill afford to invest in securities issued by the US federal government.
