Transcript: Global Sustainable Fixed Income

Air Date: March 3, 2025 | 12:00 PM, EST

Caroline: Good afternoon, everyone, and thanks for joining us. I'd like to welcome you to this week's Monday Minute Live Chat hosted by the Canadian Leadership Congress.

Today's topic is global sustainable fixed income, a market that you might be surprised to know has reached a staggering $4.7 trillion. Here to discuss it further, we have Guy Burry, Chair of the Pension Fund Investment Committee at York University, and Hadiza Djataou, Vice President and Portfolio Manager with the Mackenzie Fixed Income Team. Welcome to both of you. Guy, let’s start with you.

Guy: Thank you, Caroline. I appreciate it, and I’m delighted to be here. To begin, let’s discuss a definition of sustainability or ESG. These terms are often intertwined, but how do you approach them in your day-to-day work?

Hadiza: Absolutely, happy to be here. When discussing sustainability, one of the complexities is the variety of frameworks and methodologies, which add both challenges and opportunities. Our team typically structures sustainability around two key pillars.

• Research: We conduct independent, in-depth research using internal scoring and primary data from sources like the World Bank. We track the evolution of various sustainability scores and use materiality-weighted scores to assess risks and financial compensations.
• Engagement: We have a proactive and comprehensive engagement program. While we do have exclusions—such as in weapons and gambling—our focus is on engagement rather than outright exclusion. The more exclusions you have, the higher the risk of reduced diversification. We aim to strike a balance between financial performance and sustainability goals.

Guy: That’s fascinating. Caroline mentioned the $4.7 trillion market size, which is remarkable. Sustainable debt has seen the emergence of various structures. Could you walk us through the different types of sustainable bonds and their objectives?

Hadiza: Certainly! Sustainable bonds can generally be categorized into three main types. Use-of-Proceeds Bonds: These include green bonds, which finance environmentally focused projects, and social bonds, which support initiatives like affordable housing and social welfare.

• Sustainability-Linked Bonds: Instead of tracking the use of funds, these bonds are linked to the issuer meeting specific ESG performance targets. However, the challenge here is ensuring these targets are ambitious enough.
• Outcome Bonds: These bonds are directly tied to measurable environmental or social outcomes. One great example is the Rhino Conservation Bond issued by the World Bank, which ties returns to the population growth of black rhinos in South Africa.Guy: That’s very interesting. Now, do you see much difference between corporate-issued sustainable debt and sovereign or government-issued debt?

Hadiza: There are some key differences. Historically, sustainable debt was primarily issued by governments and supranational entities. However, in recent years, we’ve seen a significant expansion into corporate issuers, including high-yield and emerging market debt. This allows us to express diverse investment views while maintaining sustainability considerations.

Guy: How do you address concerns about greenwashing, where companies may claim to be sustainable but fail to meet real impact criteria?

Hadiza: That’s an excellent question. We rely heavily on primary data sources, such as the IMF and World Bank, and work with providers like MSCI. We also evaluate momentum—some emerging markets are progressing rapidly in their sustainability efforts, and we want to recognize that.

Rating agencies are still evolving in their ESG assessments. Traditional credit ratings often lag behind, whereas ESG-focused ratings are improving. We integrate multiple data sources to ensure a comprehensive analysis.

Guy: You’ve covered a lot of factors in sustainability scoring. Where do you think your strategy finds its sweet spot—where you can generate strong returns while staying true to ESG principles?

Hadiza: For us, the sweet spot is the intersection of ESG-labeled debt and best-in-class issuers—companies that may not issue green bonds but have standout sustainability practices. Typically, our portfolios allocate around 70% to ESG-labeled debt and 30% to best-in-class issuers. These issuers become long-term partners in our engagement initiatives, helping drive positive change.

Guy: Risk management is crucial. How do you ensure diversification within your portfolio?

Hadiza: Risk is managed through several layers.

• Pre-investment analysis: We assess credit fundamentals, relative value, and ESG materiality.
• Portfolio construction: We cap issuer exposure and maintain a balanced number of holdings.
• Ongoing assessment: We continuously evaluate ESG performance and reallocate where necessary.

Additionally, our portfolios are tactically managed. While ESG considerations play a role, they are integrated with our broader fixed-income strategies to optimize returns.

Guy: How do you measure impact?

Hadiza: We use multiple key performance indicators (KPIs) such as:

• Science-based targets (SBTs)
• Carbon intensity scores
• Water usage and clean energy metrics

We also compare our funds’ ESG scores against benchmarks to ensure we are making tangible progress.

Guy: As we wrap up, one final question: What concerns you most in this space over the long term?

Hadiza: One key concern is the evolving role of global funding agencies. For example, the U.S. has been reassessing its contributions to international organizations like the World Bank. While this doesn’t pose an immediate threat, any significant funding reduction could impact sustainable investment flows.

That said, I remain optimistic. Sustainable finance is critical to funding the energy transition, and the bond market—being the largest and most diverse financial market—will play a pivotal role in this transformation.

Caroline: That was a fantastic discussion on the role of the bond market in sustainability. Thank you, Hadiza and Guy. That wraps up this week's Monday Minute.

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