Schroder Investment Management Ltd. will seek more answers from governments over climate and other ESG risks, as the £347.6 billion ($432 billion) money manager tries to gauge how extreme weather and other environmental, social and governance events will impact investments including sovereign bonds.
The Schroders Plc unit is developing a framework to ask governments questions and track how well they’re responding to these risks. Countries issuing green and sustainability-linked debt will be key, Hannah Shoesmith, head of engagement, said in an interview.
Rising cases of ESG events “will ultimately impact credit quality” so there is a need to engage with government departments on how they are managing the risks and opportunities, she said from the firm’s Singapore office.
Schroders joins a clutch of global money managers including Aviva Investors and Pictet Asset Management that are stepping up engagement with governments as more countries look to raise money in debt markets to finance ESG projects.
The sovereign push adds to traditional engagement with companies, as asset managers increasingly press firms to adopt measures to reduce their carbon footprint or improve corporate governance. These efforts are a core tenet of asset managers’ ESG strategies and are credited by some for having persuaded companies to improve environmental standards.
Read more: Schroders, Pictet Among Investors Calling for Transition Plans
Schroders aims to engage with 1,000 companies on climate issues by 2030, and has already reached 70% of that target, Shoesmith said. Companies that Schroders has engaged with since 2021 are close to two times more likely to have set a below 2C target for emissions, she said.
Sovereign debt investors are closely monitoring default risks heightened by ESG events. Developing countries that borrowed heavily when interest rates were low are now grappling with servicing their debt, and extreme weather disasters could push them over the brink.
Pakistan, which saw flooding on nearly a third of its territory last summer causing an estimated $32 billion in damage, is a recent example. The country is likely to meet its debt payments for June, but beyond that could default without an International Monetary Fund bailout.
Read more: Climate Debt Trap Risks Pushing Emerging Markets to the Brink
For Schroders, engagement on climate issues is the priority, and will be focused on “insights and fact-finding” rather than “outcomes engagement, where we’re trying to push change,” Shoesmith said. Roadshows for sustainability-linked and green bonds are an “important opportunity” to have a broader conversation on what a country considers its material ESG factors, she said.
Fitch Ratings will put more than 1,600 non-financial companies on notice this year as part of a mass review of credit scores triggered by the growing threat that climate change poses to issuers’ risk profiles.
--With assistance from Alastair Marsh.