Morningstar - Q3 2021 - 26

Dispatches
While Shell does not have a moat against
competition today, Good writes that the specifics
of its plan to achieve its target of a net-zero
portfolio by 2050 distinguish it from peers. Shell
hasn't set a target for renewable generation
capacity, which is a competitive segment,
and plans to focus more on the customer. Instead
of producing large amounts of renewable power,
Shell will work with customers that want to
secure low-carbon solutions for their businesses.
This should result in Shell producing some
renewable power as well as expanding further
into low-carbon fuels, such as hydrogen
and biofuels, while taking advantage of its
trading operations to secure additional supplies.
Management believes that participating
along the entire low-carbon energy spectrum will
prove difficult to replicate and produce a
competitive advantage.
" As time passes and Shell demonstrates a high
level of competence and execution in these
newer areas or our view changes on commodity
prices, " notes Good, " we could revise our
moat rating. "
James Gard is a content editor at Morningstar U.K.
to have a sustainability objective or that
use specific and binding ESG criteria to select
investments. Driven by increased interest
in ESG issues and strong inflows, especially in
the past couple of years, assets in global
sustainable fixed-income funds have grown tenfold
in the past decade to $350 billion at the
end of March.
In 2020 alone, assets in ESG bond funds surged
66%-compared with a 12% increase in
assets for the entire fixed-income fund universe.
Yet while the fixed-income asset class
overall accounts for 27% of the global fund market,
sustainable fixed-income strategies make up
only 18% of global ESG funds.
Europe Propels Growth
of ESG Bond Funds
GREATER EUROPE
European Union
Sustainable investing is not as prevalent in fixed
income as it is in equities. But this is changing.
To meet investor demand, asset managers have
been actively building their environmental,
social, and governance capabilities and developing
new sustainable strategies.
The ESG bond fund universe encompasses
open-end funds and exchange-traded
funds globally that, by prospectus, fact sheet,
or other available resources, claim
26
Morningstar Q3 2021
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021*
*Data as of 03/31/2021.
Source: Morningstar Direct, Morningstar Research.
17 28
28 22
10 10
5
6
33 27
Europe
United States
Rest of World
$400B
100
200
300
There are several reasons for this underrepresentation.
It wasn't until about a decade ago that
fixed-income practitioners started to formally
consider ESG factors in their credit analysis.
The inherent complexity of bond markets, with
their wide spectrum of debt instruments,
issuer types, and maturities, has held back ESG
integration. This has been compounded
by concerns about data availability, quality, and
comparability, especially for sovereign debt.
Meanwhile, for securitized debt, analysis
is required on underlying collateral, not just the
issuer. This may mean assessing thousands
of assets, which can be very time-consuming for
fund managers.
There are also lower levels of active ownership in
fixed income. Unlike shareholders, corporate
bondholders do not have the ability to vote or
make their views known on ESG-related issues at
annual shareholder meetings, while sovereign
debtholders find it harder to effectively engage
with governments.
Despite all the challenges, however, ESG
integration in fixed income has become more
widespread in recent years. Investors have
come to realize that ESG considerations are just as
important in fixed income as they are in equity
when it comes to identifying downside risk.
Also, evidence is growing that the integration of
ESG can create alpha in corporate bond
markets. Meanwhile, more investors are looking
to align their entire portfolios to their values
and are becoming more targeted in their approach
to fixed income. Increased interest in impact
investing, for example, has translated into higher
demand for green and social bonds-debt
designed to directly address ESG issues
that are often anchored by the United Nations'
Sustainable Development Goals.
While these trends hold true globally, ESG
fixed-income fund assets are predominantly located
in Europe, accounting for nearly 90% of the
total. European money managers pioneered ESG
integration in fixed-income management,
with many firms building ESG research teams
ESG Bond Fund Assets by Domicile
Morningstar - Q3 2021

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