• About
  • Privacy Policy
  • Terms
  • Contact
Friday, January 27, 2023
Financial Eye News
  • Home
  • Markets
    • Stock Market News
    • Commodities
    • Forex
    • Renewables
  • Cryptocurrency
    • Ultimate Guide to Crypto
  • Business
    • News
    • Companies
    • Technology
    • Climate
    • Politics
  • Reports
    • Ultimate Guide to Crypto
  • VideosNew
No Result
View All Result
  • Home
  • Markets
    • Stock Market News
    • Commodities
    • Forex
    • Renewables
  • Cryptocurrency
    • Ultimate Guide to Crypto
  • Business
    • News
    • Companies
    • Technology
    • Climate
    • Politics
  • Reports
    • Ultimate Guide to Crypto
  • VideosNew
No Result
View All Result
Financial Eye News
No Result
View All Result

ESG fund boom masks mispricing dangers for investors

March 21, 2022
in Latest Financial News
Reading Time: 5 mins read
51 0
ADVERTISEMENT

The “gold rush” to socially responsible investing is here. But, across the fixed income market, environmental, social and governance risks are still not widely understood — or adequately priced in.

Last year, environmental, social and governance-linked (ESG) bond funds netted roughly $102bn, a record level of net inflows, according to data from research group EPFR. Searches for “ESG” in Google reached an all-time high in February 2022. And investors around the world advertised the sophisticated ESG standards that they apply across asset classes.

However, ESG products are still often treated separately from the core investment business and ratings are still not always a primary or decisive part of the credit risk assessment process. And, even when they are, there is no universal standard for what constitutes an ESG risk.

For example, in 2021, there were still upgrades in the credit ratings of coal companies, mortgage booms in flood zones, and schools embroiled in sexual assault cases that successfully raised money in the municipal bond market.

Line chart of $ mm showing Net flows into ESG/SRI funds

“It’s obvious to me that there are ESG risks that are not priced into fixed income markets,” warns Tom Graff, head of fixed income at Brown Advisory, the investment manager.

The commercial mortgage-backed securities market is a clear example of this, says Graff. Floods are getting worse, more frequent and more widespread because of climate change, and that rising risk is often not priced in.

A big rise in flooding costs for US companies would hit mortgage-backed securities in the $4tn commercial property market. Building damage caused by extreme flooding — worsened by climate change — could lead US businesses to spend $13.5bn on replacements and repairs in 2022, according to estimates from research firm First Street Foundation.

ADVERTISEMENT
a man riding his bike along a flooded path

Such repairs are also expected to force commercial buildings to shut their doors for 3.1m days this year, adding to corporate costs. In total, the financial impact of lost business from flooded commercial buildings is projected to set local economies back $49.9bn by the end of December. Those costs are expected to rise dramatically in coming years.

Natural disasters can be particularly risky for commercial and residential mortgage-backed securities. These bonds are linked to properties around the country but they tend to be highly concentrated in major metropolitan areas where there are more homes and businesses. Most of those metropolitan areas are coastal or situated close to large bodies of water — and all are at heightened risk of flooding.

Roughly a fifth of all commercial real estate value in the US is located in New York, Miami and Houston, according to CoStar data. All of those cities are flooding hotspots.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.


These risks are not new. Morningstar identified roughly $26.6bn in CMBS that was put at risk by Hurricane Irma which, in 2018, hit the Caribbean and the Florida Keys. Data provider Trepp also found that $29.6bn in CMBS was threatened by Hurricane Harvey. US bank Morgan Stanley estimated that $8.5bn in CMBS was at risk during 2021’s Hurricane Ida. And Fitch Ratings identified $6.3bn in CMBS jeopardised by Hurricane Dorian. Nor is the causation limited to hurricanes: more extreme weather has led to floods from higher rainfall and deluged rivers.

But major floods have, thus far, only led to a modest number of bond defaults and have not yet led to a meaningful change in pricing, even as storms have become more frequent and intense.

ESG risk is similarly underpriced in the municipal bond market, argues Erin Bigley, head of fixed income responsible investing at AllianceBernstein. Issuers that are providing educational or healthcare services, for example, may be assumed to embody ESG principles, even when they do not.

“We have found that there are issuers where our ESG scores have indicated risks that are not priced into the market,” says Bigley. “Even on the very high-quality side.”

While Bigley did not cite any specific cases, the municipal bonds of the University of Southern California may provide an example of a pricing anomaly. USC has been embroiled in a sexual assault case since 2018, in which a campus gynecologist was accused by hundreds of students of abuse. The university has agreed to pay out more than $1bn for these claims, a fact that led Moody’s to downgrade the school’s credit outlook to negative in 2021. The prices of the school’s municipal bonds, by contrast, were largely unaffected by these specific events.

But the mispricing of risk can also create opportunities for investors.

Take energy independence risk, for example. It is not always a primary consideration when evaluating the credit risk of sovereign bonds. However, when a country is cut off from foreign sources of energy — for geopolitical reasons, such as the conflict in Ukraine or because of changing trends, or legislation — it raises costs for companies and consumers, slows growth and, in turn, raises the chances of default.

Conversely, countries that have prioritised energy independence may be underpriced. Yvette Klevan, portfolio manager at Lazard Asset Management, cites Morocco, which is boosting its energy security by creating some of the world’s largest solar farms. “Sometime in the future, we believe that could be a fiscal upgrade story,” she says.

Source: Financial Times

Share6Tweet4Share1SendShareSend

Related Posts

Latest Financial News

Oil tanker jam forms off Turkey after start of Russian oil cap

December 5, 2022
Latest Financial News

The west’s messy Russian oil price cap begins to bite

December 5, 2022
Latest Financial News

Coinbase bonds: FTX saga saps credibility of Wall St wannabe

December 5, 2022
Latest Financial News

Crypto group Circle abandons $9bn deal to go public through Bob Diamond’s Spac

December 5, 2022
Latest Financial News

Trafigura secures $3bn loan facility to provide Germany with natural gas

December 5, 2022
Latest Financial News

Market turmoil threatens to undermine efforts to curb inflation, says BIS

December 5, 2022

Popular Stories

  • AIG to launch cut-price IPO of life and asset management unit

    48 shares
    Share 19 Tweet 12
  • EY boss targets $10bn boost from Silicon Valley tie-ups after break-up

    32 shares
    Share 13 Tweet 8
  • Tesla delays plan to restore Shanghai output to pre-lockdown levels -memo

    32 shares
    Share 13 Tweet 8
  • TV production giant Banijay to go public via Arnault-backed Spac

    30 shares
    Share 12 Tweet 8
  • Nio to Invest $32.8M Building R&D Labs in Shanghai By Financial Eye

    30 shares
    Share 12 Tweet 8
ADVERTISEMENT

Latest News

Taylor Swift Fans Sue Ticketmaster’s Parent Company

December 5, 2022

Fisker trades down following price cut at Citi By Financial Eye

December 5, 2022

UAW president faces run-off election as reformers make gains

December 5, 2022

Felipe Valls, 89, Whose Cuban Restaurant Became a Political Hub, Dies

December 5, 2022

Longroad buys 98-MW solar farm in California

December 5, 2022
Facebook Twitter LinkedIn

Financial Eye is one of the most trusted news sources for Financial News, global news and local USA news, we provide the news from the most trusted sources.

LEARN MORE »

Recent News

  • Taylor Swift Fans Sue Ticketmaster’s Parent Company
  • Fisker trades down following price cut at Citi By Financial Eye
  • UAW president faces run-off election as reformers make gains

Sections

  • Business
  • Climate
  • Commodities
  • Companies
  • Cryptocurrency
  • Cryptocurrency
  • Forex
  • Green Energy
  • Latest Financial News
  • News
  • Politics
  • Stock Market News
  • Technology
  • Videos

© 2022 Financial Eye News Media

No Result
View All Result
  • Home
  • Markets
    • Stock Market News
    • Commodities
    • Forex
    • Renewables
  • Cryptocurrency
    • Ultimate Guide to Crypto
  • Business
    • News
    • Companies
    • Technology
    • Climate
    • Politics
  • Reports
    • Ultimate Guide to Crypto
  • Videos

© 2022 Financial Eye News Media

Welcome Back!

Login to your account below

Forgotten Password?

Retrieve your password

Please enter your username or email address to reset your password.

Log In

Subscribe To Our Daily News Round-Up.

The top ten most-read stories direct to your inbox

You have Successfully Subscribed!

You have Successfully Subscribed!

This website uses cookies. By continuing to use this website you are giving consent to cookies being used. Visit our Privacy and Cookie Policy.