By Richard Davies, director, fixed income and multi-asset product management, EMEA

Market expectations for a global economic recovery and fiscal stimulus have spurred heightened inflation expectations—making inflation protection a priority for many investors. Meanwhile, climate risk has also emerged as a key risk consideration in recent years, with asset owners naming it as their top sustainability theme in our recent survey. There is a lively debate among economists and central banks about the extent to which climate change is inflationary, but, more practically, where does this leave investors concerned about addressing both climate and inflation risk in sovereign bond markets?

A tale of two risks

Fiscal and monetary policy changes in response to the pandemic have been significant, with unprecedented stimulus programs and an extended era of quantitative easing. And as the COVID-19 vaccine rollout gathers pace, many market participants are expecting the...

Following recent revisions of commitments during the UN “Climate Ambition Summit” in December 2020 and the US-led “Leaders Summit on Climate” in April 2021, we estimate that the resulting global trajectory will lead to a 2.9°C warming ? a level that still falls short from the “well below 2°C” Paris target.

To bridge the gap, the collective efforts to reduce GHG emissions would need to improve significantly in the next months and during COP26 to include:

There is a growing realization that combining index investing and sustainability engagement is not only possible but can reinforce and mobilize significant global assets under management to enable collaborative engagement. Passive investment has the potential to influence and achieve changes in corporate practices and strategies leading to real world impact through linking engagement to transparent capital re-allocation. This paper explores the evolution of ESG engagement and passive investing, especially the role of index providers in marrying passive investing and scalable engagement.

Yield Book is a trusted and authoritative source for fixed income analytics that enables market makers and institutional investors to perform complex analysis of their portfolios, benchmarks, trading decisions, historical performance, and risk. Yield Book products offer analytical insight into an extensive range of financial products in the fixed income space including governments, agencies, corporates, high yield, emerging markets, mortgages, ABS, CMBS, CMOs, and derivatives. The platform utilizes dedicated centralized servers that help ensure reliable, prompt data delivery. Yield Book forms part of London Stock Exchange Group (LSEG)'s Data and Analytics division.

By Eisuke Nakajima, ESG lead, Japan and Ryuichi Urino, senior manager, Japan

There’s no doubt that Japanese institutions have led the world in sustainable investment. But can they extend the approach to the least environmentally focused segment of the world’s securities markets, government bonds?

According to the Japan Sustainable Investment Forum (JSIF), sustainable investment assets in Japan reached ¥336trn at the end of 2019, a 489% increase from three years earlier[1].

Progressive moves made by large institutional players, notably the country’s ¥178trn Government Pension Investment Fund (GPIF), have helped catalyze this striking change.

GPIF has had a major influence on Japanese asset managers and asset owners by promoting environmental, social and governance (ESG) considerations in its own investment approach. It became a signatory to the United Nations’ Principles for Responsible Investment (PRI) in 2015[2] and announced its intent to...

By Eisuke Nakajima, ESG lead, Japan and Ryuichi Urino, senior manager, Japan

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In 2021, responsible investment has gone mainstream, becoming a foundation of good investment practice. No longer just 'bells and whistles', it is now essential to managing risk, seizing opportunity and maximising performance.

As our region's largest gathering of responsible investors, the Responsible Investment Association Australasia's RI Australia 2021 will bring together the responsible, ethical and impact investment community to shine a light on best practice and the significant themes emerging and shaping the industry.

The conference will be delivered in a hybrid format – both in-person and online – to allow interstate and international delegates who don't wish to travel to participate.

RI Australia 2021 will look at how responsible investing can better deliver real world outcomes, showing the pathways and opportunities for a sustainable recovery from the COVID-19 pandemic and a resilient economy aligned with the Paris Agreement and...

By Philip Lawlor, head of Global Investment Research

Stock valuations have surged globally this year, but none has climbed as high as those of the US benchmarks. Here’s where they stand relative to their own history and compared with peers.

As shown below, 12-month forward P/Es are above their 10-year averages across markets, most significantly the Russell 1000. Relative to the global index, however, only the Russell 1000 and the FTSE Europe ex UK remain above historical norms.

Absolute and relative 12-month forward P/E ratios – latest vs 10-year averages

Source: FTSE Russell / Refinitiv. Data as of April 19, 2021. Past performance is no guarantee to future results. Please see the end for important disclosures.

Much of the US premium is an outgrowth of its heavier weightings in long-time outperforming technology and consumer discretionary stocks. As illustrated below, when calculated on an equal-weighted basis to smooth out these...

With the attention of investors being increasingly focused on sustainability issues, awareness of Environmental, Social and Governance ratings characteristics is essential, as it enables a better overview of their meaning.

This paper answers the question, “What themes matter most in ESG ratings?” It explains the information that underpins FTSE Russell’s ESG ratings and identifies the themes that provide the highest contribution to an overall score.

This paper also:

By Guillaume Emin, senior manager, sustainable investment solutions

The pandemic is still damaging the health of the world's population and economy despite the gathering pace of the vaccine rollout. But COVID-19’s macabre impact extends into the climate. It’s caused a massive decline in global CO2—the first of such magnitude for at least 70 years—and illustrates the challenge economies face reaching the Paris Agreement emissions targets.

We don’t have a precise answer for the exact size of the reduction, but informed estimates suggest a 6% fall of energy-related CO2 emissions in 2020. As the research journal Nature highlighted in May 2020:

“The estimated decrease in daily fossil CO2 emissions from the severe and forced confinement of world populations of -17% (-11 to -25%) at its peak are extreme and probably unseen before. Still, these only correspond to the level of emissions in 2006. The associated annual decrease will be much lower (-4.2 to -7.5%...

Bond market structure has evolved rapidly in recent years as regulatory change, concern about bank capital adequacy, and the Global Financial Crisis (GFC) combined to move bond markets towards exchanges and electronic venues. ETFs facilitated these developments, helped underlying liquidity, and allowed investors to express market views in tactical and strategic asset allocation. Feedback loops between ETFs and index benchmarks broadened asset allocation choices as plain and smart beta products developed. Success in withstanding the COVID shock enhanced the status of ETFs in credit markets, which was confirmed by the Fed’s decision to include bond ETFs in its QE program. A return to market structure built around individual securities, and fragmented cash markets, is unlikely.

Reflecting on how the pandemic has impacted US real estate investments this past year, global index provider FTSE Russell and Nareit hosted a virtual panel to better understand today’s listed real estate market and what may lie ahead as the industry adjusts to the short and potentially longer term impacts of COVID-19.

Recent data from FTSE Russell shows the index performance since December 31, 2019, with an uptick in October 2020. 

Highlighting the macro outlook, experts from LaSalle Investment Management, Brookfield Asset Management and Nareit discussed various topics, including investors’ view of exposure to traditional REITs and “newer” ones (noting whether it influences public vs. private considerations), ESG integration and how the phenomenon of remote work impacts commercial real estate demand.

Key takeaways from the session included:

Bernhard Krieg, Portfolio Manager, Brookfield Asset Management:

“Investing in real...