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PIMCO Total Return ESG Administrative PRFAX Sustainability

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Sustainability Analysis

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Sustainability Summary

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PIMCO Total Return ESG Fund has several promising attributes that may appeal to sustainability-focused investors.

This fund lands in the 10% of strategies with the lowest ESG risk in the US Fixed Income category, earning it the highest Morningstar Sustainability Rating of 5 globes. ESG risk measures the degree to which material environmental, social, and governance issues, such as climate change, biodiversity, human capital, as well as bribery and corruption, could affect valuations. ESG risk differs from impact, which is about driving positive environmental and social outcomes for society’s benefit.

Based on its latest prospectus, sustainability or ESG factors are a focus in the investment process of PIMCO Total Return ESG Fund. Funds with ESG-focused mandates are more likely to deliver positive sustainability outcomes. PIMCO Total Return ESG Fund has an asset-weighted Carbon Risk Score of 4.0, indicating that its companies have low exposure to carbon-related risks. These are risks associated with the transition to a low-carbon economy such as increased regulation, changing consumer preferences, technological advancements, and stranded assets. Its 9.5% involvement in carbon solutions is higher than the 5.3% average involvement of its peers in the Intermediate Core-plus Bond category. Carbon solutions include products and services related to renewable energy, energy efficiency, green buildings, green transportation, and so on.

By prospectus, the fund aims to avoid, or limit its exposure to, companies associated with controversial weapons, tobacco, and and thermal coal. Yet this goal is far from achieved, as the fund exhibits 0.34% and 3.18% exposure to controversial weapons and thermal coal, respectively. This compares with 0.71% and 1.67% for its average peer in the US Fixed Income category.

Currently, the fund has 8.1% involvement in fossil fuels, which is roughly in line with 7.7% for its average category peer. Companies are considered involved in fossil fuels if they derive some revenue from thermal coal, oil, and gas. The fund exhibits moderate exposure (2.17%) to companies with high or severe controversies. Controversies are incidents that have a negative impact on stakeholders or the environment, which create some degree of financial risk for the company. Examples of types of controversies include bribery and corruption scandals, workplace discrimination and environmental incidents. Severe and high controversies can have significant financial repercussions, ranging from legal penalties to consumer boycotts. Such controversies can also damage the reputation of both companies themselves and their shareholders.

ESG Commitment Level Asset Manager

 | Basic , 

Over the past few years, Pimco has invested heavily in its people and processes to facilitate stronger integration of environmental, social, and governance factors across the firm’s investment strategy lineup. However, transparency remains an issue relative to global peers, and recent additions to the ESG team have yet to find their stride. The firm maintains a Morningstar ESG Commitment Level of Basic. Pimco’s ESG push ramped up in 2017 with the establishment of a dedicated ESG mutual fund platform and the creation of an ESG leadership team. That team has seen some turnover, including Scott Mather’s retirement at the end of 2022. Mather was instrumental in building out the central ESG team in recent years and was the lead portfolio manager on a number of the firm’s ESG strategies. Grover Burthey quickly stepped in as head of ESG portfolio management, though he hasn’t been named to the strategies Mather once led. As of December 2022, the ESG team under him consists of 11 dedicated analysts, a significant leap from just five members in 2020. Nonetheless, a change in leadership and the team's quick growth bears watching. In addition to its efforts to build out and stabilize an 11-person ESG team, Pimco also expanded its proprietary ESG score to include securitized products and municipal bonds. The day-to-day work of assessing and engaging with individual bond issuers, as well as trading based on ESG criteria, falls to the 80-plus credit analysts and portfolio managers across bond market sectors. The investment teams are also supported by a group of dedicated developers who build analytical frameworks and tools that support Pimco’s investment process as well as its collaborative engagement with industry standard-setters. As a titan of fixed-income investing, Pimco is involved in many industry initiatives to advance sustainable-investing practices. In June 2020, the firm provided critical input to the International Capital Markets Association, which sets guiding principles for green, social, and sustainability-linked bonds. The firm engages with ICMA in a range of capacities including its role on the executive committees for Green Bond Principles and Social Bond Principles, as well as its leadership in various related working groups. Pimco is also a member of Climate Action 100+, and while it is not a signatory of the Net Zero Asset Managers initiative, it has introduced a net-zero framework, although with no decarbonization targets. Unlike equities, bonds don’t have ownership rights, so bond-focused asset managers have fewer tools to influence issuers. Despite this, large debtholders such as Pimco are not powerless, and the firm engages with corporates to improve their adherence to ESG principles. Pimco is also well-positioned to engage with sovereign nations on issues such as the energy transition and green finance. However, the firm discloses limited information on sovereign engagements. All in all, Pimco does some commendable work in sustainable investing, but it could take additional steps to reach the loftiest heights.