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Where are banks on their ESG journey?
The banks are on a journey, and I think you can see how in the future they will continue to be the conduit for policies and for regulatory change within the ESG sector. Just as capital has improved over the last 10 years, driven by regulation, you can see how the sustainability policies that are driven by the regulator will be facilitated into the real economy via the banks.
If we think there is EUR 4.7 trillion of spending needed over the next 10 years to meet the 2030 targets, EUR 3.5 trillion of that will come through the private sector, and the banks will play a huge part in that.
Which types of issuers are offering value?
For us the value is going to come from the European banking sector. Here you saw a huge amount of provisions being taken over the course of 2020 and a large number of these provisions still need to be released. So even if you don't believe in the higher interest rates within Europe and steeper yield curves, just the unwinding of those provisions that have been taken should provide a tailwind to profitability.
And when we look at European banks in Additional Tier 1, this is the area where the most spread is offered and where you are likely to get the risk-adjusted returns, in our opinion. This is because you are trading 85 to 100 back of high yield double Bs, for example, and as much as 250 basis points back of lower tier 2, which to us makes no sense and should compress over time.
The value is going to come from the European banking sector
We have the tailwind of an improving macro environment
How has the banking sector weathered the pandemic?
The banking sector had its crisis back in 2007 and 2008, so as a consequence, it has spent the last 10-12 years improving its business model and its resilience in economic downturns.
As an example, the amount of capital that banks held going into the crisis was at all-time highs. Over the course of 2020 and 2021, that has only increased further, making banks even more resilient.
So banks were strong going into the crisis, and they're emerging from it even stronger. As we say goodbye to lockdowns and as the economy is allowed to grow, this is an environment where not only the fundamentals are very strong, but the economic growth and higher rates that we're likely to see will be the tailwind to improve bank profitability further.
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The banking sector is emerging from the pandemic stronger than ever, making bank subordinated debt instruments such as CoCos ever more attractive to investors.
In this video, Marc Stacey, senior portfolio manager for the BlueBay Financial Capital Bond Fund, reveals the latest market outlook, which types of issuers are offering competitive opportunities and where banks are on their ESG journey.
INTRODUCTION | Pandemic impact | Monetary policy | Value opportunities | ESG journey
BlueBay Asset Management’s Marc Stacey on banking sector health in 2022 and beyond
Columbia Threadneedle Investments' Sonal Sagar & Michael Hamblett
INTRODUCTION | ASSET CLASS | THE FUND | portfolio snapshot
What impact will rate hikes and inflation have on bank capital?
Not only are the fundamentals and the bottom-up story of banks incredibly resilient, but now we have the tailwind of an improving macro environment.
And particularly in Europe, where we've had negative interest rates for the past few years, now we're starting to get to a point where that might be moving closer to zero.
For European banks, that would be a huge improvement in the profitability environment and would go even further to improving the fundamentals of the banking sector.
Coats Group makes thread, which is an energy and water intensive process, but essential for clothing, footwear and other industrial applications. Coats is attempting to make the process greener and more sustainable by targeting reductions in water consumption and carbon emissions. The company has also pioneered a fully recycled thread, using no virgin plastic.
This is an example of the type of company we look for in the Threadneedle UK Sustainable Equity fund: a company that is perhaps under the radar, but a leading player in a fragmented market, standing to benefit from consumer trends towards sustainability.
We met the company’s head of sustainability to understand how its non-financial risks and sustainable opportunities are managed, and our opportunity to ask questions and bring the investment case to life, far more than reading the annual report.
Threadneedle UK Sustainable Equity Fund: Portfolio snapshot
Johnson Matthey is a chemicals company that makes solutions for cleaner energy and cleaner air. It has an experienced board and is investing in new and future technologies such as fuel cells and hydrogen. To continue driving its sustainability agenda, this year, it is incorporating ESG and sustainability criteria in executive pay.
Improvements are expected in its top line, margin and cash flow. We believe it is undervalued and, when you combine that with the fact that well over 80% of its revenues contribute to the UN SDGs, it is one of the leading companies within the fund.
To have confidence in our investment, engagement is key. We have met management, board members and collectively engaged with the UN Principles for Responsible Investment on its supply chain. This gives us a better understanding of the risk/return characteristics.
Reckitt is a health, hygiene, and nutrition company. It has had big changes in management and strategy over the last few years and now it is embracing its size and scope, driving more from the group level. As a result, it is well-positioned to effect change.
There is a big focus on how its products are made, with reductions in energy and water usage and more recycling. Reckitt works alongside governments and public health bodies to educate people on issues including cleanliness, infant nutrition, sexual health – this is on top of the positive impact of its products within its hygiene, health and nutrition divisions.
Again, engagement is key: we have met the CEO, CFO, chair, directors in charge of executive pay, heads of sustainability to enable us to get a holistic picture of how the company is improving its management of ESG and sustainability.
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Source: Morningstar as at 31 July 2021, net of fees, based on Z Acc share class (ISIN: GB00BZ21SS97). Net performance using 12pm prices, unadjusted income reinvested. Peer group is IA UK All Companies. The index is a Composite benchmark. The fund launched 30 October 2015. Past performance is not a guide to future performance.
Threadneedle UK Sustainable Equity Fund: Performance (%)
IA UK All Cos
Year to Date
INTRODUCTION | Pandemic impact | Monetary policy | Value opportunities | ESG journey
1 Source: https://bit.ly/3gKn2ZJ
2 Source: https://bit.ly/3H3OXi1