Climate action put Santos in Nuveen ESG bond fund

A new impact bond fund launched by global investment giant Nuveen counts ASX-listed Santos as one of its issuers.

Nuveen head of ESG/impact Stephen Liberatore.

A new impact bond fund launched by global investment giant Nuveen counts ASX-listed Santos as one of its issuers, with the oil and gas major singled out for its climate change efforts.

The $US1.2 trillion ($1.6 trillion) money manager’s Global Core Impact Bond Fund invests across global fixed-income markets and directs capital to “best-in-class” ESG leaders providing direct and measurable environmental or social impact.

The $14.8bn Santos is one of those leaders.

“Santos has extremely strong corporate governance factors,” Nuveen’s head of fixed income ESG and impact investing strategies, Stephen Liberatore, said.

“It has almost all outside board members, almost 40 per cent ­female board members, and a very strong history on health and safety practices for employees.”

The oil and gas producer’s move to shift its business model towards more natural gas and LNG to reduce carbon intensity was another element that put it out in front, he said.

“And it’s looking at employing carbon capture technology at its Cooper Basin project while targeting being able to reduce scope one emissions by over 5 per cent by 2025,” he said.

“So you see the benefit and the projections and the forward looking (statements) that they’re trying to make as an issuer from an ESG perspective.”

Santos CEO Kevin Gallagher has become increasingly vocal about the immense climate pressure being heaped on the energy industry and the need for change.

Last month he called on Australia to take a lead in the carbon offset market.

“Australia can become a carbon storage superpower based on our vast tracts of pastoral and cropping land and our depleted oil and gas reservoirs,” Mr Gallagher said at an energy conference. “Just as Japan and Korea have counted on Australia to ­supply the energy resources to feed their economies over the last half century, they and other countries can look to Australia to help meet their emissions reduction targets.”

Focusing on these “ESG leaders” and impact investments would result in Nuveen identifying the best operated and managed issuers; the ones least likely to have problems in the future, Mr Liberatore said.

“Ultimately what we hope we have combined is a portfolio that can outperform regardless of the market environment and can deliver long-term outperformance, with higher ESG quality and that direct and measurable impact,” Mr Liberatore said.

“How you generate performance over longer periods of time isn’t by picking winners, it’s by avoiding the losers. And that ‘loser’ concept really is tied to free cashflow generation.

“So we think that if you’re doing your ESG analysis correctly, you’re identifying those issuers that have that more stable free cashflow profile.”

Commenting on the inclusion of oil and gas producers in an ESG-focused portfolio, Mr Liberatore pointed to how responsible investing had changed from its original iteration.

“Companies were either good or bad; it was pure exclusionary screening. And what that ended up doing was excluding entire sectors,” he said. “So if you were an oil and gas company, you were automatically excluded. But if you construct a portfolio and then oil and gas rallies, you’re structurally deficient. There’s no way for you to outperform or to keep up.”

Nuveen’s new bond fund strategy looks for the best-in-class across all industries and sectors.

Its launch, with $US25m of seed capital, comes as large investors, including major super funds, seek out ESG-focused fixed income to meet demand from ­socially responsible members.

“There’s really been a lack of options that have been a replacement for a core fixed-income strategy that also incorporate this really strong ESG and responsible investing impact focus,” said ­Nuveen’s head of Australia, ­Andrew Kleinig.

“Apart from some periodic allocations to green bonds, the fixed-income portion of those portfolios are by far the largest areas of interest.”