Episode 8 - Kindness Begets: The Power of Avoidance in Fixed Income

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  • 46 mins 39 secs
Can fixed income investors influence the behavior of issuers? In Episode 8 of the All Angles podcast, Vish Hindocha and Mahesh Jayakumar discuss how bondholders hold power over corporates as well as sovereigns, and share the state of integrating ESG factors into the fixed income landscape.
Channel: MFS Investment Management

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Vish Hindocha:  Hello, and welcome to another episode of the All Angles podcast.

Speaker 2:  The views expressed are those of the speaker and are subject to change at any time. These views are for informational purposes only, and should not be relied upon as a recommendation to purchase any security or as an offer of securities or investment advice. No forecast can be guaranteed. Past performance is no guarantee of future results.

Vish Hindocha:  Today, I'm speaking to Mahesh Jayakumar. He's an investment officer and analyst that's working on fixed income and sustainability here at MFS, and it's a really interesting and wide-ranging conversation. We're going to cover topics including the power of curiosity, change, and adaptation. We're going to cover things like what's happening at the frontier of some of these big fixed-income asset classes, like sovereign debt and other asset classes in credit. And one of the things that I really took away from this conversation is that we have to evolve our thinking as to how we apply some of these principles of how we think about sustainability into these other major building blocks of asset classes that are in our allocators' portfolios.

I hope you take away something from this conversation too. Remember that you can subscribe to All Angles through any of your listening platforms, including Apple and Spotify. And if you have any questions, we would love to hear from you. Please email us at [email protected] with your question, and we're happy to address it. Thank you for listening.

Mahesh, welcome. It's great to have you here, and I know we're going to talk about a whole wide range of subjects. Before we do that, I'd love to learn a little bit more about you. Can you go all the way back to the beginning and give us a kind of potted history of how you got here?

Mahesh Jayakuma: That's a good question, Vish, and wow. So let me dig deep into the memory banks here. You've heard me say this, that I consider myself a citizen of the world, but the reason I say that is, I had the privilege of growing up in India, in the Middle East to Indian expatriate parents, who not only exposed me to life in the Middle East, but more importantly, we traveled the world.

Mahesh Jayakuma: And that exposure at a young age to various cultures, geographies was just amazing. Right? It stays with you. It shapes your persona. Andin my case, living in India and going to boarding school and living, leading an independent life, yet being connected to my expatriate folks who lived in the Middle East, traveling the world, was just an unbelievable background because that eventually led me to come to the US at a very young age for school, for university, and I have called the US now home for 35-plus years.

And I'm glad you asked this because I reflect upon this. Who you are as a human being is often a composite of all your experiences-

Vish Hindocha:  Lots of fun experiences.

Mahesh Jayakuma: Growing up, the people you've met, the wonderful colleagues you work with. So I'm very thankful. I'm very thankful that my folks allowed me that opportunity to start witnessing the world and traveling at a very young age. Fast forward, I have been extremely fortunate, and I tell this to everyone that I meet, which is when I least expect something, it happens and it turns out to be an unbelievable experience because, fast forward, the joke I tell folks is, I went from India to Indiana because I didn't know any better. I just added two alphabets at the end of the name of the country where I was born.

After that, I was fortunate enough to move to Florida, and that was another chapter of my life where now I was exposed to Latin American culture.

So I'm very proud to say that I was exposed to Cuban culture, learned Spanish. I still appreciate Latin American and Cuban culture because of my life in South Florida, which also happened to take me to Europe, specifically France. So I lived in France for a couple of years, which means I ended up learning the language there also.      

It just so happened that the company I used to work for shut shop in Florida and basically said, "Hey, Mahesh, we don't want to lose you. We'd love to have you move to the headquarters." And by the way, it's in the Boston area.

Vish Hindocha: Mm. So 19 years in Boston, but lots of change, adaptability.

Is there anything in that initial period before you get to New England and to Boston that you think has shaped your worldview or your ability to do what you do today? Like you said, your experiences often shape who you are. I'm just wondering, is there anything in there that you think of as a somewhat seminal moment as to how you think about the world today, how you approach problems today? Anything in that?

Mahesh Jayakuma:  I think it's the sense of wonder, because you don't know what you don't know, and you know what you know.

Vish Hindocha:  Mm, yeah.

Mahesh Jayakuma:   My wife and I talk about the fact that if I hadn't taken this path in life and if my folks had continued to stay in India, maybe I wouldn't know anything else. Right? I would've thrived and be happy with my life there, but I wouldn't have had the chance to experience the joy of other cultures, other countries, other nations, other peoples. And that has always, has always, stuck with me.

The joy of learning something, knowing about something continues to fascinate me until today. And what that has done for me is, that sense of curiosity doesn't end just in the personal life. Right? It also continues on to your professional life, because as research analysts, you can imagine, you don't know everything. You're trying to dig into something and figure out why something is occurring. What is the history behind this? And so, that sense of curiosity is something that I'm extremely grateful for

Vish Hindocha: And that curiosity, no doubt, helps you in what you do today. Maybe explain for people what you do at MFS and where you fit into the MFS family.

Mahesh Jayakuma:   I'll just quickly take a step back, Vish, just to finish the story of how I got here, because I talked to you about moving to New England. What I didn't talk about was, I'm a computer scientist by training, so what brought me to New England was a job in software, in software engineering. And I have been very privileged to have that mathematical, logical brain of writing code, because that ability carries with you throughout your life in terms of logical problem-solving, breaking things down, and then logically connecting the steps.

 I was just fortunate that after a career in technology, I was able to go to business school in the Boston area. And in business school, I was able to start taking finance classes, accounting classes, really look at other subjects that I had never been exposed to in depth.

I started studying for my CFA the same year I was graduating. It was crazy. There was a baby on the way, I'm graduating, looking for a job, trying to change careers, and studying for the CFA, but I loved it. I loved every minute of that, because I was fortunate enough to join State Street in their management training program. And I'm eternally grateful to them because that's where I started my finance career and asset management career at SSGA. And long story short, I ended up managing fixed income, systematic beta portfolios there. As part of that journey, we had launched systematic green bond strategies as early as 2011.

Vish Hindocha:  Wow.

Mahesh Jayakuma:   I mean, we were ahead of the game in 2011 when we ran, launched, commingled systematic green bond strategies, which I had the pleasure and the privilege of managing, and that continued my ESG journey, that continued my fixed income plus ESG, if you will, to the point where I decided to make that my full-time career, the focus on ESG. One foot in ESG, one foot in fixed income. And that has continued to this day, and I've been fortunate to come to a place like MFS. Very different, right? Not a ETF, beta, beta-like provider, but bottoms-up, smaller fundamental shop, and that's fascinating.

And the beauty of being at a place like MFS is, it's a very different philosophy to what sustainability means and how to think about sustainability. And in my case, my job is to work with my fellow analysts, my fellow fixed-income credit analysts, on helping them understand how to better integrate ESG in their investments.

These folks for are the ones that are making buy, sell, and hold decisions on the names and the sectors they cover. And my role simply is to help them understand how to think about ESG in that process, how to apply it, and how to cut through the noise, if you will, with all the data and the information being thrown at you to make sure that we're making investment-friendly decisions while incorporating ESG. So that's what I would say is my job.

Vish Hindocha:  Amazing. Why does what you do now excite you? What kind of moves you today?               We talked about working with colleagues, and you're clearly somebody that thrives on learning new things and adapting yourself to new environments for new skills or new problems to solve. But what is it that keeps you here and keeps you excited about coming into work every day?

Mahesh Jayakuma:   I am blessed to work at a place like MFS, and I don't mean that as a cliché. I have worked in enough companies. I'm old enough to tell you that I worked in enough companies in my life. And the culture, the sense of collaboration, purpose is just unbelievable at a place like MFS. And I knew about this from the outside, right? MFS has a reputation, when you're standing outside the gates of MFS, that you know what a wonderful firm this is, but you don't know that until you're actually in in the seat.

 And so, I'll talk about multiple reasons, but I'll start with that. I'll start with a sense of the collaboration and the quality of individuals that you're working with and you're collaborating with and talking to and exchanging ideas on a day-to-day basis. In a world where asset management is increasingly being democratized, fees are going down, passive is on the rise, active is under threat, MFS is one of the last bastions of pure bottoms-up fundamental.

Vish Hindocha:   Mm-hmm.

Mahesh Jayakuma:   Yes, yes, this world of fundamental active research might be under threat and there might be fee pressure, but I sincerely feel a place like MFS is going to survive and come out of the passive-active wars, if you will, successfully. And I say that because of the unwavering commitment that MFS has to long-termism. Right? Let's stay the course. Let's not jump ship every few years and change our strategy just because somebody else is doing it or it's fashionable. Right? That's not what this firm does. This firm says, "Hey, this is our bread and butter. This is our ethos, fundamental, long-term, active security selection." Let's stick to that.

Vish Hindocha:   Yeah, absolutely. And you apply yourself to a really fascinating intersection, which I want to get into now, which is this very dynamic and emergent field of how we think about sustainability or ESG in specifically across the gamut of fixed income. Right? And you've talked a little bit about philosophy, firm philosophy. Maybe just in a nutshell, how would you describe how you approach the problem of how do we best think about sustainability in the context of fixed-income asset classes?

Mahesh Jayakuma:  I'll first start with how to think about sustainability. Right? And it's personal, and it comes from a personal philosophy, which is, if you treat other people nicely, hopefully you'll get treated the same way.

Vish Hindocha:  Okay.

Mahesh Jayakuma:  Right? And you might say, "What is he talking about? Really? Treating other people nicely?" And I'll tell you why I say that. Kindness begets kindness. Right? So now, let's apply that to a company, an enterprise. If this company trashes the community it operates in, pollutes all the lakes and rivers and the earth that it's operating on, treats its employees like crap, with no respect, no benefits, just breaks rules, pollutes the atmosphere, is that company...

Again, kindness begets kindness. And I'm not saying it's kindness, but is that a company that you and me want to work for, that anybody wants to work for? Is that company going to survive into the long term? No. Right? So let's start with that, right? Sustainability. I'm not talking about charity. I'm just saying behavior.

What is the right behavior that an enterprise or a government or a public authority should do to foster proper outcomes?

Vish Hindocha:    Yeah.

Mahesh Jayakuma:     Right? That's what we're talking about. And I started with the word "kindness" just to tell you about "do no harm". Right?

Vish Hindocha:     Yeah.

Mahesh Jayakuma:  Would you do harm? And what that means, right?  So when I think about sustainability, I think about the fact that it should not even be called ESG. It should just be doing the right thing.

Vish Hindocha:   Right thing. Yeah. Yeah.

Mahesh Jayakuma: Right? Let's throw the word "sustainability" out. Let's throw the word "ESG" out. It's doing the right thing. Doing right by the planet, doing right by society, and doing right by other stakeholders that you work with as a entity, regardless of who the entity is. It could be a government. It could be a company. So that's how I think about sustainability. And I'll connect that to MFS, because if you want to do that well, if you want to think about it well, there are no shortcuts.

Vish Hindocha:   Yeah.

Mahesh Jayakuma:   You need to dig in to this enterprise, this company, this country, understand why and how these dynamics are playing out and that sort of understanding what is the right behavior, understanding the use of digging into fundamental research to understand this better. Plus, in fixed income, you're basically... Think about it. You're lending money to these enterprises. You're lending money to these countries. So you're a provider of capital.

So, ultimately, if you're a provider of capital, you can think about it two ways. You can think about, is this entity that is taking my money behaving in line with my own values?

Right? That's one way to think about it. And that was what I called, when you and me have discussed this concept of ESG 101, values investing. Thou shall not invest in sin stocks, et cetera, et cetera. And some investors still continue to do that today.

That's fine. That's their prerogative. Right? They're basically saying, "Hey, these are my values." We've also talked about the fact that even if you don't provide capital, somebody else is going to provide capital. So that activity that may not be in alignment with your own values is probably going to continue. Again, but I'm not judging anybody, right?

Vish Hindocha:    Yeah.

Mahesh Jayakuma:  So that's values-based. The other side of the coin is, if I'm providing capital in fixed income, what is the number one goal of fixed  income? Capital preservation.

Vish Hindocha:  Yeah.

Mahesh Jayakuma:  Right? At the end of the day, I'm lending you money, and hopefully you pay me back.

Vish Hindocha:  Yeah.

Mahesh Jayakuma:  And so, now, if you're not behaving well, if you are not behaving in a sustainable manner, how does that affect the likelihood of capital preservation?

Vish Hindocha:  Definitely.

Mahesh Jayakuma:  That's what it comes back to in fixed income, right? So that hopefully gives you a quick link of how I think about sustainability in fixed income.

Vish Hindocha:  Yeah, definitely. And we've heard on prior podcasts in this series, and you and I have definitely talked about how we integrate sustainability factors as part of just good, long-term active management. But implicit in what you've talked about, and you explicitly referenced it earlier, is a time horizon that allows for it. I think once we extend the time horizon to be good, long-term stewards of capital or asset allocators, wherever we fit in the value chain, then I think it becomes incredibly obvious that we have to think about how a company treats its employees or how it could get fined or how it operates with regulators or the threat of substitution,] just like you have to with just about everything that we contend with.

But now, there is a lot of pervasive short-termism. So one of the things that often gets talked about in the realm of ESG is really centered a lot, I don't know if you agree with this, on the equity domain, certainly over the last few years. And now, we are broaching the subject of, how does this play in fixed income? How do you think about the differences? Obviously, MFS has strategies in equity and fixed income. How do you think about some of the similarities and differences between these two major building blocks, asset classes, that asset allocators are using today, and what are the nuances that we should be thinking about when it comes to sustainability across that piece?

Mahesh Jayakuma:   Yeah. No. I mean, equities as an asset class were the clear forefront and leader in ESG investing, that sort of values investing manifested itself in the world of equities.

I'm not going to buy stock of a company that is involved in a particular sector. Right? So that's the genesis of that and why equities is where this phenomenon started. But when you think about fixed income, and you about time horizons, because that's the very first attribute that's different between the two. Right? Think about what it means to be an equity investor. You are providing capital as a shareholder, as an owner of the company.

Right? You are at the bottom of the capital structure. Once the company has paid out everybody else, you're getting your EPS, your earnings per share. Right?

Vish Hindocha: Yeah.

Mahesh Jayakuma:   So as long as that company or enterprise continues to survive into perpetuity, you're a shareholder. You're an owner into perpetuity. That's not the case in fixed, because when you think about fixed income. And I talked about providing capital, right? When you buy a bond of an issuer, it doesn't matter what kind of issuer. You're buying a bond with a maturity.  It could be a three-year bond, a five-year bond, a 10-year bond. Now you have 100-year bonds. I mean, I'm fascinated by that because it's like, I have no clue what the world is going to look like in 100 years. I can take a guess, but wow.

Vish Hindocha:    Yeah.

Mahesh Jayakuma:     Can you imagine somebody owning a 100-year bond in the portfolio that's probably going to go through multiple managers looking at that book? But the idea with fixed income... Yes, 100 years is a long time, and you could say, "Mahesh, isn't that like an equity?" Maybe. Yeah. It's like, it's going into perpetuity. But the idea in general with fixed income is, you are lending money for a certain amount of time, and after that certain amount of time, you're getting back your capital.

Vish Hindocha:   Yeah.

Mahesh Jayakuma:   That is, your capital is preserved and returned to you. That's the big difference. So if you have a risk... Any risk. I'm not saying ESG risk. Let's talk about any risk. If the probability of that risk playing out within the time period of your lending, if it doesn't happen, then you know that that risk is not going to play out and you're safe in terms of your capital being returned to you. If not, how does that risk, including ESG risk, affect that enterprise and its ability to pay you back? Right?

That's how we think about it in fixed income in terms of ESG factors, versus an equity investor, dare I say, has a much higher risk appetite to begin with and already knows that when I am buying equities, the amount of risk you're bearing and the amount of volatility that you're going to possibly encounter is much higher-

Vish Hindocha:     Much higher.

Mahesh Jayakuma:   ... than fixed income. Right?

Vish Hindocha:  =   Yeah.

Mahesh Jayakuma:   It's a different world of expectations, return and risk expectations, according to me. And ESG is just another risk factor that affects that thinking. So that, I would say, is one of the big differences, so time horizon.

Vish Hindocha:    Time horizon.

Mahesh Jayakuma:    Right? The second one, I would say, is going back to this concept of being an owner. Right? If you are a stockholder or an owner, that comes with certain privileges.

And what are those privileges? The ability to basically vote on an annual basis at a public company's meeting and say, "I don't like this management team," or "I like this management team." "I like the board," or "I don't like the board." " I want the company to do this." You have the right as a shareholder. Right? You don't have that right as a bondholder. You're a creditor, at the end of the day. You're lending money to the issuer and you're hoping to get paid back. And there's the concept of covenants. Yes.

Covenants protect us as creditors and bondholders on ensuring the company behaves and continues to behave the right way during the amount of... the time period that I mentioned that we've lent funds. But we technically don't have any legal mechanisms, like our equity counterparts, to influence management.

Vish Hindocha:   Yeah.

Mahesh Jayakuma:    Right? But, but, but, but, but, but that doesn't mean, that does not mean we don't have a say.

Vish Hindocha:                Yeah.

Mahesh Jayakuma:    Right? This concept of, "Hey, fixed income investors have no power." Yes. We have no legal authority and power, but that doesn't mean that a company is not going to listen to you and have a conversation with you as a bond investor on what your views might be on what the company is doing and not doing. Why do you ask? Because think about it. Bond investors? A company depends on the bond investors again and again and again.

Vish Hindocha:       Again and again. Yeah.

Mahesh Jayakuma:   That's the whole point.

Vish Hindocha:    =Yeah.

Mahesh Jayakuma:   You are providing capital on a short-term to intermediate to long-term basis repeatedly because companies pay down debt, go back and raise debt, pay down debt, go back and raise debt, unlike equities. A company might not issue equities at all, whereas they're issuing bonds again and again and again. So if I don't believe you're doing the right thing, am I going to lend money to you as a bond investor the second time around? No.

Vish Hindocha:    Yeah.

Mahesh Jayakuma:   So there is a mechanism to, not influence, I don't want to use that word, but to provide feedback to a company's management team even if you don't have formal mechanisms like proxy voting, shareholder resolutions, et cetera, et cetera. So that's another big difference between fixed and equities.

Vish Hindocha:    You have access to management. And again, you're working, hopefully, in a place where you can sit side by side with your equity colleagues and have that access, but one thing... You've mentioned this idea of values and it gets into the realm of exclusions. One thing I'd lay out on the table, something I've been thinking about quite a bit, so correct me where my thinking goes wrong. So, historically, we've had... The world of ESG began as really SRI and it was religious institutions,-

Mahesh Jayakuma:   Correct.

Vish Hindocha:     ... faith-based institutions that imposed negative screens, what we would call today, or exclusionary lists on sections of the economy or certain sectors or businesses or industries that they didn't like. And again, I'm with you. I have full respect for that and people should... There are some institutions that need to reflect their values in the way that they invest.

And now, we've inherited that and you roll it forward. And because of the structural growth of passive, my feeling is we... And the ESG industry is still in its infancy, and as it matures, I think it will start to get more nuanced and more sophisticated around some of these issues. So I think we currently use words like divestment or exclusion somewhat synonymously. And to me, they're very different things, and I think there are actually three categories that people should be thinking about.

One is exclusion, which says, "Ex ante. Before I've done any analysis, before I've done anything, I've just decided I don't like X. I don't like tobacco stocks or alcohol stocks," or whatever it might be that's offending your value system.

And I'm not doing any analysis. I'm not looking at those companies. Those are just out of my investable universe.

Mahesh Jayakuma:   Correct. Correct.

Vish Hindocha: Then you've got a second category which, to me, is avoidance, which is, I'm going to do the work. To your point, there's no shortcuts. I'm going to roll up my sleeves. I'm going to try and understand this business. And for a variety of fundamental factors, which could include sustainability, I'm going to decide not to invest in some of those things, and you can do that in the equity world or the fixed income world. And as an active investor, you could argue that, "We spend more of our time deciding what not to invest in than-"

Mahesh Jayakuma:     Exactly.

Vish Hindocha:     "... attempting to invest in something."

Mahesh Jayakuma:     Exactly.

Vish Hindocha:   And then once you have invested, that's when divestment becomes an option. So the thesis could be fulfilled or broken for a number of reasons which would drive a divestment for a firm like ours or for any active investor. And then once you've also chosen to own it, you've got stewardship and active ownership, which you've talked about here, which is access.

Mahesh Jayakuma:   Yeah. Yeah.

Vish Hindocha: And I actually think that, again, because there's another dynamic at play which sometimes goes a little bit under the radar,] which is, people think that buying equities in a company is giving that company direct capital which, for the most part, is a kind of misnomer. Most equities operate on public exchanges. And so, to me, selling means that there's another buyer in the open exchange. So if I sell my shares of ExxonMobil and you happen to buy them off that exchange, ExxonMobil doesn't know-

Mahesh Jayakuma: Exactly. Exactly.

Vish Hindocha:     ... or particularly care that that has happened. But all that's happened is, I've transferred that ownership to another individual, whereas with fixed income, like you're saying, you're essentially lending fresh debt, fresh capital to that business often with covenants and contractual obligations applied of how they're going to spend some of that capital. Again, it doesn't have to necessarily be the case and it's a complex field.

Mahesh Jayakuma:    Yeah.

Vish Hindocha:   So again, there are some nuances there that, to me, speak to why avoidance could actually be quite a powerful tool in the fixed income world because by... Again, to your point of understanding the business, compounding that understanding, and then being able to interact and engage with management teams before they syndicate their loans or before they come to the market is actually a very powerful position that fixed-income investors have been in. And again, maybe a year ago, I didn't really appreciate the strength of that position as much.

Mahesh Jayakuma:    Yeah. No.

Vish Hindocha:    Is that fair?

Mahesh Jayakuma:  You're absolutely right. I just want to also point out that you can trade debt in the secondary market.

Vish Hindocha:    Yeah.

Mahesh Jayakuma:   I'm glad you mentioned the Exxon example of, "Hey, you're buying..." That share, that stock is changing hands, and bonds can also-

Vish Hindocha:   Also... Of course. Of course.

Mahesh Jayakuma:   ... change hands in the secondary market. The big difference I would say is, bonds are much more illiquid.

Vish Hindocha:    Yes.

Mahesh Jayakuma:    You cannot necessarily find a buyer every single time-

Vish Hindocha:   Every time.

Mahesh Jayakuma:   ... you want to sell a particular bond, whereas I think stocks, you can, in all earnestness. So I think that's the big issue, is that bonds in general have what they call an illiquidity premium. Right? It's not as liquid as an asset class. But going back to your observation, you are correct. You are correct. This concept of ex ante avoidance, if you will, is something that is being practiced in fixed income.

In fact, when we talk about the evolution of ESG and developing ESG away from equities towards other asset classes, corporate fixed income, which is, "Hey, this is a company that issues stocks and equities, and here's the same company that also issues debt in the capital structure." Right? So if you're going to avoid the stock of a particular company because of your sustainability values, why would you buy the debt?

Vish Hindocha:   Yeah. Yeah.

Mahesh Jayakuma:      So you would also avoid that debt. So that's that concept of avoidance. And I love the way you laid it out in terms of the five pillars or themes or views, if you want to call it that, the way you laid them out. That very first pillar of avoidance can very well be practiced in fixed income.

Absolutely. And dare I say, you can practice it without even going down the divestment path.

Vish Hindocha:   Yeah.

Mahesh Jayakuma:    Right?

Vish Hindocha:    Exactly.

Mahesh Jayakuma:   Because if going back to what I told you earlier, you're not a perpetual owner.

You might have held onto a piece of paper, a bond, that matured at some point and left your portfolio without you necessarily making an active decision on it, but then when they're coming back to the market again, what is your stance now on that particular sector or company?

Vish Hindocha:    Yeah.

Mahesh Jayakuma:   So I hear you. I hear you. That's a style of implementation that can be done both in fixed and in equities.

Vish Hindocha:   And equity.

Mahesh Jayakuma:   Yeah.

Vish Hindocha:  Yeah. And maybe just there's some subtlety in terms of the emphasis that you could apply that. One of the things that I know that you're very focused on now and you and I speak about a lot is, one of the other big differences obviously is that fixed income isn't as maybe a homogenous asset class as equity might be, that you've got different sub-asset classes within there. And so, in the interest, I'd love just to maybe scratch the surface a little bit. We won't get time to go in full depth today. Maybe we'll have you back to talk about the full depth of the work that you're doing.

 But if you could break down for us, where is sustainability, in your view, across the marketplace today in the fields of things like the sovereign market or the municipal bond market or the corporate credit market that you've just referenced? Where would you say that they are on the journey? What are some of the hurdles, obstacles that investors like you are facing? What are some of the things that the industry is contending with on that? Maybe we start with sovereigns, if that's okay. Where are we on sovereigns and sustainability?

Mahesh Jayakuma:   Yeah. No. I'll step back and quickly allude to what you just pointed out, which is, the fixed income asset class itself is not uniform. It's not homogenous. You have different kinds of bonds being issued by different types of issuers countries can issue sovereign bonds in their own currency, and that's typically what you call local currency bonds, versus issuing in other currencies outside of their local currency in typically G7 currencies, the United States dollar, the British pound, the Japanese yen, et cetera, and those are called hard-currency sovereign bonds. Right? So you already have that distinction in sovereign bond space itself. You have sub-sovereigns, states, governments, local governments, cities that have to, again, raise funding for operating their cities or states. And so, that's sub-sovereign debt, and the biggest sub-sovereign debt globally is the US municipal bond market.

Vish Hindocha:    Municipal.

Mahesh Jayakuma:    And then one of the biggest asset classes, of course, is... Sovereign bonds is, by far, the biggest sub-asset class within fixed income, but the second biggest after that is corporate bonds.

Going back to your question of, where are we? Where are each of these sub-asset classes? Right? I would say that the ability to think about ESG factors and execute and implement ESG factors is probably the greatest in corporate credit space, simply because it mirrors many of the same tools and methodologies and frameworks that our equity counterparts might utilize. Right?

 And that's not all the time, but for the most part, right? I'm glad you talked about sovereigns, because I would say that's the second sub-asset class or partition within fixed income where the implementation and the ability to implement ESG is now gradually increasing. And it started out with this concept of thematic bonds, right? So countries would issue green bonds and the country would say, "Hey, I, as a sovereign, am issuing this green bond or a social bond to take these monies and use it towards projects that are going to help my country or my citizens in a certain way." Right?

 "In one case, I might be cleaning up a brownfield zone with these funds or I might be providing renewable energy with these funds or I might be building a hospital or providing and building a school," et cetera. So that was the very first, I would say, taste of sovereign ESG investing for a lot of investors, which is, "Hey, I know I'm providing capital to this country to do certain things." Fast forward, the same concept of understanding what we call ESG materiality, which is, what is the most important or what are some of the most important ESG factors from a risk and return perspective that I need to think about when understanding a corporation, for example, in corporate credit? That same concept, you can also apply to sovereigns, right?

And by the way, the pillars are the same. Right? I want to reemphasize that the environmental pillar, the social pillar, the governance pillar, those pillars are the same across these different parts of fixed income, but the factors underlying each of those pillars might not be the same.

Vish Hindocha:  Might be different. Mm-hmm.

Mahesh Jayakuma:  Right? So when you think about governance for a company, you're thinking about the management team, the board. When you're thinking about governance for a country, you're thinking about political stability, the administration in power,-

Vish Hindocha:   The strength of institutions.

Mahesh Jayakuma:    ... the strength of institutions, the rule of law, regulation, et cetera. So it's governance. It's the G pillar in both ways, but they're implemented and manifested differently. So you are thinking about the strengthening of these factors or erosion of these factors in different ways and applying that to your own risk framework to say, "Hey, what do I think is going to happen to the sovereign?" So that concept of applying ESG factor materiality to the process of evaluating risk is now firmly embedded also in sovereigns just like it, I would say, started out in the world of corporate credit.

And the reason is simple, because to do this effectively, you need data. You need to understand behavior. You need to understand what is happening. And without data, you cannot make that.

Vish Hindocha:       Mm.

Mahesh Jayakuma:   You may not be able to make that decision correctly. And so, because disclosure was not as forthcoming from an ESG perspective on the sovereign side compared to corporates, it was slower to take hold. But now, countries understand, right? Countries themselves understand that they need to behave in a much more sustainable manner. Think about what the SDGs are, right? For those of you who don't know, the UN Sustainable Development Goals that all the major countries of the world have signed onto, the goal of the SDGs is very simple. It's sustainable development. How can we make this world a better place with less poverty, with better environment, and manage the resources that we have? Right?

That's what the UN SDGs are alluding to, with the 17 different principles. And the idea is, when a country signs onto that, it's saying, "I, as a country, want to do right by my citizens. I want to do right by the environment." Right? So it's a fancy jargon for, again, going back to this concept of understanding and doing right by your stakeholders. So that ability to now understand and get information on ESG for sovereign has markedly improved.

Vish Hindocha:   Mm.

Mahesh Jayakuma:  Right? And that's why I would say that's where we are with sovereigns. And even if that information was not available, you have NGOs and initiatives that focus on influencing sovereigns and saying, "Hey, by the way, we need this information from you." And I'm pleased to tell you that MFS is part of one such initiative known as the ASCOR, A-S-C-O-R, Assessing Sovereign Climate-related Opportunities and Risks. This initiative, which is a wonderful initiative that has been spearheaded by the PRI,-

Vish Hindocha:    CERES. Yeah. Yeah.

Mahesh Jayakuma:    ... IIGC, CERES, many other NGOs, and has a coalition of asset managers, including MFS, at the table, as well as being worked on and helped and implemented by the London School of Economics. The goal of this initiative is climate-related disclosures from sovereigns.

If climate risks are as important as they are, and we consider them one of the most pivotal risks that we're facing,-

Vish Hindocha: Material risks. Yeah.

Mahesh Jayakuma:    ... material risks that we're facing, how can we get better disclosure from sovereigns on, A, how are they exposed to these climate risks and, B, how are they managing these climate risks? Right? So the goal of this initiative is precisely to do that, which is to encourage sovereigns to say, "This is how investors can use a climate risk assessment framework when understanding this for sovereigns. These are the metrics, these are the data points that we'd be looking for, and how can sovereigns help with that? And once you have disclosure, how are you remediating that risk?" Right?

So that's what this is focused on. And the reason ASCOR came about is because this same sort of initiative started out, again, in corporates. Right? The Transition Pathway Initiative, the TPI, which both of us are familiar with, that's exactly what TPI did. TPI said, "Hey, company, corporate, XYZ, how are you exposed to climate risk and how are you managing it?"

And the idea was, "Let's do TPI for sovereigns," and that's precisely the goal of the ASCOR project. And that's the right thing to do. MFS, as an asset manager, has a seat at the table and should contribute to the development of standards and frameworks, and we do that every single day, as you know.

Vish Hindocha:  Particularly given the importance to, I mean, not only just... I mean, it's exciting and it's fascinating to see what that group will come up with, and I know there are some plans as we head into the end of 2022 and early '23 in terms of some of those metrics and frameworks that will be disclosed. But sovereigns play such an important role in client portfolios or asset allocators' portfolios, either for liability matching or risk management or as a ballast to other growth assets.

 So it's funny, because in my capacity, as I interact with clients all around the world, and those are asset allocators, asset owners, I think everyone's attention is slowly pivoting to other very large segments of their portfolio, which is typically the fixed income, the sovereigns or the high-quality credit component parts, and saying, "Hey, I've been very focused on sustainability or ESG and my equity or my growth assets. I should be also focused on the 40% or 50 or sometimes 80% of my assets that are actually in this." And that's where we're becoming a little bit unstuck, I think, in the industry.

And something like ASCOR and the work of the other NGOs that you mentioned, it's really exciting to think about how we're going to evolve that thinking over time.

Are there other thematic issues that you're looking at today? Anything that's top of mind to you in your seat as you look across the landscape of both sustainability and fixed income?

Mahesh Jayakuma:   Investors are now paying attention more to what I would say the S pillar and the E pillar.

Right? If you think about the S pillar, we talk about culture, right? I talked about MFS culture. How do you measure that, Vish? How do I express culture to you? I cannot quantitatively tell you what culture looks like. We can try to poke and prod what culture might mean. Culture might mean diversity.

Vish Hindocha:     Yeah.

Mahesh Jayakuma:  Oh, if you're more diverse, if you have a very diverse workforce, the culture is more fostering a collaborative. Yes, you can make that deduction and you can deduce that. But again, when you think about the social pillar, typically we have focused on safety metrics, health metrics, et cetera. But increasingly, we're now focusing on culture, diversity. DEI has become a very big theme that we're all thinking about. And by the way, there's no good data. There's some diversity data that companies are now disclosing, but we have to do more work on, what does that mean?

Vish Hindocha:  Mm.

Mahesh Jayakuma:    Are you succeeding just because you're diverse? Are other policies within the firm impeding that in spite of you being diverse? These are things that we're slowly discovering. So that's this S pillar and diversity and culture theme under the S pillar, is something that we're all working on as ESG investors, regardless whether you're a fixed-income investor or as an equity investor. Right? We're thinking about it as a theme, and then we can tease that out and say, "What does that mean-"

Vish Hindocha:    What does that mean for them?

Mahesh Jayakuma:    "... for fixed income?"

I would say climate risk is the number one E pillar item that we're all thinking about. And climate risk, the climate risk factor, is one of those things where it's not as clean and boxed in as many other ESG factors. It has so many other linkages to sovereigns in terms of what kind of physical risk a sovereign might be exposed to.

Vish Hindocha:   Yeah.

Mahesh Jayakuma:  What happens to a company's demand, company's goods? What happens to a demand for a company's goods in a warming planet? So climate is one of those things that attacks other sub-sectors, other parts of fixed income. And so, I am not surprised. And I think we're doing the right thing, which is, we're attacking this and understanding this in a very deep fashion, like we are at MFS. Right? We're thinking about how to think about this risk, how is the marketplace thinking about this risk, how are other stakeholders thinking about this risk.

So I would say that that theme, that factor under the E theme or that theme under the E pillar is something that we're thinking about a lot. The other aspect that is now coming up is decarbonization, especially in the context of the Russia-Ukraine crisis, We had now have experienced disturbances in the theme and the thinking that we didn't have before. And so, time will tell what happens. What does it mean? So our coal assets now, is there a new lease of life on coal assets? Which I would say there is because of the energy crisis globally. Natural gas. The pure environmentalists have always said, "Natural gas is a fossil fuel." Right? This concept of nat gas being a bridge fuel is fallacy, right?

Vish Hindocha: Yeah.

Mahesh Jayakuma:   I disagree with that because you have to be very realistic in terms of balancing energy needs, energy security, and development.

Vish Hindocha:     I do think that the notion of the transition and how important a transition is going to be from one to the other has started to really permeate people's thinking now. Before, it was, "I want to move to the green economy. I want to green my portfolio, essentially. And if I green my portfolio by some form of magic, that will translate into greening the economy."

And now we recognize that it's the other way around, that actually this is going to take time. There are going to be missteps globally. We'll be likely to go down cul-de-sacs that may not pan out. There's new technologies that will come online and we'll need to help us. There are trade-offs that will have to be made.

Mahesh Jayakuma:   Exactly.

I have a question for you, pivoting out to a little bit more about you. What is the book that you've read or gifted the most to other people? What's the book that moved your thinking? What should I be writing down as my next book on my reading list?

I've read so many books, so many authors. Where to begin? I'll go back to my childhood. I'll go back to where you started this conversation. There was an Indian British author by the name of Ruskin Bond. Right? Now, what was interesting about Ruskin Bond was, this was an Anglo Indian who was of English heritage, who was born in India of mixed parentage.

And so, he had a wonderful way of writing short stories, especially in the hill stations and the hill country of the north of India, where he lived.

They could be humor, they could be horror. So I still have a fondness for Ruskin Bond that I had today. The other person that I encourage people to read is a gentleman by the name of R.K. Narayan. Right? R.K. Narayan was an Indian author who wrote about life in India, and especially in Southern India, and the stories of his main character was a kid named Swami and the misadventures, if you will, that Swami got into trying to do the right thing. He was like the local Dennis the Menace, if you will.

Vish Hindocha:  Right.

Mahesh Jayakuma:   And his stories had a lot of heart. As an Indian child growing up, you could see in Swami the reflections of you getting into trouble and you trying to fix things behind your parents' back when you knew you had gotten into trouble. So I encourage people to read R.K. Narayan-

Vish Hindocha:    And Ruskin Bond.

Mahesh Jayakuma:    ... and Ruskin Bond, The Adventures of Swami.

Vish Hindocha:    That's perfect. I'm going to add those to the list. Before we close out, what's the one thing you would want our listeners to take away?

Mahesh Jayakuma:   I'm going to go back to this concept of being curious. Vish, I want everybody to be curious, be uncomfortably curious. Even if it's uncomfortable, dig, learn, understand. There's a lot of problems on planet Earth right now, be it political, be it economic, be it perceptions. There's a lot of problems. And when I feel uncomfortable about that problem or that topic, there's parts of me that wants to run away and hide that webpage or hide that article and not want to read it, and I precisely try not to do that.

Even if I have to squirm, I am curious. I want to learn. I want to be uncomfortable and get a new perspective. So please never ever, ever, ever stop being curious, because that's the only thing that you have.

Vish Hindocha:  That's beautiful. Thank you for sharing that. You've certainly added fuel to the fire for me and let it spark, so thank you. And I'm sure you have many other lessons. So I really appreciate your time, Mahesh, and your insight and your wisdom on many, many topics. I'm sure we'll have you back again. Once maybe I've read one of these books that you recommended, then we can talk about Ruskin Bond.

Mahesh Jayakuma:  Thank you for hosting me, Vish. Thank you for hosting me and being a generous host. And really, I mean, you've given me a chance to talk about things that I've not even thought about in a long time, so thank you for that.

Vish Hindocha:  Great. Thank you so much.

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