Sustainable investing gains traction in fixed income

Fixed income is quickly catching up in the field of sustainable investing. Andre & Ashley share the latest insights.

The stock market has been an early player in sustainable investing – while the fixed income market has lagged in data, tools and insights. But that’s changing fast, as we detail in a new publication: Sustainability: the bond that endures. New ESG indexes have created building blocks that can be used to bring sustainability into portfolios, even in asset classes such as emerging market (EM) debt that until recently lacked sustainable solutions.

Sustainable investing is the combination of traditional investment approaches with environmental, social and governance (ESG) insights. The “E” includes climate risks, “S” covers labor issues and product liability risks, and “G” refers to topics such as corporate board quality and effectiveness. What ESG factors really move the dial in financial performance? Organizations such as the Sustainability Accounting Standards Board (SASB) have taken the lead in investigating which sustainability topics are most relevant across industries. Our quantitative work builds on such studies, extending the analysis to global equities and credit. A key conclusion: Market pricing suggests each of the three ESG pillars are of roughly similar levels of importance in both credit and equity markets, as the chart shows.

The need for sustainable fixed income solutions is growing: Bonds are in high demand – against a backdrop of aging populations in search of income and geopolitical volatility that has sparked greater demand for “safe” assets. We believe fixed income investors can draw on many of the insights that equity-focused research has produced on ESG. Companies or issuers with strong ESG performance are likely to be better at managing operational and reputational risks. Yet there are nuances to sustainable investing in bonds. Sovereign debt requires a different approach, as we detail in Sustainability: the bond that endures. And in contrast to equities, fixed income investors’ main focus is often on mitigating downside risk, rather than capturing upside potential. We believe ESG metrics can help identify new risk factors.