Bondholders have traditionally not integrated ESG factors into portfolios or held much sway when influencing the companies they invest in. But is that about to change? Emma Cusworth investigates.
“Investors are changing their view of ESG and, given the importance of the credit rating agencies, they should be part of that conversation.”
Archie Beeching, UN PRI
Integrating environmental, social and governance (ESG) factors into fixed income portfolios has been slower to catch on than for equity. Bondholders do not enjoy the same built-in system for holding companies to account on this score as their shareholding compatriots, but the materiality of ESG factors on corporate – and by extension investment – performance is asset class agnostic.
Just as integrating ESG has become mainstream thinking in the equity space, the same is likely to occur for fixed income, and the pace of change is likely to be much faster.
According to My-Linh Ngo, ESG specialist at Bluebay: “ESG should not be a silo or additional offering. It is a need-to-have. We view it as credit-relevant and apply it to all the assets we manage. We have a fiduciary duty to manage assets responsibly and that applies whether you’re talking about debt or equity. Data shows ESG can help manage performance so we have a duty to incorporate it in our investment processes.”
PERFORMANCE LINK
There is considerably more evidence regarding the impact of ESG on equity performance than for fixed income and the case for integrating ESG in fixed income portfolios is still arguable.
As Kate Brett, principal, responsible investment at Mercer Investments, says: “There is not enough evidence to be conclusive. The performance link to ESG factors is strong for equities, but that evidence is still lacking in bond markets.”
