Fixed Income has been slow to embrace ESG factors
In spite of its increasing popularity, it is perceived that fixed income significantly lags equities in the field of environmental, social and governance (ESG) investing. CAMRADATA’s latest whitepaper focused on ESG in Fixed Income explores why this might be the case and the opportunities that are emerging for sustainable investors.
The whitepaper includes expert insight from guests who attended a virtual roundtable hosted by CAMRADATA in July. Participants included AXA Investment Managers, Federated Hermes, Royal London Asset Management, Barnett Waddingham, Canaccord Genuity, Pension Insurance Corporation and River and Mercantile Solutions.
Analysis last year by the financial research firm Morningstar found that global funds labelled as “sustainable” accounted for $1.8 trillion (€1.6 trillion) of assets as of mid-2019 – but fixed income strategies made up only one fifth of these.
When it comes to integrating sustainability, traditional fixed income markets have often been referred to as the “neglected child”. However sustainable investing, for example in the context of identifying downside risk, is just as important for fixed income investors as equity investors.
Sean Thompson, Managing Director, CAMRADATA said, “Fixed income approaches may have been slower to embed sustainability considerations in part because of the differences between the bond and equity markets – and the methods for integrating sustainability in equity portfolios cannot simply be transferred across to fixed income.
“Nevertheless, evidence is growing that the integration of ESG can create alpha in corporate bond markets and can even outperform non-sustainable investments. Our panel shared their insight and considered what the future might hold for ESG investors looking at fixed income strategies.”
Key discussion points included whether there is enough ESG fixed income products available to sustainable investors, the risks for investors and how managers scrutinise these risks; followed by a discussion on the challenges facing different sectors including the automotive, packaging and energy sectors.
The panel also considered the nature of bondholder engagement, before ending with a discussion about the growing category of green bonds – which all managers felt required closer inspection.
Key takeaway points were:
- On the question of whether there are enough ESG fixed income products, panel responses included, “by quantity, yes; but by variety, no” and “there is not enough maturity. The further you go out, the less there is, which is partly a reflection of the market.”
- Another panellist said that generally there are enough ESG-integrated fixed income funds, but highlighted they have experienced difficulties sourcing products with add-ons, such as the exclusion of fossil fuels for university endowment clients.
- Managers at the roundtable recognised a lack of issuance at the long end, with one portfolio manager saying, “we struggle to find appropriate long-duration assets.”
- Another suggested that in the aftermath of COVID there will be more debt issued at the long end: Covid-bonds; transition bonds; social bonds and green bonds.
- One panellist said that there was a risk of making a false distinction between ESG and credit analysis. They said the former is not an adjunct to the latter, adding they are not hung up on the origin of risk but its discovery. Anything likely to impair expected returns for clients matters.
- The panel discussed bespoke ESG ratings agencies, with most recognising their limitations. One panellist said that they give an opinion at a point in time, but it was for active management to assess an issuer’s progress.
- Another described ratings as “backward-looking”, which necessitated engagement by bondholders.
- It was noted that both insurers and pension funds are going to have to disclose far more on their engagement policies and practices in the future.
- One panellist appreciated out-of-sight engagements with follow-ups that suggested a continuity of ESG policy by an asset manager. In contrast they said lengthy engagement reports were often “fluffy” and contained far too much information for clients to absorb.
- The panel agreed that not all green bonds are the same. But one panellist said they will work with companies that are on the path to sustainable energy, adding that not every enterprise is yet ready to issue green bonds or qualify as an ESG leader.
- Active management is all about looking beyond the label. In some ways, this is even more important in the fashionable sectors of green bonds, transition bonds and sustainability targets embedded into such debt agreements.
- The final point was that the wider trend is that bond investors are moving faster than bond issuers towards sustainable capitalism. The new regulations governing DB pension funds’ stewardship of assets – whose effects will be visible this autumn – are just the latest spur.
The whitepaper also features three articles from the sponsors offering valuable additional insight. These are:
- AXA Investment Managers: ‘How ESG can help build resilience in Buy & Maintain strategies’
- Federated Hermes: ‘Developed and emerging markets: spreads split the difference’
- Royal London Asset Management: ‘ESG integration into credit analysis – time to take off the blinkers’
To download the ESG in Fixed Income whitepaper click here