In our view, sustainable-bond investing can provide investors with the opportunity to direct their fixed-income investments towards a range of positive impacts. Environmental, social and governance (ESG) factors have already been proven to have a material impact on a company’s financial profile, and we believe in-depth analysis of ESG factors, alongside issuer engagement where appropriate, can help to enhance long-term investment opportunities in this growing sector. Below, we list six factors that we believe make sustainable bonds worth considering as part of a fixed-income portfolio.
- Positive social or environmental impact
Bond investors have the ability to provide financing for a range of socially and environmentally beneficial investments that are not available to equity investors. Examples include supranational development agencies, green bonds, social housing, and other not-for-profit organisations.
Bondholders can still engage even though they do not have a vote. They may hold less influence with large public companies than equity investors do, but they represent the only external investor influence that can be brought to bear on private companies, which are often more reliant on debt-capital markets to sustain and grow their businesses. Better assessment of (and sometimes influence on) a company’s management of ESG risks and opportunities should, in our view, provide the potential to deliver a more rewarding investment for clients.
In the context of our firm-wide investment across the capital structure of businesses, we can, as bondholders, harness the engagement activity of our equity colleagues in cases where we own both the bonds and equity of an issuer. This can be helpful in cases where companies may be less receptive to bondholder engagement given their wider capital market access.
- Risk mitigation
ESG factors can have a material impact on a company’s financial profile, and, as noted above, a large body of academic research supports this view. The inclusion of ESG factors within credit analysis can enhance risk mitigation, and, in our opinion, responsibly managed companies are best placed to achieve sustainable competitive advantage and provide strong long-term investment opportunities.
- Limited opportunity cost from lower sector weightings
Owing to the nature of sustainability-focused investing, some sectors will inherently have a lower portfolio weighting. For example, our ‘red lines’ approach of excluding investments which are in violation of the UN Global Compact or those businesses which are incompatible with a ‘2-degree world’ means that we have little or no exposure in our sustainable strategy to some sectors such as energy, defence and tobacco. However, the opportunity cost of this is limited in a fixed-income context, given lower sector concentrations and the lesser upside potential of bonds compared to equities.
- Robust sustainable fixed-income investment process
We believe a robust sustainable fixed-income investment process should incorporate in-depth ESG analysis of all corporate and sovereign-bond candidates in order to determine those with material ESG risks. Furthermore, giving responsible investment specialists veto power in the bond selection process enables them to prevent a sustainable portfolio from holding a particular issue if they believe the risks are too high.
A transparent approach to sustainable investment enables clients to see the positive impacts of engagement activities. We believe in being as transparent with our clients as we would wish our investee issuers to be with us, so we look to publish detailed quarterly reports of all our fixed-income engagement activities.
 ESG and Financial Performance: Aggregated evidence from more than 2,000 empirical studies, Journal of Sustainable Finance & Investment (Friede, Busch & Bassen), 2015