Almost half of global institutional investors are set to increase allocations to ESG bonds due to Covid-19, CoreData’s new income investing study shows.
The CoreData Research study of 200 institutional investors conducted in February 2021 found 45 per cent will raise their exposure to ESG bonds such as green bonds and sustainable bonds because of the pandemic. This figure increases to 59 per cent of investors in Europe and 53 per cent in the Asia Pacific. North American investors are less enthusiastic, with a third (34 per cent) set to raise their exposure to ESG bonds.
A key driver is the desire to boost fixed income returns and manage risk. Nearly three-quarters (72 per cent) of global investors agree that integrating ESG into fixed income investments can improve performance and credit risk management. This proportion jumps to nearly nine in 10 (84 per cent) European investors. Furthermore, the majority of global investors disagree (61 per cent vs. 39 per cent agree) that ESG risk factors are less relevant to the investment performance of fixed income strategies.
However, the study also reveals that seven in 10 (69 per cent) global respondents think a shortage of ESG risk ratings and data for fixed income investors is holding back greater adoption of ESG bonds. Concern about a lack of ratings and data is especially pronounced among respondents in Europe (81 per cent).
“These findings indicate that difficulties assessing and benchmarking the sustainability credentials of ESG bonds are acting as a barrier to stronger growth,” says Andrew Inwood, founder and principal of CoreData. “This highlights a real need for institutional fixed income investors to have access to robust and transparent data to help identify and monitor ESG risk and return factors.”
Elsewhere, the CoreData study shows how the hunt for yield in the wake of Covid-19 has propelled investors into more risky areas of the fixed income market. Eight in 10 (79 per cent) global investors say the current low yield environment is forcing them to look for opportunities in income-generating alternative investments. And more than half (55 per cent) say it is compelling them to look at distressed debt and high-yield bonds.
The lure of stronger returns is also driving income investors towards emerging markets. Seven in 10 (71 per cent) global respondents say the prospect of higher yields and improving fundamentals create compelling opportunities in emerging market debt.
