Bond funds, with an ESG twist are on the rise. Several funds launched over the past year have focused on fixed income, linking the asset class with key Environmental, Social and Governance (ESG) themes of carbon-neutrality and climate change.
CAMRADATA reports that asset managers are applying the same procedures to bonds as they have for public equities and that like equity funds, bond funds can reduce exposure to material ESG risks by screening issuers.
CAMRADATA’s latest whitepaper – ESG in Fixed Income – highlights the opportunities and challenges ahead for those increasing their efforts in ESG investing.
The whitepaper includes insight from guests who attended a recent virtual roundtable hosted by CAMRADATA, from firms including Aegon Asset Management, Amundi Asset Management, Natixis Investment Managers, Aon, Barnett Waddingham, Hymans Robertson, Russell Investments and Zurich.
The report highlights that the importance of ESG criteria in fixed income investing continues to grow. In terms of supply, the issuance of bonds labelled green, social, or sustainable in the first four months of 2021 topped USD160 billion.
Social bond issuance alone is up twelve times compared with Q1 2020. In terms of demand, more of the regulations applied to long-term investors, including asset managers, now explicitly require the recognition and evaluation of ESG factors.
Sean Thompson, Managing Director, CAMRADATA, says: “Last year we reported growing evidence that the integration of ESG can create alpha in corporate bond markets and even outperform non-sustainable investments. This trend continues.
“Bond funds, like equity funds, can reduce exposure to material ESG risks by screening issuers. Alternatively, portfolios can tilt in favour of the strongest sustainability performers.
“But there are challenges, including whether bond indices are up to the job of supporting sustainable investments. Our panel explored these themes and shared insights into what the outlook may hold for fixed income ESG.”
The CAMRADATA roundtable began with consultants outlining that ESG integration in fixed income was an essential part of manager research. The consultants were asked if they saw considerable differences in use of metrics by managers; and whether they had to standardise managers’ measures for their own internal ratings.
The managers attending went on to explain their own ESG methodology and were asked whether they engaged for influence or to understand a company better, as a feedback mechanism.
The discussion also looked at the green bond market, which is in its infancy, and how the standardisation of metrics would come in time, along with the behaviour of some issuers when it comes to greenwashing. The final question was, what is required to take asset owners and consultants to the next level in fixed income ESG?