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ESG

More research needed on using ESG in fixed-income investing — GPIF, World Bank

Further research and development about incorporating environmental, social and governance factors into fixed income is needed to increase ESG fixed-income investing, said a new report from Japan's 162.8 trillion ($1.5 trillion) Government Pension Investment Fund and the World Bank Group.

The report is the first part of a partnership between the Tokyo-based GPIF, the world's largest pension fund, and World Bank, in promoting strategies for including ESG criteria in investment decisions across different asset classes.

The report says while much ESG research has been concentrated on how to integrate those factors into equity investing, fixed-income investors are applying ESG factors using various methods, such as purchasing green, social and/or sustainable bonds, setting up ESG and/or socially responsible investment funds, following ESG indexes and hiring active ESG managers, as well as embedding ESG factors into the entire investing process.

The report cited multiple sources of research in saying there is a link between ESG factors and credit risk, and how applying those factors should not undermine strong financial results. However, the report said research on ESG in fixed income is still very limited, and much of it is concentrated primarily on credit risk and there is very little concerning the relationship of ESG factors on income stability, inflation, liquidity, market risks, maturity, term structures and yield curves, total returns and other risks and opportunities such as default risk or recovery rates.

The report promotes more robust research on the impact of ESG factors in fixed income, and also recommends the development of innovative products that accommodate growing demand for sustainable fixed-income investments, as well as allowing investors to make customized approaches to ESG investing by refining principles and metrics.

"Our research collaboration with the World Bank Group will help encourage greater awareness and wider adoption of ESG integration in fixed income. We especially value the World Bank Group's unique convening power and expertise to improve breadth and depth of ESG data, especially of social criteria such as human capital and health care, and to refine pricing and cost mechanisms for the green and other labeled bonds so that such products can become mainstream investment products. GPIF is committed to work with our external fixed-income managers to integrate ESG," said Hiro Mizuno, GPIF's executive managing director and chief investment officer, in a news release announcing the research report.

The report is available on the World Bank Group's website.