Updated with correction
Bond managers are working to add environmental, social and governance factors to their investment processes to meet growing client demand for responsible fixed-income investments.
The trend, at an early stage of development, is furthest advanced among large, sophisticated investors in Europe and North America.
Managers that have taken strides to incorporate ESG factors into investment processes include Aviva Investors, AXA Investment Managers and Schroder Investment Management Ltd., while pension and sovereign wealth funds that have pledged to do so include the 2.86 trillion Norwegian kroner ($452 billion) Government Pension Fund-Global, Oslo; the €208 billion ($263 billion) Stichting Pensioenfunds ABP, Heerlen, Netherlands; the $206.7 billion California Public Employees' Retirement System, Sacramento; the £3.8 billion ($5.9 billion) London Pensions Fund Authority; and the £1.4 billion Environment Agency Active Pension Fund, Bristol, England.
Most ESG integration into mainstream investments has been in equities (Pensions & Investments, April 5). That's because bondholders lack the voting power shareholders have, and generally don't have the ear of corporate leaders the way shareholders do, experts say.
“You don't get invited to the (annual general meeting), so that engagement is very difficult to do,” said Mark Gull, partner and head of fixed-income asset management at Pension Corp., London.
Still, bond investments are growing as a share of total assets at most European pension funds and many U.S. ones; as closed and frozen defined benefit funds are wound down, trustees typically increase bond allocations at the expense of stocks. That means responsible bond investing will only become more important in the future.
“The trajectory is clear,” said Will Oulton, London-based principal and head of responsible investment for Europe, the Middle East and Africa at Mercer LLC. “The question is, how does that get applied across the whole investment process.”
Most managers see a strong case for including governance in investment decisions. “There's been enough corporate governance catastrophes that have ended up with companies defaulting” to lead managers to look much more closely at governance processes, said Emma Hunt, senior investment consultant in Towers Watson & Co.'s sustainable investment team. “They've really upped their game.”