The integration of environmental, social and governance factors into fixed-income portfolios is gaining traction with money managers across the globe, as they and their institutional investor clients realize large parts of their portfolios are not up to scratch on sustainability.
Sources at consultants and money management firms said they are seeing increased interest from institutional investors in integrating ESG factors into fixed-income portfolios — something they are surprised has taken so long. Managers already integrating ESG factors into their fixed-income processes said they are also seeing increased inflows.
ESG integration in fixed income has been called the “neglected child of responsible investment, but it is the sleeping giant, as it is a huge asset class and very important,” said Archie Beeching, senior manager, fixed income in the Principles for Responsible Investment's investment practices group, based in London. “Most pension funds and insurance companies have very large fixed-income allocations,” yet ESG integration has been focused on public and private equity, he added.
Given fixed-income investing is about identifying downside risk, and ESG analysis has been shown to be most relevant in this context, My-Linh Ngo, senior ESG analyst at BlueBay Asset Management LLP in London, said: “It is surprising that ESG is more established on the equities side than on debt, especially given it represents a bigger asset class.”
Ms. Ngo thinks it might be as a result of “the equity side having the owner/shareholder dimension, which makes corporate engagement on ESG risks more natural, and also perhaps because share price sensitivities to ESG risks are more direct as they are influenced by sentiment.” When it comes to debt, however, prices and spreads “are buffered to some extent by credit strength, which may not be immediately impacted.”
Mr. Beeching said a number of institutional investors are now realizing they cannot apply ESG factors to just part of their portfolios “but need to do so universally.” They are increasingly engaging with money managers to ensure their processes are robust, and they are also asking more difficult questions, he said.
Executives at a number of pension funds across the U.K., continental Europe and the U.S. could not be reached for comment. However, money management executives said they are seeing increased interest in ESG bond portfolios or the integration of ESG factors into fixed-income strategies.
“We are seeing tremendous interest in ESG bond portfolios,” said Alex Struc, London-based portfolio manager at Pacific Investment Management Co. LLC and co-head of the ESG effort at PIMCO. “There is a lot of short-termism in markets today; however, investors are starting to recognize that considering factors like a business' approach to environmental, social and governance factors is critical in identifying long-term value. Investors that do take a broader, longer-term view have an edge in unlocking that value, especially within fixed-income markets.”