When it comes to green investing, fixed income seems to be getting more attention than equities from institutional investors, which also like the asset class for capital preservation, diversification and downside risk management.
A survey of 80 midsize U.S. institutional investors conducted by Breckinridge Capital Advisors and Greenwich Associates found investment-grade fixed income to be the top asset class for ESG use, ahead of domestic and non-domestic equities.
At the time of the 2020 survey, 34% of the institutional investors were using ESG in their portfolios and 70% of the others were either actively considering it or might consider it.
Corporate and public pension funds made up more than half of the sample of investors with assets between $200 million and $1 billion, along with endowments, foundations and others.
"It was revealing that what was really driving a lot of the ESG is the belief that it helps as a risk mitigator," said Peter Coffin, founder and president of Breckinridge Capital Advisors. The Boston firm manages $44 billion in assets and specializes in investment-grade fixed-income portfolios.
That asset class is "a logical and relatively seamless starting point" for integrating ESG, said Andrew McCollum, managing director and head of investment management for Greenwich Associates in Boston.
ESG, Mr. Coffin said, "is in large part trying to identify external risks. The purpose of a fixed-income allocation is to preserve capital. We see ESG aligning with that objective of looking ahead and trying to gauge and assess price and risks that are long term," he said. "A pension fund would want their investment manager examining those factors when they are looking at issuers."
Part of the increased interest comes from better disclosure by companies of environmental impacts, he said. "As disclosure has improved, as investors have become more knowledgeable about ESG making an impact, I think the investment case has really taken hold," he said.
Green bonds generally refer to how the proceeds will be used, from specific environmental goals to helping companies transition to a greener outcome. Curbing climate change was the top reason that national governments issue green, social and sustainability (GSS) bonds, according to the Climate Bonds Initiative, an international organization working to develop a green and climate bond market. Those sovereign issuers also are serving as catalysts for corporate and institutional issuers, green bond advocates say.