We use cookies to support features like login and allow trusted media partners to analyse aggregated site usage.
To dismiss this message and allow cookies to be used, please click "Continue".



Twitter board

Follow us
  • Friday View: Piecing together the pooling puzzle- DGF Roundtable - Royal Mail names pensions boss -LGPS Central sel… https://t.co/DPfZ3WUv6K2 days ago
  • portfolio institutional is launching a new series on LGPS pooling, tracking changes to investment strategies and up… https://t.co/Ld04PZ2TNK4 days ago
  • Friday View: ESG: What lies beneath? - Industry backs DWP's ESG push - LGPS Central CEO to step down - Railpen hire… https://t.co/S3knBieob09 days ago
  • Out now- The portfolio institutional September issue feat our cover on ESG: What lies beneath? -Interview: Railpe… https://t.co/x9EYxDVXEl13 days ago
  • Friday View: LGPS pool appoints CIO - Jack Dromey on cost reporting - TPR hires former FCA director - NEST issues p… https://t.co/aNVGQqK35Z16 days ago
  • RT @AonRetirementUK: How prepared is your portfolio? Read a write-up of the discussions at our recent event with @portfolio_inst, along wit…18 days ago
  • "Shadow pensions minister Jack Dromey comments on the need to set compulsory standards for cost reporting." Read m… https://t.co/vH1gGZBm1q18 days ago
  • "Border to Coast, a recently launched £46bn public sector pension pool, has appointed Daniel Booth as its chief inv… https://t.co/AlIwikhgli19 days ago
  • Friday View: Spike in shareholder rebellions - Investors ditch GBP funds - Access launches first  pooled fund - GAM… https://t.co/aFzvBWgsmp23 days ago
  • Join us and HarbourVest Partners for breakfast to discover how access to private companies can provide diversificat… https://t.co/JaRlWiziJl23 days ago
  • "Ian Scott tells Mark Dunne about being back on the buy side, hedge funds, self-sufficiency, the trouble with infra… https://t.co/G0UUF9ldSx24 days ago
  • "Aon has developed an ESG rating system for buy-rated investment strategies which is designed to assess whether and… https://t.co/mstoAc3vr325 days ago
  • "With hedge fund performance improving and pension scheme investment increasing, has more institutional backing res… https://t.co/JVcIEXXKwr30 days ago
  • "The infrastructure repair bill is huge and more and more pension funds are willing to step in and plug the funding… https://t.co/zXy2lbpj6K31 days ago
  • "For investors looking to own sustainable businesses, engagement is the new divestment." Read more here:… https://t.co/YiA28qc6BI32 days ago
  • "Thanks to climate change, pension scheme portfolios are in danger of overheating. So what are trustees doing to pr… https://t.co/8gND4lC1OZ33 days ago
  • RT @eVestment: With research claiming that companies with high #ESG standards make better #investments, are sustainable strategies on the v…37 days ago
  • "The revolution in how investors are assessing companies is gaining momentum. No longer considered niche, responsib… https://t.co/uFCHnMlOux37 days ago
  • Friday View: Beyond bonds: The future of LDI - Responsible investing: Just reward - Just buys DB adviser - Ex Railp… https://t.co/1suOFFSprA37 days ago
  • "An increasing number of pension schemes are adopting a more efficient way of investing." Read more in our in-dept… https://t.co/F6Y0e9DB5E37 days ago


Integrating ESG investing  into bond portfolios

Integrating ESG investing into bond portfolios

Emma Cusworth
Monday 12th June 2017
Integrating ESG investing  into bond portfolios

"Investors are changing their view of ESG and, given the importance of the credit  rating agencies, they should be part of that conversation."

Archie Beeching, UN PRI

Barclays’ studies have produced mixed results on the link between performance and ESG factors for bonds. In a 2015 study, Barclays Research concluded the wholesale exclusion of entire industries from the investment universe for ethical reasons, for example, was not justified in purely financial terms.

A 2016 study into the impact of ESG on credit portfolio performance, Sustainable investing and bond returns, found the return associated with a high governance score had been both high (5.5% of cumulative outperformance) and persistent over the previous seven years. It concluded, therefore, that: “Our research into the impact of ESG on the performance of US investment-grade corporate bonds in the past seven years has shown that portfolios that maximise ESG scores while controlling for other risk factors have outperformed the index, and that ESG-minimised portfolios underperformed.”

The evidence regarding the link between ESG factors and credit risk is perhaps more compelling. Barclays found bonds with low governance scores experienced a consistently higher rate of subsequent downgrades than those with high scores throughout their study period.


The credit rating agencies (CRAs) are key influencers in the fixed income value chain and have a large role to play in reflecting ESG risks in how they rate companies. Significant progress has been made in this regard in recent years, especially following the work by the UN Principles for Responsible Investment (PRI) to create guidelines for best practice in factoring ESG risks into credit ratings.

“Investors are changing their view of ESG and, given the importance of the credit rating agencies, they should be part of that conversation,” says Archie Beeching, senior manager, fixed income and infrastructure at the UN PRI. Their work has seen eight CRAs and 112 investors commit to transparency in considering ESG factors.

CRAs are critical for two reasons. Firstly, fixed income investment is still dominated by passive, index-tracking funds, but it is not necessarily the job of the index provider to apply that ESG analysis. (Specific ESG bond indexes are growing in popularity, but the total capital tracking these benchmarks, in which the index providers take a more selective approach to inclusion is still relatively small). As a consequence, investors passively following mainstream fixed income benchmarks could be exposed to unrewarded risk if ESG factors are not appropriately built into the credit rating process.

Secondly, the CRAs’ ratings directly affect the cost of capital available to companies. Thus, companies that are heavy polluters or are poorly governed should pay a higher price for borrowing because it has a material impact on creditworthiness. This sends a powerful message to the corporate world that is reliant on debt as part of its permanent capital structure.

More needs to be done in this regard. As Laura Nishikawa, executive director of ESG research at MSCI, says: “ESG is not systematically brought in to CRAs’ day-to-day ratings. It will take a long time to get to that.”


Engagement by creditors with corporates is another important factor in improving the performance of fixed income portfolios and is an area that is growing. Bondholders, however, report some degree of frustration in their engagement efforts, which is arguably more limited than for shareholders who are able to use their voting power to influence company management. For many bondholders, their key opportunity to exert influence is at the point of primary issuance.

“Creditors’ maximum influence is at primary issuance, where they can negotiate on terms and covenants,” says Bluebay’s Ngo. “We start a dialogue at primary issuance, but if we find, over time, that a company is not managing a credit-relevant risk, we will engage with them and encourage them to change their practices.”

Page: 1 2 3 4

Leave your comment

View our comments policy

Please login or register with us to leave a comment. It's completely free!

Friday View

Friday View

Shareholder engagement: