Considering environmental, social and governance factors has traditionally been associated with equities, but demand for ESG in fixed income is starting to outstrip the supply of products available, according to new research by Cerulli Associates focused on Europe.
“The inclusion of ESG factors in fixed income is becoming more widespread, with ESG data and ratings now available for most investment grade credit issuers, as well as a large proportion of high-yield issuers,” said Ilonka Oudenampsen, senior analyst, european institutional research at Cerulli in a press release. “In addition, there have been several important innovations in the fixed-income space, including the rise of green bonds and the emergence of social bonds and bonds linked to the UN’s Sustainable Development Goals.”
Oudenampsen also said in the press release that because ESG integration into fixed income is relatively new, asset managers should expect to spend a lot of time understanding their clients’ views on ESG to develop solutions.
Melissa Haskell, director of fixed income research, North America at MFS Investment Management says that she is being asked more about ESG in fixed income, which started in Nordic and European countries but is slowly becoming more prevalent in the United States.
Haskell says that while people are now calling certain risks ‘ESG’, many of these risks are not new. “Fixed income in general has always had some of these risks as part of its fundamental analysis,” says Haskell. “I think that some of them we’re just renaming as being ESG risks.”
The approach Haskell says she takes is an integrated one, focused on embedding ESG analysis into the research process, rather than using exclusions or basing decisions only external ESG ratings. She says while she looks at ESG ratings, it’s not something that she relies on and, at times, has disagreed with external ratings.
To incorporate ESG, Haskell says she uses a process to systematically go through and identify the risks and consider their materiality and their time horizon. She also says it is important to re-assess risks periodically.
Green bonds
The Cerulli report said it expects more social and green bonds to launch in the future due to growing investor demand.
However, Haskell says that green bonds may not be all they’re cracked up to be.
“We’ve looked at the green bonds piece and, in many instances, feel like there’s some green washing going on,” she says.
She says this is the case across the board. “We see it on the structured side as well that green bonds are getting issued, and yet our analysts are not seeing that they’re any better on underlying credit than the bonds that are not deemed to be green in the market. And there’s some question as to whether or not they’re in fact serving more of a social benefit,” Haskell says.