Inclusion of ESG in fixed income isn’t keeping up with investor demand: research

While global institutional investors’ ability to analyze fixed income products on environmental, social and governance factors is growing, the supply of socially or eco-savvy bonds isn’t keeping up with demand, according to new research by Cerulli Associates.

“Cerulli research shows an increase in demand for ESG in all segments of the fixed-income market,” said André Schnurrenberger, managing director for Europe at Cerulli, in a press release. “We expect to see the launch of a variety of new ESG products over the coming years, including in areas less suited to ESG, such as high yield.”

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While fixed-income ESG assets are far outnumbered by equities, they’re on the rise, with net new flows surpassing US$11.4 billion per year for the past two years, the research found. Currently, the shortage of benchmark indexes measuring ESG fixed income is making the inclusion of ESG criteria into the asset class more difficult, according to the report, which noted ESG it’s trickier because there are simply fewer ESG-focused products and it can be difficult to engage with fixed-income issuers, like sovereigns.

“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 in European institutional research at Cerulli. “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 [United Nations]’ sustainable development goals.”

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Currently, bonds with some ESG element make up less than 0.1 per cent of the global bond market. While social bonds and bonds directly linked to the UN’s sustainable development goals are fresh on the market, more of these products are likely to be introduced to meet investor demand, as well as further growth in so-called green bonds, the research found.

“ESG integration into fixed income is relatively new, so many institutions rely on their asset managers for suggestions,” said Oudenampsen. “Managers should therefore expect to spend a significant amount of time gaining an insight into their clients’ views on ESG in order to devise suitable solutions.”