ESG in fixed income – do bond managers walk the walk?

Our new 2016 survey highlighted an increasing level of ESG awareness and a widespread willingness to incorporate ESG factors into fixed income managers’ investment processes.

I’ve just completed our second annual survey of fixed income managers’ attitudes to Responsible Investment and Environmental, Social and Governance (ESG) factors. Our new 2016 survey highlighted an increasing level of ESG awareness and a widespread willingness to incorporate ESG factors into fixed income managers’ investment processes. ESG is becoming increasingly important for many investors, so it’s unsurprising to see growing interest in ESG among fixed income managers, and a strong desire on the part of the managers to blend their branding to the topic. Amongst many interesting questions and findings in our survey, one issue stood out – how many managers are just talking the ESG talk, and what proportion are actually walking the walk?

Our 2016 survey was based on responses from 109 managers across a wide range of fixed income sectors. One sign of increased ESG awareness was the increased proportion of signatories to the United Nations Principles for Responsible Investing (UNPRI) – 76% in 2016 versus 52% in our 2015 survey. Further, 68% of the respondents stated that they have a responsible investment policy that covers how ESG considerations are integrated into their investment processes (2015: 49%). For proponents of ESG investing, this is all very encouraging.

Now for the problem areas. First, was there any hard evidence from the managers for adopting ESG as a decision driver? When asked whether they conducted specific capital markets research into the impact of ESG factors in bond markets, only 15% of the respondents could cite some in-house work on this subject. Amongst the 15%, there was no consensus about whether ESG factor portfolios significantly out or under-performed. Next, what does ‘ESG integration’ mean in practice? We asked the managers if ESG factors had ever been the dominant criteria in their investment decisions. Just 44% of the respondents claimed ESG considerations had overridden an otherwise attractive investment opportunity, and many of the overridden decisions were made because of ESG filters or screens established for specific clients. Overall, we observed that ESG factor considerations appear not to be a dominant driver in investment decision making, but rather used as supplemental information to credit analysis. We also asked which ESG factors are considered the most important in making investment decisions. As in our 2015 survey, most of the respondents cited Governance. Some noted that Governance often plays an explicit role in assessing the fundamentals of corporate bonds (as it is essential both to good management and to adequate protection of bondholders’ rights). We observed that some respondents claimed to have an ESG-integrated process because they incorporate Governance into their investment analysis. Essentially, Governance considerations were already a subset of their fundamental analysis before they labelled it as ESG.

Often the quantitative data from the 2016 survey were at odds with the qualitative assessments we made after direct contacts with the managers as part of our regular manager research. These meetings several times highlighted a disconnect between our survey responses and what the managers are actually doing in practice.

Overall, we believe that the results of this survey point to a market that is reacting to client-driven demand. The lack of common practices in ESG and the fact that there are frequently disconnects between policy and action may indicate that the industry is struggling to embed these processes and this vision satisfactorily.

As an example, after conducting the survey we met with a big-brand manager with one ESG fund already launched and a second (Green Bond) fund in the pipeline. Trouble was, their ESG insights were not being applied to the rest of their active product line-up. Do bond managers walk the ESG walk? Well, sometimes yes, sometimes no!