Barclays: Sustainable Investing and Bond Returns

Nov 17, 2016 3:40 PM ET

Responsible investing has gathered momentum across the world in the past decade as investors look for financial returns while helping to achieve a positive impact on the world around them.

In the first report in Barclays’ Impact Series, our study shows the positive effect that environmental, social and governance investing can have on bond portfolio performance.

Research into the impact of ESG on credit portfolio performance

Does the incorporation of environmental, social and governance (ESG) criteria in the investment process improve the financial performance of a bond portfolio or hurt it?

Barclays Quantitative Portfolio Strategy Research team recently investigated the relationship between ESG investing and performance in the US corporate bond markets. The highlights of the findings were:

  • Introducing ESG factors into the investment process resulted in a small but steady performance benefit. No evidence of a negative impact was found. 
  • Over the historical period of the study, the performance advantage of portfolios with an ESG tilt was not caused by high-ESG bonds becoming more expensive than their low-ESG peers, driven up by excess demand. Thus, we found no evidence to suggest that including high-ESG bonds would cause future underperformance as the prices of these bonds revert back to the prices of their peers. 
  • Of the three scores – E, S and G – the governance score had the strongest impact on performance. Bonds with a high G score also suffered credit downgrades less often than those with a low G score.

The appetite for sustainable investing

In a world where concerns over climate change, pollution and issues of sustainability are ever more pressing, socially responsible investing has become an important consideration for a growing number of individuals and institutions. 

Different investors have different appetite for ESG. For some of the most committed, knowing that the funds in which they invest will help make the world a better place is so important that they are willing to accept a lower return on their investments. A much larger group would be happy to support these values if they could be convinced that their commitment would not result in underperformance.

If the sustainable investing tilt can actually help to improve portfolio performance, it would be hard to justify not adopting it. The relationship between ESG characteristics and performance is therefore of primary importance.

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