In order to measure a corporate’s long-term sustainability, a set of Environmental, Social and Governance metrics has emerged to help corporates, asset owners and asset managers make decisions.
What effect does investing based on ESG criteria have on portfolio performance?
For some investors, the knowledge that their funds are being invested to support the values in which they believe is so important that they would accept a lower return on their investments. Many more would sign on if convinced that sustainable investing would not hurt – and could even help improve – portfolio performance.
The three dimensions covered by ESG provide a set of tangible and objective metrics that corporations can be evaluated against. Those who seek to invest more responsibly rely on ESG scores and ratings in their investment decisions.
Is a company a polluter and does it make any efforts to remedy its impact on the environment?
Does a company treat its workers well and play a positive role in its community, for example?
How well managed is a company? Does a company have appropriate management incentives and sound processes in place?
Individual asset owners want to make the world a better place by allocating resources to responsible companies while maintaining financial performance.
Asset managers acting on behalf of these investors want to be seen as ESG-compliant in order to attract assets, but also need to deliver financial performance in order to retain those assets.
Corporations develop a responsibility agenda to improve the sustainability of their business and to meet investor demand.
Investors seek companies that do business "the right way," with enduring business models and practices.
Investors also expect companies to consider the effect of their activities on the environment and on society.
Asset owners, asset managers and corporations all have to look beyond their traditional remit.
Source: Barclays Research
Source: UN PRI
Source: Barclays Research. Barclays survey of large fixed income asset managers (2016).
The Barclays Research team studied data on bond portfolios over seven years (taking into consideration two providers of ESG scores – MSCI and Sustainalytics), and found that:
Greater emphasis on ESG factors, which play out over a long horizon, may provide a counterweight to the constant pressure on companies to maximise near-term earnings. This longer-term approach to value creation is well-suited to the investment horizon of many bond investors.
Barclays found that ESG factors produced a small but positive return in corporate bond portfolios, with a high G score especially correlating with better performance. Bond portfolios with strong ESG attributes (measured by either MSCI or Sustainalytics) have outperformed low-ESG portfolios in the past seven years. Irrespective of the ESG data source, Governance has the strongest positive effect on performance while the effect of the Social factor was marginal.
Barclays found that ESG factors produced a small but positive return in corporate bond portfolios, with a high G score especially correlating with better performance. Bond portfolios with strong ESG attributes (measured by either MSCI or Sustainalytics) have outperformed low-ESG portfolios in the past seven years.
Source: Sustainalytics; Barclays Research *Sustainalytics’ Governance pillar measures governance of sustainability issues. The firm has a separate Corporate Governance rating that is not represented in this study.
MSCI ESG Research; Barclays Research
The Barclays research also shows that companies with higher ESG scores often have higher credit ratings (measuring financial health) and lower spreads (yield difference over government bonds). The data shows that investing in top-tier ESG bonds comes with a roughly one-notch uptick in credit quality.
Source: MSCI ESG Research, Barclays Research