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Sustainability is high on the agendas of investors, businesses, governments and not-for-profit organisations worldwide.


These stakeholders look to the private sector to help address these issues, which range from water conservation to ethical corporate governance. Indeed many investors require that the companies they invest in adopt business models and practices that are consistent with the broader sustainability of the environment and of society.


As a result, managers of many stock and bond portfolios now rely on metrics such as Environment, Social and Governance (ESG) ratings to make investment decisions and to document their compliance with these goals. Yet, much of the analysis to date on the relationship between ESG factors and performance has been focussed on the equity markets.


In an effort to help address the information gap for ESG investing in credit markets, Barclays released a study in 2016 entitled Sustainable investing and bond returns, which explored the relationship between ESG and credit portfolio performance. The study found that favouring issuers with high ESG ratings can generate positive returns in US dollar investment grade (IG) corporate bond portfolios. Since publishing our 2016 report, clients have asked for a deeper investigation as interest in ESG investing keeps growing.


Common questions include:


  • Do these results apply in the euro IG bond market?
  • What about US high yield (HY) bonds?
  • Does the effect of ESG investing vary by industry sector?

In response, we extended our analysis to address these questions, adding two years of data to our original study.

Methodology: Constructing bond portfolios to understand ESG effects

To investigate the impact of ESG factors in credit markets, our analysts carefully constructed high- and low-ESG portfolios using security-level data from Bloomberg Barclays bond indices. The analysis was performed twice, using ESG ratings from two different providers: MSCI ESG Research and Sustainalytics. For a closer look at how we built these portfolios, watch this quick video.

High-ESG portfolios have outperformed in both US and euro IG credit markets

Over the nearly nine years of our study period across US and euro IG credit markets, the high-ESG portfolios outperformed the low-ESG ones. This was the case for both sources of ESG ratings considered, despite the differences in methodology and the relatively low correlations between their ratings.

Portfolios of high-ESG issuers have outperformed low-ESG portfolios in the euro and US IG markets (2009-18)

Source: Bloomberg Barclays Bond Indices, MSCI ESG Research, Sustainalytics, Barclays Research

The euro IG market has a stronger relationship with ESG than the US market

However, our study did reveal some interesting differences between regions. Notably, European corporations have, on average, higher ESG scores than their US counterparts, possibly pointing to a greater emphasis on responsible investing by European investors. Additionally, companies with high ESG ratings tend to benefit from lower borrowing costs in Europe but not in the US.

For more on how to interpret ESG ratings, including the impact of geography, here’s an overview

In the US high yield bond market, high-ESG outperforms low-ESG as well

We also investigated ESG in the US high yield (HY) credit market for the first time, which was more challenging. Many HY issuers – which typically have lower credit ratings – are private companies, meaning far fewer of them have ESG ratings. But our data still show that portfolios of high-ESG bonds in this market outperformed low-ESG ones over the course of our study period.

Analysis period: 2012-18
Source: Bloomberg Barclays Bond Indices, MSCI ESG Research, Sustainalytics, Barclays Research

The effect of ESG investing varies according to the industry sector

We repeated our analysis within individual industry sectors and found that the effect of ESG can vary greatly depending on the industry sector considered. For example, Governance is most important in the banking industry, while in the energy and transportation sector, it is Environment that is most closely associated with bond performance.

For a sector-by-sector analysis of the US and euro IG markets, view our infographic

ESG continues to yield positive results in credit portfolios

This follow-up study confirms the overall findings of our original research: there is a generally positive relationship between ESG ratings and bond portfolio performance. While this is consistent with our earlier analysis, the new study offers a detailed look across regions and sectors over an extended time period.

As the interest in ESG investing continues to grow, our hope is that this analysis will serve as a reference for investors who wish to integrate ESG considerations into bond portfolio construction.

Authorised clients of Barclays Investment Bank can log in to Barclays Live to view the complete data-driven report, entitled ESG investing in credit: A broader and deeper look (22 October 2018).

Important content disclosuresImportant content disclosures
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Related content

Read 'The case for sustainable investing in bond markets strengthens' (PDF, 4.6 MB)

Download the fourth report in the Impact Series from Barclays Research.

Examining E, S and G performance across sector portfolios 

Investigation into the performance effect of Environment, Social and Governance (ESG) ratings on sector-specific bond portfolios.

Understanding ESG ratings: What do investors need to know? 

Investors are increasingly considering ESG ratings when making investments. But these ratings are complex, so it’s imperative to understand how they are determined before applying them to bond portfolios.

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About the authors

Lev Dynkin is the founder and Global Head of the Quantitative Portfolio Strategy (QPS) Group at Barclays Research. Dynkin and the QPS group joined Barclays in 2008 from Lehman Brothers, where the group had been a part of Fixed Income Research since 1987. The Institutional Investor magazine survey ranked the QPS group #1 in the category of Quantitative Analysis for over a decade in the US, as well as top-ranked it in Europe.


Dynkin began his career as a research scientist in the area of theoretical and mathematical physics after obtaining his PhD in physics from the University of St. Petersburg, Russia. He is a member of the editorial advisory boards of the Journal of Portfolio Management and Journal of Fixed Income. Dynkin has co-authored with his colleagues several books on quantitative portfolio management.


Albert Desclée is a Managing Director in the QPS Group at Barclays Research, based in London, and is responsible for its European activities. He advises investors on portfolio construction, including benchmark selection, risk management, asset allocation, choice of investment style and optimal risk budgeting.


Albert joined Barclays in 2008 from Lehman Brothers, where he had the same responsibilities. Prior to joining Lehman Brothers’ Research department, he worked at Salomon Brothers in London, where he was in charge of fixed income index analytics and portfolio construction advisory. Albert graduated from the Catholic University of Louvain (Belgium) and obtained an MBA from INSEAD.

Mathieu Dubois is an analyst in the QPS Group, based in London. Prior to joining Barclays in 2018, he worked as a quantitative analyst at Prudential plc, conducting multi-asset research. He studied mathematics at the Swiss Federal Institute of Technology (EPFL) and Paris VI University, and he holds a PhD from the London School of Economics.


Jay Hyman is a Managing Director in the QPS Group within Barclays' Research team. Based in Tel Aviv, Jay advises clients around the globe on portfolio management relative to traditional benchmarks or liabilities. He has published research on topics including risk budgeting, performance attribution, portfolio optimization, style analysis, cost of constraints, sufficient diversification and index replication. Jay joined Barclays in 2008 from Lehman Brothers. He holds a PhD in Electrical Engineering from Columbia University in New York.


Simon Polbennikov is a Director in the QPS Group. He is responsible for empirical studies on quantitative strategies and investment styles in fixed income; benchmark customization; tactical allocation; and hedging. Simon joined Barclays in October 2008 from Lehman Brothers, where he held a similar role. He studied physics at Moscow State University, Russia, and received a PhD degree in empirical finance from Tilburg University, Netherlands.

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