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.