Want a better bond portfolio? Better think responsibly.
According to a recent study from Barclays, a bond’s risk-adjusted returns stem in part from the environmental, social and governmental (ESG) characteristics of its issuers.
In other words, social and environmental responsibility are performance factors for fixed-income portfolios, says Lev Dynkin, managing director, founder and head of Barclay’s quantitative portfolio strategy group.
“We fully expected that the impact of ESG would be negative,” Dynkin says. “It turned out to be the opposite. We felt like ESG bonds should have higher demand and higher prices, and that they should underperform, but the presence of ESG factors was actually accompanied by small but steady outperformance.”
Barclays says that its study found a “small but positive” impact on returns for bonds issued by entities with high ESG scores as compared to those issued by entities with low ESG scores.
The difference persisted when Barclays used different methods of scoring and ranking companies based on ESG, says Dynkin.
“The performance was not achieved due to excess demand, but because ESG bonds tend to have fewer credit downgrades and experience fewer adverse credit events,” Dynkin says. “We think that portfolio construction should consider ESG ratings as one of the risk factors, specifically in the fixed-income side of the portfolio.”
In it’s research, Barclays used ESG data from MSCI and from Sustainalytics, measuring a 42-basis-point return advantage in high ESG bonds using MSCI’s scoring and a 29-basis-point advantage using Sustainaytics scoring.
Corporate governance was the most impactful factor on investment returns, according to the study, bonds issued by companies with strong governance scores within the MSCI Socially Responsible Indexes outperformed their lower-scoring peers by 82 basis points.
Environmental and social factors had lower impacts, with the social factor bringing the smallest return of all three. Nevertheless, a corresponding Barclays survey of asset managers found that investors were most responsive to environmental factors.