Despite the near-zero interest rate environment, more institutional investors are looking toward investment-grade fixed income for long-term returns, according to a panel brought together today by Breckinridge Capital Advisors.
And those fixed-income investments increasingly are being directed at investments that take environmental, social and governance issues into account, the panel said.
“ESG is primarily a long-term risk mitigator, particularly in the current low-rate environment,” said Peter Coffin, president of Breckinridge, a Boston-based asset manager specializing in investment-grade portfolio management. “It is natural that we are hearing that risk mitigation is part of the reason for this increased interest in ESG.”
The three panel members drew their conclusions from talking with managers of 80 mid-sized pension funds, endowments and foundations with between $200 million and $1 billion in AUM.
In the past, institutional investors looked to ESG as a way to positively impact the community and did it mainly through equities, but both of those factors are shifting.
“Now, institutional investors are taking their first steps into ESG as a way to enhance long-term returns and reduce risks,” Coffin said, noting that one in five institutional investors are involved in ESG investing because of the financial benefits.
“Managers believe including ESG evaluations gives a more holistic evaluation of a company’s risks,” he said.
“More than one-third of the managers we spoke with are very confident that a review of ESG issues can show what a company is doing to mitigate investment crisis,” said Jeff Glenn, head of portfolio management at Breckinridge. In addition, he added, more than half of the pension fund managers who were interviewed want to integrate more ESG into their portfolios.
Overall, portfolio managers see investment-grade fixed income as a tool for a diversified portfolio, and that has not changed because of the current low rate, explained Andrew McCollum, head of investment management at Greenwich Associates, a global data analytics and financial services firm which presented the webinar and research in conjunction with Breckinridge.
Those investors who are underweight fixed income now are expected to increase allocations in the future, McCollum said.
Glenn agreed that some investors see the current fixed-income market as the most challenging in many years, but added that the environment has not changed investors’ long-term goals of having a mix of assets.
A majority of institutional investors are interested in ESG investing, even if they have not taken the first step yet, Coffin said.
“A decade ago, few institutional investors were interested in investment-grade fixed-income ESG investing,” McCollum said. “Now, only 16 of the 80 said they were not interested.”
In a statement that accompanied the webinar discussion, Breckinridge posited that high-grade bonds and ESG are such a good match that investors should consider investment-grade fixed income as a foundational asset class for the broader integration of ESG into their organizations and investment processes.