More fixed-income investors in Europe demand that their investments are screened for ESG factors than in the U.S., but that trend could reverse itself, said Chris Bowie, a partner and portfolio manager at TwentyFour Asset Management, a $23 billion fixed income boutique of Vontobel Asset Management.
Interest in the U.S. should surpass that of Europe in the next few years, Bowie said in an interview. Bowie is the lead manager for the American Beacon TwentyFour Short Term Bond Fund and is a member of the firm’s investment committee and ESG steering committee.
“Europe is leading the way for ESG (environmental, social and governance) corporate bond investing now, but just in the last six months we have seen more conversations around ESG from investors and advisors in the United States than in the past,” he said.
Factors that exist in some European countries, but not in the United States, are pushing the advanced interest in ESG investing. For instance, Bowie explained, pension plans in the U.K. now have to report whether they take ESG factors into consideration for their investments.
“Once global fixed-income investors become more comfortable with the fact that they can obtain equal returns for ESG investing as with traditional investing, the interest in the United States will grow,” Bowie said.
Two of the problems that exist with ESG investing is that the term means different things to different people and there is little coordination between the third-party rating systems. ESG rating systems exist for almost all equities, but not only about 60% of all fixed-income investing, he said.
“At TwentyFour we integrate ESG considerations into all of our investments, instead of having a separate ESG team. If an investment manager is not considering ESG factors for all investments, he or she is not considering all of the risks,” Bowie said.
TwentyFour now has taken the practice a step further and started to consider sustainability, which means adding negative or positive screens to the investment process. That makes the process more complicated because investments that would be screened out in some countries, such as oil or liquor, are considered a positive in other countries where the economy is dependent on these exports.
“Investors have to do their due diligence to make sure their definitions of a negative are the same as those setting up the credit funds,” Bowie said. “Investors and advisors also have to be careful that they are not screening out potential returns or putting in additional volatility. You can also screen investment options to the point where there is not enough diversity in the portfolio.”
At the beginning of the year, TwentyFour launched a new fund, the Sustainable Short-Term Bond Fund, which has matched the returns for traditional credit investments even with Covid roiling the market, Bowie said.
TwentyFour favors utilities, banks and finances, mutual building societies that do work in a community, and telecom companies. It does not like retail, which is a trend that started before the pandemic and, except for grocery stores, continues. It also avoids oil and feels natural gas is only a transition energy source that will be used until more sustainable energy sources are available, Bowie said.
Advisors have their work cut out for them in deciding whether companies successfully meet ESG standards, Bowie said. He used Tesla as an example because it earns a high rating for improving the environment, but its governance could be questioned by some. Likewise, other companies might be considered good on one of the three ESG factors, but might be judged poorly on another.
“Due diligence is absolutely crucial” for advisors and investors,” Bowie warned. “There is little independent verification for how well corporations” employ ESG standards and what they mean by those standards. “Investors have to be careful what they buy.”