ESG: The Intent Beyond the Income
Environmental, social and governance (ESG) themes have risen in prominence across many investment strategies over the last decade. Shaped by the influence of investors, regulators and society—as well as by global issues that have and will continue to impact financial markets—sustainable investing is becoming ever more ingrained in the investment process.
The pace of this change is apparent in the growth of assets managed under sustainable strategies, which, globally, expanded to $31 trillion at the start of 2018, up more than 30% from $23 trillion in 2016.1 Europe has the largest share, with roughly $14 trillion of sustainable assets under management, followed by the U.S. ($12 trillion), Japan and Canada.
That said, the rate of ESG adoption across asset classes has not been uniform, with equity leading the way in terms of formal adoption, and fixed income—by some measures—lagging behind. A key reason for this was the perception that fixed income investors, as debt rather than equity holders, were limited in their ability to meaningfully engage with companies. In addition, the data and disclosures available to fixed income investors have traditionally been less comprehensive.
But the tide is turning—or arguably has turned—for fixed income. The global credit market provides the bulk of financing to companies, meaning fixed income investors have a very real ability, and arguably responsibility, to hold issuers accountable on ESG. At the same time, companies are realizing that engaging with debt investors can have tangible benefits when it comes to navigating an ever-changing world, particularly to the extent that ESG can influence a company’s cost of capital.
At Barings, we believe integrating ESG into fixed income investing can help mitigate risks, uncover new opportunities and provide long-term value to investors. The way we integrate ESG across our corporate credit asset classes is authentic to our overall investment philosophy, and an extension of the way we factor in any type of risk—in essence, we analyze ESG data alongside other fundamental factors in order to better understand each investment. While our formal integration of ESG is consistent across these asset classes, the way we apply our analysis is necessarily different due to the nuances of each market.
In this piece, we describe our approach to ESG across our corporate credit asset classes, highlighting firsthand examples of our own experience in high yield, investment grade credit, emerging markets corporate debt, and private credit.
1. Source: Global Sustainable Investment Alliance (2018 Global Sustainable Investment Review).