While much of the discussion around ESG factors in investment returns skews towards equities, the fact that it tends to be a risk-driven debate (rightly or wrongly) means that fixed income is arguably the natural home for much deeper research. It’s taken a while, but we’re seeing a lot more interesting data crunching.
As an insightful new report from Macquarie Investment Management guided by Dean Stewart, Executive Director, Fixed Income and Currency, notes, the “best way to manage credit is to avoid problems that could cause losses, and E, S and G factors can be another way of identifying potential problems”.
The way that ESG factors do influence credit pricing and performance, however, is complicated. And bond managers don’t agree, depending on how the data is interpreted.
There’s no substitute for reading the report, and the Macquarie work is neat and to the point, so here’s the link
In short, it says that all three E, S and G factors have a small impact on the price of credit.
Importantly, it concludes that governance factors are under-priced by the market, so that a bond portfolio with high ESG scores could outperform a portfolio of similarly rated and industry classified credits.
For social factors, however, the reverse is true. Loans to companies with a positive social bias could introduce a performance drag compared to peers.That said, Stewart indicated that Macquarie was being ‘hard’ on the social factor in its own bond purchases, because it believes that the risk of blow-ups is higher in the event of serious ‘leftfield’ credit events and market distress.
The Macquarie research is interesting because it questions a 2017 report by Barclays, which found that introducing ESG factors into the investment process resulted in a small but steady performance benefit.
Loans to companies with a positive social bias could introduce a performance drag compared to peers.
Conversely, Macquarie concludes that ESG factors can influence credit price, but have little to no predictive value on credit spreads and performance.
Crucially, it notes that ESG data is ‘stale’ compared to credit rating data, and difficult to use, even if bad ESG scores tend to mean that companies have to pay more to borrow money.
The corollary appears to be that deeper and more timely ESG research could impact the data more, and enable the quants to delve further on the potential pricing and performance effects.