Stockholm (NordSIP) – ESG is gaining popularity in fixed income markets, according to Investment Magazine’s latest Infocus Report (August 1), though without a free lunch: demand is also emerging for specialist products to meet the specific needs of fixed income investors, and a host of difficulties in terms of integrating ESG in fixed income make it a less amenable asset class to ESG than equities.
According to the Infocus Report, based among other things on data and commentary from the UN PRI, fixed income investors are warming to the ESG trends among investors more broadly, but they have some catching up to do in terms of matching other asset classes according to tracking provided by the UN PRI.
The PRI, which scores its signatories in relation to implementation of the PRI’s Six Principles, provides median figures across its 1,750 signatories in order to encourage peer comparison and cross-pollinating mutual support. According to its 2016 assessment, equities scored in the A’s and B’s, while scores for various fixed income categories ranged from C’s to E’s (with E denoting a complete lack of RI).
“ESG in fixed income is catching up quickly but it will take some time before it’s as widely used as in the equity space,” PRI Managing Director Fiona Reynolds commented to the findings. “Because it’s a newer area, best practice is still emerging but scores will increase over time as practice and tools develop.”
In the 2016 Fixed Income Reporting Module, the PRI cautions that although certain RI activities can be carried out across both equities and fixed income, such as engagement and screening, the approaches are different, according to Deborah Johnson in the IM Infocus Report. This is necessary because the difference between fixed income and equities pose unique challenges for each, according to Ms Reynolds.
“Lenders have a contractual relationship with borrowers; they are not owners,” says Reynolds. “Debt holders don’t vote at AGMs, and access to management can be relatively infrequent. Fixed income investors also have to deal with issues such as multi-layered analysis (like yield spread and yield curve) and multiple issuer types (such as corporate government, financial sector and supranational).”
There’s a need for a specialist approach even with the broad fixed income class, according to Reynolds. “Widespread incorporation of ESG hinges on: a stronger consensus on which available ESG indicators give the most insights; more ESG research coverage for high-yield, emerging market and non-listed issuers; and a better understanding of how bondholders can manage ESG risks by engaging issuers.”
The complexities of integrating ESG in fixed income and the related lack of available products have been cited as reasons for the relatively low take up among asset owners.
Read more here.
Picture: (c) AamonFotolia.com