Every Little Basis Point

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Talking about sustainable investing, without looking at fixed income is akin to investing in global equities without considering emerging markets. Or perhaps more like practicing tango without caring about your left foot. Yes, equities make for a larger proportion of asset owners’ portfolio, but fixed income isn’t that far behind. And, I am proud to say, thanks to the articles in the report on Sustainable Fixed Income we just published, you may find that it is indeed possible to integrate SRI into practically every aspect of fixed income management.

Sustainable investing is not one-size-fits-all. It is full of grey areas, half tones and compromises. Therefore, for many years, it stayed in the realm of ‘communication’ and ‘governance’ professionals. Meanwhile, most of the investments crowd remained at a safe distance, applying exclusion rules, sometimes half-heartedly, thinking that constraining the investment universe would necessarily reduce future returns. But since the end of 2015 in the wake of COP21, many woke up to a certain degree of urgency, not least as evidence emerged that returns did not suffer from integrating ESG, especially among equity investors.

Fixed income allocations are moving too, but very slowly. Too slowly. On one hand, it is easy to understand. Bond math appeals to the least ‘fluffy’ people of the investment world. They have to be meticulous, if they are to count basis points. Why would they care about ESG? Most credit pickers admit they have always took ‘G’ into account but they wouldn’t call themselves sustainable. What about ‘E’ and ‘S’? Eyeroll… no one has reliable data. Beyond analysis, bond investors usually add, we can’t do anything to influence the company, – not like the shareholders, with their votes!

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On the other hand, as bond holders are scraping every little basis point off the table, with spreads compressed to razor-thin levels, shouldn’t it make sense to focus on doing the ‘right thing’ when there is so little to lose, in relative terms? If ESG isn’t currently priced in the yields, it may not add value, but it may not cost much either (but a little more work, of course).

No matter why, it is crucial that asset owners move their fixed income allocation into sustainable waters, fast. The capital this allocation represents is needed to drive shifts in infrastructure, energy and technology. Green and social bonds are perhaps not the sole answer to the earth’s problems, but fixed income allocations can certainly be deployed more responsibly. Lending to support future-oriented, environmentally friendly projects is inarguably more sustainable than leveraging up mature economies that borrow from future generations and encourage excessive consumption.

I sincerely hope that this report can provide some inspiration for fixed income folks looking to shift their gears. Come on! Make every little basis point count.

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