Don’t forget ESG in bond portfolios
More progress is needed when it comes to environment, social and governance (ESG) in fixed income investing, according to Insight.
A particular area of ESG interest in fixed income was the default risk for debt valuations and assessing debt suitability.
The Insight responsible investing annual report highlighted how ESG is traditionally-focused on equities but that there was a “much sharper focus” on how it could be applied to bonds.
Abdallah Nauphal, chief executive of Insight, said: “Responsible investment has traditionally focused on how shareholders influence management decisions. However, the centrality of default risk for debt valuations clearly indicates an urgent need for a much sharper focus on ESG risks as they apply to fixed income – taking into account the opportunities and complexity of the asset class”.
Bondholders could have far-reaching influence over governments and companies, the firm said, as they could access markets and sectors that might be inaccessible to other investors. This was primarily due to the range of institutions being dependent on debt capital markets for financing and required regular dialogue to access finance.
“Debt markets provide finance to a wide range of entities, including sovereigns, supranational and agencies, as well as many companies, some of which prefer to raise finance using the debt rather than equity markets. This means fixed income investor can have influences on entities and market sectors that are inaccessible to other investors,” the report said.
Joshua Kendall, head of responsible investment and stewardship, said: “Investors are at the beginning rather than end of their journey with respect to integrating a responsible investment approach into their fixed income portfolios. However, as investor practices evolve, the focus on ESG risks and sustainability factors could provide investors with further opportunities to build portfolios that can target both financial and sustainability targets with greater precision”.
AUTHOR
Laura Dew
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