In a recent commentary, investment consultant Mercer noted that while the responsible investment movement continues to gain momentum, the focus has been almost entirely on publicly-listed equities, with the bond market being more or less ignored.
“Amongst major asset classes, fixed income stands out as something of a forgotten child,” Mercer noted. “After all, the market capitalization of fixed income markets globally exceeds that of equity markets. But where are the managers with highly developed environmental, social and governance (ESG) integration in fixed income? Where are the SRI fixed income strategies? Where are the RI fixed income indices? Where are the opportunities for ESG themed investment in fixed income? The answer is that all of the above exist, but they have much less prominence than their counterparts in equity markets.”
Mercer says there are some very good reasons for the low profile of responsible investment (RI) in the fixed income world. “Firstly, single country government bond mandates make up a large slice of overall fixed income strategies and the scope to apply RI techniques in such strategies is relatively limited. Incorporating analysis of ESG issues into management of multi-country government bond strategies, whilst possible, raises some very difficult issues which are not encountered in equity strategies. Even with corporate bond strategies, the scope for active ownership is much more limited than in equity strategies and this slows down the penetration of RI thinking.”
Still, asset owners wishing to adopt responsible investment in their fixed income portfolios have options spanning broadly similar terrain to those available in relation to equity investments, Mercer points out. Those options include engagement, screening, ESG integration in corporate bond portfolios and ESG-themed investment.
“We expect that over time greater attention will be paid to RI in fixed income,” Mercer says. “After all, signatories to the UN Principles for Responsible Investment have given a commitment to integrate ESG into investment decisions across all asset classes.”
Mercer plans to release a white paper on responsible investment in fixed income, addressing issues such as: the characteristics of the fixed income market which contribute to the slower progress in incorporating RI and which will affect the way that the market develops; the merits of various RI techniques (screening, integration, etc.) in a fixed income context; ESG integration in fixed income; as well as a review of microfinance and community investment for ESG-themed fixed income investment.
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