Responsible investment and fixed income

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.

RiskMetrics Group to acquire Innovest

Two of the world’s leading providers of environmental, social and governance (ESG) research and analysis are joining forces. RiskMetrics Group has announced plans to acquire Innovest Strategic Value Advisors. Both firms are headquartered in New York, though Innovest also has a Toronto office.

The acquisition of Innovest and its team of experts, led by co-founders Dr. Matthew Kiernan and Hewson Baltzell, enlarges RiskMetrics footprint in the environmental, social and governance research space at a time when the financial community’s interests in sustainability are growing, the two companies said in a joint news release issued on Thursday.

"A myriad of long-term sustainability factors, particularly around climate change, are playing an increasingly important role in the way funds invest and view their portfolio risk," said Ethan Berman, chief executive officer of RiskMetrics Group. "Innovest is one of the few firms that has successfully taken a quantitative approach to assessing ESG issues, thereby helping investors view what are typically intangible, compliance-oriented issues through a clearer financial lens."

RiskMetrics provides ESG research, data feeds and portfolio screening tools to global institutions that have a need to comply with clients’ investment mandates. With the acquisition of Innovest, clients will have access to an ESG analyst team of more than 50 research professionals.

"It would be an understatement to say that today’s turbulent market environment is placing an unprecedented premium on understanding the entire spectrum of investment risks – both traditional and non-traditional,” said Dr. Matthew Kiernan, founder and chief executive of Innovest. "By combining Innovest’s ESG research with RiskMetrics leading capabilities in risk management and corporate governance, we can help investors make more-informed decisions."

Innovest had $7.0 million of revenues in 2008 and is expected to contribute in excess of $2 million of adjusted EBITDA to RiskMetrics. The transaction is expected to close on March 2, 2009, pending the usual regulatory approvals.