ESG and Fixed Income

Sustainable investing in fixed income

Historically, the integration of sustainability aspects has been more prevalent in listed equities than in fixed income. This lag in investors implementing ESG criteria within fixed income investment processes has been due to a variety of reasons. These include the role of ESG in credit ratings, the limited availability of sustainability indices against which to benchmark performance, and the challenges in engaging with bond issuers.

At UBS Asset Management (UBS AM), we observe that this is now quickly changing. Investor interest in broad ESG investments has been rising steadily over the past three decades. Today is also supported by policymakers via initiatives, such as the European Commission’s High-Level Expert Group on Sustainable Finance.

This paper examines the drivers behind this trend, what ESG integration means for fixed income investors, how the ESG corporate universe compares with a traditional one, and why investing in green bonds is not as simple as one may think.

Analyzing the inherent challenges in addressing ESG issues in fixed income starts with the fundamental differences between fixed income and equity asset classes. This includes the focus on default risks, maturity considerations and bondholders rights.

Increasing levels of corporate disclosure and the expansion of corresponding coverage by ESG data providers have provided a starting point for the deeper integration of ESG into fixed income. In our opinion, the next significant step is incorporating the effect of this in the overall credit assessment process. This moves sustainability beyond a niche investing activity with significant implications for mainstream investors who are looking to implement sustainability in their credit portfolios.

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