Fixed income investors sharply increased their exposure to ESG-compliant investments over 12 months to November 2019, according to a Global Fixed Income Study carried out by Invesco.
The group questioned fixed income investors across North America, EMEA and Asia-Pacific (APAC) with a combined assets under management of $20trn (as of December 31, 2019). Respondents included defined benefit and defined contribution plans, sovereign wealth funds, insurers, private banks, diversified fund managers, multi-managers, and model builders.
It found that 80% of EMEA and 69% of APAC investors incorporate ESG into their fixed income portfolios, up from 51% and 38% in 2019 respectively.
EMEA investors had the highest proportion of ESG bond holdings with 34% compared to 22% held by investors based in North America and 19% by those in APAC. The survey also highlighted North American investors continue to be the “least enthusiastic adopters of ESG”, with just 56% incorporating it into portfolios – something that was reported in the 2019 study published by Invesco in March that year.
Furthermore, 52% of investors located in EMEA said incorporating ESG into their fixed income portfolios boosted returns, with just 2% stating it was a hindrance. They were also more optimistic about the future of ESG with 34% anticipating these considerations having a “much greater influence” in three years’ time.
Nick Tolchard (pictured), head of EMEA at Invesco Fixed Income, commented: “Many investors used to assume that integrating ESG would compromise performance, but attitudes have changed. Across all regions, very few investors report that it has hindered returns and, in the case of EMEA, a majority (52%) have said that integrating ESG has improved them.”
The most common motivations for incorporating ESG into fixed income were the ‘social responsibility’, ‘stakeholder wishes’ and ‘alignment with beneficiary beliefs’ indicating that bond investors are aligning their ESG credentials with their social conscience, day-to-day practices and increasing client demand for a focus on holdings that are sound or progressive from an environmental, social and governance perspective.
More than half of respondents also said ‘alignment with fund/investment objective’, a ‘senior management decision’ and ‘return enhancement’ were also reasons to move in ESG-rated positions. Just 25% cited ‘regulatory’ reasons.
Invesco also said 54% of those surveyed now consider informed assessment of issuer-related ESG risks as a key tool to unlock hidden value in fixed income and, on the flip side said issuers who fail to address environmental and governance concerns may face higher borrowing and refinancing costs, with clear implications for the valuation of these securities for investors.
Tolchard added: “Acknowledging the duty investors have to the environment and society they operate in, three-quarters (75%) reference social responsibility as the main driver to integrating ESG factors within portfolios. Furthermore, More than two-thirds (67%) of investors cited stakeholder wishes as a key motivator behind their decision to integrate ESG, showing just how important this issue has become to asset owners and investors.”
End of bull run
Overall, the Global Fixed Income Study 2020 also found bond investors were becoming increasingly risk averse prior to the coronavirus market fall-our and 43% said the end of the record-long economic cycle was a year or less away, with the consensus expecting a “soft landing”. Less than a third feared a major collapse in bond prices.
“The perception that spreads were tightening drove many investors to cautious positions. Given what covid-19 has done to the market, those investors may be relieved,” added Tolchard.
“However, not all investors were so cautious, meaning some are having to manage significant volatility in what would traditionally be seen as high-quality assets, such as consumer goods, oil & gas, and travel.”