PLANADVISER - March/April 2020 - 10

trends
Investments
That Sustain ...
ESG-conscious fixed-income
products can strengthen a portfolio
INVESTORS in the U.S. are steadily warming to the idea
of using environmental, social and governance (ESG)
considerations when building out their portfolios.
Research from Morningstar finds most investors, across
ages and genders, have clear preferences for ESG-conscious
investment products. Morningstar suggests that 72% of
the U.S. population expresses at least a moderate interest
in sustainable investing. Institutional investors, similarly,
have expressed a good measure of their own cautious but
significant interest.
Manan Mehta, senior quantitative research analyst
for Northern Trust Asset Management, says sustainable
investing themes and bond portfolios make for a good pairing
because risk management is a key focus for both.
" Bonds help manage risk through lower correlation
and volatility, versus equities, " Mehta wrote in " Sustainable
Investing in Fixed Income: Avoiding the Pitfalls, " a
white paper published recently in collaboration with Brad
Camden, the firm's director of fixed-income strategy. Their
observation is that bonds issued by companies with favorable
ESG governance ratings tend to trade at tighter credit
spreads with longer durations.
" We find that bonds with higher ESG ratings offered
downside mitigation during periods of market turbulence,
despite their loose relationship to traditional credit ratings, "
Camden and Mehta wrote. " This suggests that investing in
4x
A NEW HIGH. Estimated
net flows into open-end
and exchange-traded
sustainable funds
totaled $20.6 billion
last year-four times
the previous annual
record set in 2018.
Source: Morningstar Direct
companies with the highest ESG ratings may offer further
downside mitigation above and beyond what their credit
ratings would suggest. "
Northern Trust's take is far from unique. PIMCO, for
example, has published a white paper reaching similar
conclusions, titled " ESG Investing and Fixed Income: The
Next New Normal? "
Gavin Power, PIMCO's chief of sustainable development
and international affairs, says the institutional and retail
investing marketplace is witnessing a growing recognition
that ESG issues present material credit risk with respect to
both corporate and sovereign debt. He adds that PIMCO's
integration of ESG credit analysis across the entire investment
universe " reflects the understanding that investors,
like any lender, cannot ignore sustainability and governance
issues that may affect a borrower's ability to repay
its debt. " -John Manganaro
A Global Perspective
What institutional investors here and abroad say about applying environmental,
social and governance factors to their equity and fixed-income strategies
■ 2018 ■ 2019
42%
45%
32%
24%
2%
important for both
It's more important
for equities
2%
Source: RBC Global Asset Management, 2019 Responsible Investment Survey
It's equally
It's more important
for fixed income
It isn't important
for either
25%
28%
10 | planadviser.com March-April 2020 Art by Claudi Kessels
http://www.planadviser.com
PLANADVISER - March/April 2020

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