Royal London Asset Management: Does sustainable investing belong in fixed income?

Sustainable investing is traditionally an equity concept. Its history is largely devoid of fixed income. Yet that appears to be changing. The growing desire from clients for products that embed ethical values, alongside growing evidence that sustainable approaches do not compromise financial performance, has led to a surge in enthusiasm for sustainable approaches to investing across all asset classes. But is this all hype? Does it truly belong in the world of credit?

Before attempting to tackle this question, it is worth laying out what we mean by sustainable investing, since there is no universally agreed definition. We consider it to be the practice of investing in companies that will deliver a net benefit to society. The companies must provide products or services that make the world better, while at the same time exhibiting sector-leading environmental, social and governance (ESG) standards.

Fixed income considerations

Financial considerations are obviously of great importance to us as investors. From a fixed income perspective, we want to know (among many considerations) how robust the balance sheet is, whether the debt can be serviced and how volatile the business model is. We essentially want a comprehensive understanding of the risks that we face as lenders, and will then consider whether these risks are sufficiently compensated for by the price.

This is where there are abundant benefits in incorporating ESG considerations in our analysis. Forecasting how robust our investments will be in 10, 20 or 40 years is an extremely difficult task. One thing which is clear is that companies with serious ESG red flags almost always spell trouble for long-term lenders, despite the higher credit spreads they might offer. Consequently, the ‘sector-leading ESG’ requirement for sustainable funds does not seem too burdensome to us as credit investors.

Consider the recent drive to decarbonise the UK. Heating domestic houses constitutes a large proportion of carbon emissions, and so the government is committed to removing gas as a source of energy over a very short period of time. This will be a major challenge for our gas infrastructure, and so any related bonds due to mature in 30 or 40 years are going to be impacted. Stringent ESG requirements help shield against such risks.

 

Read in full: Does sustainable investing belong in fixed income?

 

 


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All information is correct at November 2020 unless otherwise stated. Issued in February 2021 by Royal London Asset Management Limited, 55 Gracechurch Street, London EC3V 0RL. Authorised and regulated by the Financial Conduct Authority, firm reference 141665. A subsidiary of The Royal London Mutual Insurance Society Limited.

 


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