Wellington Management
June 20, 2022
Tracing our history to 1928, Wellington Management is one of the largest independent investment management firms in the world. We serve as a trusted adviser for institutions in more than 60 countries.

Sustainable fixed income investing comes of age

The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

By: Anand Dharan, CFA, Investment Director; Meredith Joly, Investment Director; Keenan Choy, Fixed Income Trader

Key points

  • Growing awareness of how risks such as climate change can impact financial markets’ risk-adjusted returns is leading more market participants to embrace sustainability and sustainable investing as critical to the long-term health of global markets.
  • The sheer size of global fixed income markets and the variety of ways in which they touch the real global economy demand that the asset class be part of the broader conversation about ESG and sustainable investing.
  • The heterogeneity of the fixed income universe presents both opportunities and challenges for fixed income managers and allocators alike who want to make ESG and/or sustainable investing a priority.
  • From sovereign debt to corporate and securitized credit, each segment the global fixed income markets faces challenges with ESG and sustainability, yet each is at a different stage of its “journey” (some further along than others).
  • We believe it is essential that asset managers be able to tailor their approaches to ESG and sustainability to each particular fixed income sector in order to effectively address the challenges and opportunities therein.

Consideration of environmental, social, and governance (ESG) factors has increasingly come into the mainstream of investment conversations, both through routine incorporation into traditional investment processes and through distinct sustainable or impact styles of investing. Recent and current global conditions — including extreme weather events, the inequitable impacts of the COVID-19 pandemic, rising distrust of government institutions, and geopolitical challenges to a rules-based world order (such as the Russia/Ukraine conflict) — have accelerated this trend, highlighting the direct relevance of ESG and sustainability to understanding long-term market risks and opportunities.

Until recently, ESG and sustainability have been more of a focus for equity investors than for their fixed income counterparts. Encouragingly, that is beginning to change and doing so at a pretty swift clip too. Especially since the onset of COVID-19, ESG and sustainability have gained considerable traction among bond investors and, indeed, are now seen by many as integral to fixed income investing. For example, global sustainable debt issuance hit a new record high of over US$1.6 trillion in 2021 and is projected to keep climbing in future years ( Figure 1 ). Notably, we believe that ESG integration and sustainable investing in fixed income necessitate a very deliberate, thoughtful approach — one that would vary meaningfully from one fixed income sector to another.

Figure 1

Sustainable-fixed-income-investing-comes-of-age-fig1

ESG and sustainability: The 30,000-foot view

At a high level, we believe that increased awareness of ESG and sustainability provides two key benefits to global markets:

  1. ESG integration helps market participants to think more holistically about the types of financially material risks and opportunities — for example, physical, reputational, and (geo)political — that should ideally be reflected in asset valuations and considered in the process of routine portfolio construction and management.
  2. Additionally, the dialogue around sustainable investing is leading more market participants to look beyond narrow, issuer-specific investment theses to consider how market participants’ behaviors are affecting the broader systems and structures (e.g., climate stability, strength of institutions) whose continued viability is so important for the long-term health of economies and markets.

Like many others, we firmly believe that a stable global climate, clean air and water for all, adherence to rule of law, strong institutions with broad public legitimacy, and broad-based access to economic opportunity are valuable public goods from which market participants would collectively benefit over the long term. Therefore, a central objective of sustainable investing is to...

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