Research investigates the “ESG effect” in fixed income portfolio construction

Researchers at City, University of London have concluded that when investors seek to integrate ESG (Environmental, Social and Governance) factors in their fixed income portfolios, they are not doing so at the cost of risk-adjusted performance. The research, which received financial support from Insight Investment, an asset management firm, investigated the “ESG effect” and found that portfolios with relatively higher-ranked ESG issuers tend to outperform those with lower-ranked issuers. The researchers also used tilting methodologies to test the effect of tilting a portfolio towards ESG factors. In the conclusion of the paper, the researchers argue “We have shown, at a minimum, that enhancing the ESG profile of a fixed income portfolio has not led to any deterioration in the risk-adjusted performance of fixed income portfolios. Given this, investors could feel confident that integrating ESG considerations could be a worthwhile exercise”.