ESG Investing is Here to Stay—Even in the Fixed Income World
Equity managers concerned about the long-term health of their investments have long had to take environmental, social and governance concerns into account. So-called ‘ESG’ investment guidelines help them steer around all kinds of management crises that might lay waste to returns in otherwise pristine equity portfolios.
Until recently, however, fixed-income liquidity investors managing short-term portfolios never had to think too much about ESG standards. When nearly all your holdings are in cash, safe government funds, or commercial paper with limited durations, why worry about potentially unethical boardroom decisions that might only come to roost much further down the line? At least, that was how the thinking used to go—before the world changed in ways that injected more credit risk into even the safest fixed-income investments. In fact, ESG concerns now are very much here to stay, even in the short-term world of institutional cash investors.
First, there is growing recognition that ESG issues represent hidden credit risks with potential material impact on bond investors. Boeing’s 737 Max, the Volkswagen emissions scandal, and Wells Fargo’s fake accounts are just three recent examples of ESG debacles that have impacted both bond and equity markets.
And when reforms following the financial crisis converted prime money market funds to floating net asset values, a new degree of risk crept into previously safe investments that had delivered predictable returns. Now, corporate cash managers must be more aware of the risks inherent in managed funds—including ESG-related risks.
Our June research report, Demystifying ESG Investing: Considerations for Institutional Cash Investors, is a comprehensive guide to this new environment. Among other things, it looks at the pros and cons of financial products and funds catering to ESG-minded bond investors. For instance, “green-bond” and “social-bond” funds have grown in size from zero to more than $200 billion globally over the past decade. Our report also discusses how corporations’ own ESG investment policies are influencing the ways in which treasury professionals manage their cash portfolios.
Most important, it gives practical advice on how institutional cash managers can approach ESG investing. For example, it recommends placing a top priority on monitoring governance. Credit-management information is often readily available on governance practices that might have negative short-term impacts. The monitoring of social issues is important as well, though credit-related information is harder to measure and generally less available. Environmental decisions, on the other hand, are often felt well beyond the time horizons of liquidity portfolios, so these may demand less ongoing attention.
But that’s just a quick overview. For a deep dive into the world of ESG investing that will help you sleep more easily at night, download the full report.