Hundreds of investors are convinced that sustainability investing offers a better way of buying equities. But few really apply it to fixed income portfolios – and that is a shame, since SI works just as well with bonds and can be essential for risk management in certain markets.
The myth that SI only works with equities exists because government bond prices are more sensitive to macroeconomic issues such as interest rates and GDP growth than to company-level environmental, social and governance (ESG) factors. And it is hard for some investors to see how ESG issues would have any bearing on debt that needs to be repaid anyway.
It basically boils down to trying to reduce risk, and a principle in credit markets that Robeco has long followed – it is more important to avoid the losers than necessarily always pick the winners in a portfolio. Avoiding the losers means making a careful analysis of the inherent risk in any bond: the ability of the issuer to pay the money back, or alternatively, default. This is where ESG analysis can help.
For government bonds, countries issuing them can be assessed for their risks using a wide range of ESG criteria. RobecoSAM’s Country Sustainability Ranking (CSR) contains masses of data gleaned about a country, puts it into a score, and updates the information twice a year. The score is based on 17 factors which receive a weight of 15% for environmental, 25% for social and 60% for governance. This greatly assists in country allocation; for example, the October 2017 survey was much more positive on Ireland and less so on Turkey, allowing the bonds teams to risk-adjust their portfolios accordingly.1
RobecoSAM also compiles the Company Sustainability Assessment (CSA), a detailed questionnaire about every aspect of a company’s ESG performance, from carbon emissions to worker relations and board composition. This is used for both equities and corporate bonds, since the underlying data applies to the company rather than purely to the security.2
As with equities, all the information gleaned must be financially material; it must have a tangible impact on factors such as profit margins, revenues or costs. This has a direct impact on the company’s ability to repay (or refinance) a bond. Whereas analysis for equities usually seeks an upside, the focus for fixed income remains on trying to deflect any downside.
The ESG information garnered is then integrated into a wider analysis of the merits of whether a bond is worth buying. At Robeco, this is done by creating a five-way ‘F-score’, using a company’s financial profile, business position, corporate strategy and structure on top of the sustainability score, as seen in the diagram below.
And it works… Robeco’s experience found that for credit investments in 2017, ESG information had a negative impact on the total fundamental analysis in 30% of cases, and a positive impact on 3% of names in the investing universe. This directly influences investment decisions by the fixed income portfolio managers and has been instrumental in the buying and selling of bonds – just like in equities.
The relative importance of each ESG variable differs though between industries. Environmental factors and the need to reduce emissions is more important for the oil industry than for retailing, where worker relations is a bigger issue, or for banking, where governance has a higher priority in managing risk factors. Food companies face rising pressure to make healthier products; recent evidence presented to the UK Parliament complained that “sugar is the new tobacco” and should be taxed as such. This presents a clear risk to future profitability and a license for food and beverage makers to operate.3
One area in which sustainability investing has developed an exclusive inroad into fixed income markets is green bonds. These are credits issued to fund environmental projects ranging from wind farms to water purification facilities, mostly in emerging markets.4
They work just like normal government or corporate bonds, and most are investment grade. They are sometimes securitized, where the future revenue streams from the project (such as renewable energy sold to national power networks) act as a form of security for the issue.
The market has developed strongly since the first green bonds were issued by the European Investment Bank and World Bank in 2007. Now they’re popular with mainstream investors, including Robeco, which includes them in selected fixed income funds. According to research by Bank of America Merrill Lynch, which launched a Green Bond Index in 2014, the total outstanding amount of green bonds exceeded USD 200 billion in 2017.5
1 For more information about how the CSR is compiled, see
2 For more information about the CSA, see
3 Dr. Aseem Malhotra, ‘Sugar is the new tobacco, so let’s treat it that way’, 2016
4 For more information about green bonds, go here
5 Bank of America Merrill Lynch research, November 2014
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商号等： ロベコ・ジャパン株式会社 金融商品取引業者 関東財務局長（金商）第２７８０号
加入協会： 一般社団法人 日本投資顧問業協会