ESG Opportunities via Fixed Income

RBC Global Asset Management recently published its third annual Responsible Investing Survey, and My-Linh Ngo, ESG [environmental, social and governance] investment specialist for the firm’s BlueBay Asset Management division, in London, offered PLANADVISER her take on the results.

At a high level, the survey results suggest that U.S. institutional investors are rapidly warming to the utilization of ESG factors when building out their portfolios—and many are already applying their own conclusions about the strategy. Notably, the percentage of these investors that reject ESG considerations outright shrank year over year, from 51% to 34% this year.

As Ngo pointed out, equities have long been the primary focus of ESG analysis and investing, but these days such analysis is quickly moving beyond equities. Thirty percent of respondents in the U.S. said it is important to incorporate ESG into fixed-income considerations, she said. Asked directly whether they incorporate ESG into fixed-income management, 52% of U.S. investors that already use ESG said, yes.

“Our company has a core belief that ESG considerations are investment additives, not a hindrance to performance,” Ngo said. “Thinking about ESG helps us generate a more holistic and informed view of how companies are performing or are likely to perform in the future. So, we are applying an ESG risk overlay across all of the fixed-income assets we manage. It is not something we limit to niche funds.”

The specific approaches BlueBay applies will vary across different products and geographies, but ESG risk overlays “come standard with every fund and investment product,” she said. “We do it this way because we see ESG as something that can be quite beneficial in terms of measuring and addressing downside risk, especially on the fixed-income side.”

According to Ngo, providers these days are taking a much more sophisticated approach to ESG than just running simplistic negative portfolio screens to avoid bad apples.

“Today, we are conducting sophisticated analysis on the investment materiality of key ESG factors, and we are doing this in a rational way that looks across the entire institutional portfolio,” she said. “This work is not about running a bunch of negative screens, but instead it is about being scientific about how you build portfolios and the risks you take.

“In absolute terms,” she said, in sum, “both ESG equities and fixed income are not quite mainstream yet. [But] they are getting there.”