Sustainability: the bond that endures
Sustainable investing is going mainstream. Evidence is building that a focus on sustainability-related factors — ranging from carbon efficiency to quality of governance — can help investors build more resilient portfolios.
Download PDF
Download PDF
-
Our key findings
Environmental, social and governance (ESG) investing is spreading to all pockets of the fixed income markets. This includes sectors such as emerging market debt, which were until recently lagging in ESG data, tools and insights. We explain how sustainable investing in fixed income requires a differentiated approach. In contrast to equities, bond investors’ main ESG focus is on mitigating downside risk, rather than capturing upside potential. ESG metrics can help identify new risk factors. Yet the diverse spectrum of debt instruments, issuers and maturities calls for targeted analysis in fixed income.
Read more- Environmental, social and governance (ESG) investing is spreading to all pockets of the fixed income markets. This includes sectors such as emerging market debt, which were until recently lagging in ESG data, tools and insights. We explain how sustainable investing in fixed income requires a differentiated approach. In contrast to equities, bond investors’ main ESG focus is on mitigating downside risk, rather than capturing upside potential. ESG metrics can help identify new risk factors. Yet the diverse spectrum of debt instruments, issuers and maturities calls for targeted analysis in fixed income.
- Innovations in ESG fixed income indexing have created sustainable building blocks that can form the core of portfolios. Our research suggests it is feasible to create portfolios that offer a significant uplift in key sustainability metrics — including ESG scores and measures of carbon intensity — while adhering closely to key characteristics of standard bond indexes, such as their duration and yield. The history of these indexes is relatively short. Yet the early evidence suggests they can deliver on their objectives without sacrificing risk-adjusted returns or diversification.
- We introduce a sovereign sustainability gauge. The tool provides a framework for gauging the performance of 60 sovereign issuers on key ESG issues. The goal: to uncover hidden strengths and vulnerabilities of issuers that may not be captured in traditional macro data. The index draws on 39 metrics available from the World Bank's ESG data portal — and includes a proprietary big data component that scrapes thousands of news articles daily to gauge shorter-term sustainability trends.
- Our research suggests the new ESG lens explains a meaningful share of the variation in credit spreads across EM sovereign issuers today. Strong ESG performers tend to carry lower credit spreads — and vice versa. When we integrated the new ESG lens into a sovereign credit pricing model, we found it to be a stronger building block than traditional sovereign credit ratings from international agencies. Our results suggest that markets are already pricing in ESG-related risks. We see the weight of sustainability in our EM credit analysis rising over time as regulatory pressures lead issuers to pay greater attention to sustainability.
- The financial materiality of different ESG pillars varies greatly across sectors. Our first-of-a-kind ESG materiality matrix for global credit reveals some key differences with standard findings. Among them: the E pillar may have a bigger sway on financial institutions than commonly thought — via carbon transition risks embedded in loan books. We find some evidence that overweighting exposures to the most salient sustainability factors by industry can potentially enhance the performance of portfolios relative to standard benchmarks.
- We show how ESG indexes can be used to make a global multi-asset portfolio sustainable. To illustrate, we walk through implementing ESG in a hypothetical global factor strategy. We replaced the fixed income and equity assets in the portfolio with sustainable equivalents. This resulted in a large uplift in key sustainability metrics. These substitutions had little impact on the portfolio’s diversification or risk/return properties, strengthening our conviction that ESG integration is a "why not?" proposition.
Brian Deese, Global Head of Sustainable Investing, discusses the opportunities for investors to align sustainability views with investment portfolios.
-
View transcript
It’s a great question and it’s a place we always need to start. We start with a simple definition: Sustainable investing combines the best of traditional investing approaches with insights about society, traditionally non-financial insights, to generate better long-term outcomes for our clients. First, this is about delivering on our fiduciary obligation. This is about finding ways to integrate sustainability consistent with driving long-term financial performance. The second is, this is about enhancing the way we invest; improving on traditional investing approaches by taking new approaches, new data, new insights. It drives you toward an understanding of how you can actually measure and integrate those sustainability-related issues.
In 2020, we see two principal limits. The first is the physical limits associated with climate change. As we increasingly see the impacts of rising global temperatures, we will reach physical limits. The second is the societal expectations and frustrations around sustainability-related issues. This is going to force limits on how companies are allowed to operate; when companies lose their social license to operate.
The bottom line for sustainability in 2020 is increasingly, issues that have been considered nonfinancial are going to come to the core of financial analysis. And the bottom line for investors in 2020: You need to be thinking more about sustainability, asking more questions about the risks that sustainability may pose to your financial investments. But also, more opportunities for you to invest consistent with your sustainability views and do so in a way that will be better for your long-term financial outcomes.
Paragraph-1,Accordion-3,Multi Column Teaser-1,Bio-1
Paragraph-2,Accordion-4,Multi Column Teaser-2,Bio-2
Paragraph-3,Accordion-5,Multi Column Teaser-3,Bio-3
Paragraph-4,Accordion-6,Multi Column Teaser-4,Bio-4
Sustainable building blocks
Sustainable investing is no longer just a niche strategy in fixed income. The bulk of growth in ESG mandates to date has been in equities, as the chart below shows. But this is set to change. New building blocks such as ESG bond indexes make it easier for investors to bring sustainability into their portfolios.
Gathering momentum
Growth in ESG funds under management, 2010-2019
-
Sources
BlackRock Investment Institute, with data from IMF, June 2019. Notes: Data are based on IMF staff calculations using Bloomberg Finance data. The year-to-date (YTD) 2019 data are as of June. The chart shows global ESG-mandated funds only.
Meet the authors
Joel Silva
Portfolio manager – North America Core Portfolio Management team in Global Fixed Income
Jessica Huang
Head of Americas and APA Platform Strategy and Innovation – Sustainable Investing
Sovereign sustainability
We introduce an ESG lens for viewing the sustainability of sovereign bond issuers and explore the relationship between ESG performance and sovereign bond spreads. We explored scoring government bond issuers on their sustainability credentials based on 39 indicators available on the World Bank’s ESG data portal, and a proprietary BlackRock text analysis that measures short-term sustainability trends. See the map below.
Around the world in sovereign sustainability
Rankings by quintile in sovereign sustainability gauge, October 2019
-
Sources
BlackRock Investment Institute, with data from Bloomberg and World Bank. Notes: The chart shows rankings of the 60 sovereign issuers as of October 2019, based on 39 World Bank ESG indicators and a proprietary BlackRock text analysis that measures short-term sustainability trends. Issuers are bucketed into quintiles. High rankings indicate positive performance on ESG criteria. See page 9 of the report for details on the methodology and underlying components of the index. For illustrative purposes only.
Meet the authors
Michel Aubenas
Head of EM Hard Currency Sovereign Debt and Sovereign ESG
Christian Carrillo
Head of Macro Asia Rates and FX research - Alpha Strategies Investment group
ESG in credit – what’s material?
What are the ESG factors that really move the dial in financial performance? Our research, built on work by organizations such as the Sustainability Accounting Standards Board (SASB) on sustainability topics most relevant across industries, suggests each of the three ESG pillars are of similar levels of importance in both credit and equities markets, as the chart shows. We compare our findings to a “base case” derived from SASB’s findings. A key conclusion: Governance factors may be more important than commonly thought.
What’s material?
Materiality of E, S and G in global credit, 2015-2019
-
Sources
BlackRock Investment Institute, with data from MSCI, Sustainalytics and Refinitiv, October 2019. Notes: The chart shows BlackRock’s estimate of the financial materiality (or relative importance, in percentage terms) of E, S and G factors in driving performance in the equities and global credit market over the five-year period through June 2019. We use regression analysis to estimate the relationship between each ESG pillar and monthly excess returns over the period. The “base case” is derived from BlackRock’s numerical interpretation of the Sustainability Accounting Standards Board (SASB)’s “materiality map.” Equities analysis is based on the MSCI World Developed index. Global credit is based on credit spread returns of the Bloomberg Barclays Global Aggregate credit index. For illustrative purposes only.
Meet the authors
Andre Bertolotti
Head of Global Sustainable Research and Data – Sustainable Investing
Building portfolios
We demonstrate how adding fixed income ESG exposures to a diversified multi-asset portfolio can meaningfully increase its sustainability without sacrificing return objectives. In the case of emerging market debt, our research shows new sustainable EMD indexes allow for a dramatic reduction in the carbon emissions embedded in such exposures. See the chart below.
Curbing carbon
Carbon intensity: standard vs. ESG bond indexes, 2019
-
Sources
BlackRock Investment Institute, with data from MSCI, October 2019. Notes: The chart shows the carbon intensity (metric tonnes of CO2 emissions divided by total revenues) of standard equity and bond indexes versus their ESG counterparts. Standard indexes are represented by: JP Morgan EMBI Global Diversified Index, Bloomberg Barclays Global HY Index, Bloomberg Barclays U.S. Corporate Index, MSCI Emerging Market Index, MSCI World Index and MSCI USA Small Cap Index. ESG indexes: JP Morgan ESG EMBI Global Diversified Index, Bloomberg Global HY Sustainable SRI, Bloomberg Barclays MSCI US Corporate ESG Focus Index, MSCI Emerging Market ESG Enhanced Focus Index, MSCI World ESG Enhanced Focus Index and MSCI USA Small Cap Extended ESG Focus Index.
Meet the authors
Katharina Schwaiger
Investment researcher - Factor Based Strategies Group
Brian Deese
Global Head of Sustainable Investing Bio
Philipp Hildebrand
BlackRock Vice Chairman
Richard Kushel
Head of Multi-Asset Strategies and Global Fixed Income
Ashley Schulten
Head of Responsible Investing for Global Fixed Income
General Disclosure: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of November 2019 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.
In the U.S. and Canada, this material is intended for public distribution. In the UK and outside the EEA: Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. Please refer to the Financial Conduct Authority website for a list of authorized activities conducted by BlackRock In the event where the United Kingdom leaves the European Union without entering into an arrangement with the European Union which permits firms in the United Kingdom to offer and provide financial services into the European Union (“No Deal Brexit Event”), the issuer of this material is: BlackRock Investment Management (UK) Limited for all outside of the European Economic Area; and BlackRock (Netherlands) B.V. for in the European Economic Area, however, prior to a No Deal Brexit Event and where a No Deal Brexit Event does not occur, BlackRock Investment Management (UK) Limited will be the issuer. BlackRock (Netherlands) B.V.: Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Trade Register No. 17068311. For more information, please see the website: www.blackrock.com. For your protection, telephone calls are usually recorded. BlackRock is a trading name of BlackRock (Netherlands) B.V. In Switzerland, this document is marketing material. This document shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006, as amended. For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the “Advice Law”), nor does it carry insurance thereunder. In South Africa, please be advised that BlackRock Investment Management (UK) Limited is an authorized financial services provider with the South African Financial Services Board, FSP No. 43288. In the DIFC this material can be distributed in and from the Dubai International Financial Centre (DIFC) by BlackRock Advisors (UK) Limited — Dubai Branch which is regulated by the Dubai Financial Services Authority (DFSA). This material is only directed at 'Professional Clients’ and no other person should rely upon the information contained within it. In the Kingdom of Saudi Arabia this information is only directed to Exempt Persons, Authorized Persons or Investment Institutions, as defined in the relevant implementing regulations issued by the Capital Markets Authority (CMA). In the United Arab Emirates this material is only intended for -natural Qualified Investor as defined by the Securities and Commodities Authority (SCA) Chairman Decision No. 3/R.M. of 2017 concerning Promoting and Introducing Regulations. Neither the DFSA or any other authority or regulator located in the GCC or MENA region has approved this information. In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N). In Hong Kong, this material is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. In South Korea, this material is for distribution to the Qualified Professional Investors (as defined in the Financial Investment Services and Capital Market Act and its sub-regulations). In Taiwan, independently operated by BlackRock Investment Management (Taiwan) Limited. Address: 28F., No. 100, Songren Rd., Xinyi Dist., Taipei City 110, Taiwan. Tel: (02)23261600. In Japan, this is issued by BlackRock Japan. Co., Ltd. (Financial Instruments Business Operator: The Kanto Regional Financial Bureau. License No375, Association Memberships: Japan Investment Advisers Association, the Investment Trusts Association, Japan, Japan Securities Dealers Association, Type II Financial Instruments Firms Association.) For Professional Investors only (Professional Investor is defined in Financial Instruments and Exchange Act). In Australia, issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975 AFSL 230 523 (BIMAL). The material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. In China, this material may not be distributed to individuals resident in the People’s Republic of China (“PRC”, for such purposes, excluding Hong Kong, Macau and Taiwan) or entities registered in the PRC unless such parties have received all the required PRC government approvals to participate in any investment or receive any investment advisory or investment management services. For Other APAC Countries, this material is issued for Institutional Investors only (or professional/sophisticated /qualified investors, as such term may apply in local jurisdictions) and does not constitute investment advice or an offer or solicitation to purchase or sell in any securities, BlackRock funds or any investment strategy nor shall any securities be offered or sold to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. In Latin America, for institutional investors and financial intermediaries only (not for public distribution). This material is for educational purposes only and does not constitute investment advice or an offer or solicitation to sell or a solicitation of an offer to buy any shares of any fund or security. If any funds are mentioned or inferred in this material, such funds may not have been registered with the securities regulators of any Latin American country and thus, may not be publicly offered in any such countries. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. No securities regulator within Latin America has confirmed the accuracy of any information contained herein.
The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in merging/developing markets or smaller capital markets.
© 2020 BlackRock, Inc. All Rights Reserved. BLACKROCK is a registered trademark of BlackRock, Inc. All other trademarks are those of their respective owners.
BIIM1119U-1012333