Sustainable Investing in Fixed-Income Funds

A just-released study shows it can make as much sense to consider sustainability factors in a corporate-bond portfolio as it does in an equity portfolio. While fund investors have relatively few options to put that finding into effect today, more choices are on the horizon as bigger players get into the picture.

Researchers from the Quantitative Portfolio Strategy group at Barclays Research found that tilting corporate-bond portfolios toward companies with higher environmental, social, and governance scores resulted in a performance advantage over portfolios tilted toward companies with lower ESG scores.

Using company-level ESG scores from Sustainalytics and MSCI ESG Research, the Barclays researchers constructed two pairs of corporate-bond portfolios, one for each research provider. For each pair, one portfolio was tilted toward issuers with high ESG scores and the other toward issuers with low ESG scores. The portfolios were constrained to otherwise mimic the Bloomberg Barclays US Corporate Investment-Grade Index in terms of yield, maturity, credit quality, and sector allocation.

Between 2009 and 2016, the time span for which the ESG data was available, the high-ESG portfolios produced average annualized returns that were 0.29% to 0.42% higher than the low-ESG portfolios. As with many other ESG performance studies, this one has limitations--primarily the relatively short time period studied--but also the same general conclusion--that ESG incorporation does not have a negative effect on performance and, if anything, may have a positive effect.

To date, though, only a dozen established U.S. bond funds, listed in Exhibit 1, explicitly incorporate ESG into their credit analysis or portfolio construction. Of particular note, Bronze-rated

Two additional options, Access Capital Community Investment ACASX, run by RBC Global Asset Management, and

Some bigger players are now getting into the act. In August, BlackRock launched

Last but not least, a note about green bonds, which are issued by either governments or corporates to fund projects that have positive environmental benefits. It is still a very small market--perhaps $150 billion in issuance since 2010--but just this year,

While sustainability is not as frequently applied to fixed income as it is to equity investing, it is possible to find bond funds with established track records that incorporate ESG considerations into their credit selection while also achieving impact. As with equity funds, ESG investors should expect competitive performance. The choices are limited, but growing.

Jon Hale has been researching the fund industry since 1995. He is Morningstar’s director of ESG research for the Americas and a member of Morningstar's investment research department. While Morningstar typically agrees with the views Jon expresses on ESG matters, they represent his own views.