In this paper, we examine how to incorporate ESG-enhanced corporate bonds into an investment portfolio from a strategic asset allocation standpoint. To this end, we examine the differences between ESG-enhanced corporate bond indices, namely the Bloomberg SASB US Corporate ESG Ex-Controversies Select Index and the Bloomberg SASB Euro Corporate ESG Ex- Controversies Select Index, and their traditional market-value weighted counterparts.
As a reminder, the Bloomberg SASB Corporate ESG Ex-Controversies Select indices utilise both an ESG exclusion1 and integration approach and are designed to target bonds whose issuers have an enhanced ESG profile while keeping in check their active risk to the market value-weighted corporate bond indices.
How to Incorporate ESG-Enhanced Corporate Bonds in a Portfolio Context
ESG-enhanced corporate bonds can form part of a strategic (core) allocation within investment portfolios. Compared to broad-based corporate bond indices, bond indices with a focus on issuers with a strong ESG profile are often less volatile by virtue of their tilt towards higher grade bonds. In turn, this can improve the overall risk-return efficiency of investment portfolios. Along with a reduction in volatility, the inclusion of bonds whose issuers have an enhanced ESG profile undoubtedly improves the ESG profile of the portfolios too.